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The recovery will be a jagged swoosh, not a V-shape
British economist Jim O'Neill says the global economy can bounce back right to where it was before, in a V-shaped recovery. But his argument is based on a lot of "ifs," plus comparisons to the 2008 recession and conditions in China and South Korea that may not truly apply. Ian Bremmer and Eurasia Group's Robert Kahn take issue with O'Neill's op-ed, on this edition of The Red Pen.
Today, we're taking our Red Pen to an article titled "A V-Shaped Recovery Could Still Happen." I'm not buying it. It's published recently by Project Syndicate, authored by British economist named Jim O'Neill. Jim O'Neill is very well known. He was chairman of Goldman Sachs Asset Management. He's the guy that coined the acronym BRICS, Brazil, Russia, India, China. So, no slouch. But as you know, we don't agree with everything out there. And this is the case. Brought to you by the letter V. We're taking sharp issue with the idea that recovery from all the economic devastation created by the coronavirus pandemic is going to happen quickly. That after the sharp drop that the world has experienced, everything bounces back to where it was before. That's the V. Economists around the world are debating how quickly recovery will happen to be sure. But we're not buying the V. Here's why. W-H-Y.
First, among his arguments, O'Neill points to stimulus money pouring in from all corners of the globe. He writes, "After all, governments around the world have mustered an absolutely massive economic response, exceeding the amounts even provided during the 2000, 2008-2010 financial crisis." No question. But this is not the 2008 recession. This moment has brought the entire world's supply chain, massive disruption, debt-distress, unlike anything we've seen in our lifetimes. And with the virus very much still exploding around the world and no vaccine for the moment and none really expected that would work and be distributed globally until at best, mid, late next year, we're likely to see a relentlessly stop and start economy that more resembles what we think is a jagged swoosh, then a V. Sure, we've had a good balance after a very steep decline, but all indications are that the hard part is still to come.
Second, O'Neill writes that improving conditions in China and South Korea bode well for the rest of the world. He writes, "despite China's ongoing challenges, the Caixin services PMI index rose to a 10-year high in June," and he points to increased exports from South Korea, too. Sure, China and South Korea, but they're doing particularly well because they contained the virus. They quarantined. They had contact tracing. They had early testing. That's not true in much of the rest of the world. Certainly not in my own United States, the world's largest economy. Not in Brazil. Not in India. Not in most of the world's emerging markets. A global recovery will not gain momentum while the world is following completely divergent parts.
And finally, O'Neill writes, "If lockdowns remain localized and temporary, if health systems continue to expand testing, and especially if a vaccine or more effective treatments are developed, the economic outlook need not be as bleak as many believe." Those are some very big "ifs", my friend. Testing is nowhere close to what it needs to be in the United States and in most of the developing world, aside from China.
Yes, the United States is testing a lot more than it used to, but nowhere close to the explosion of cases that we have right now. We're still looking for effective treatment options, let alone the vaccine that could potentially take years to develop and distribute globally. And if the first vaccines are not seen as effective, a lot of people are going to wait. They're not going to take them immediately. That's even with good education. That's even, never mind, anti-vaxxer sentiment. And it's not paying attention to vaccine nationalism and the fact that the world is not rowing together in developing a vaccine together, which is what you want to respond to a global pandemic.
Quick Take: On masks & mishandled US response
Ian Bremmer's Quick Take:
Got through the Fourth of July. Pretty rough one for 2020 here in the United States. Still in the thick of it as we see caseload exploding in the United States. But really, the virus is all about developing markets right now. Poor countries around the world very soon, with the exception of the US and the UK, all of the top 10 countries around the world in terms of coronavirus caseload will be poorer countries. Let's keep in mind, these are countries that test a lot less, which means the actual numbers, in the United States the experts are saying probable likelihood of total cases is about 10x what we've actually seen in the US, in emerging markets and most of them, it's more like between 20 and 100. In other words, this is really where the virus now is.
Those countries have nowhere near the money to be able to ensure that people can stay locked down and out of work and safe for a long period of time as we have been able to in the United States and Europe and Japan. They aren't going to get enough aid to make up the difference internationally. And, you know, populations are younger. Life is cheaper in these countries. A lot more people die from, they have lower life expectancy, they have worse health care, and so the willingness to, you know, tie yourself in knots over the latest dangerous disease is much less than in a country where every additional person that dies drives political outrage. And it should not be that way. But it is that way. So, you're seeing different policies as a consequence.
That means de facto herd immunity strategy. Doesn't mean de facto herd immunity, because we still don't know that herd immunity is something that you'll be able to get to. We don't know how long antibodies last. Your first studies now, with just a few months, this disease has been with us as humanity for six months, so we have no idea if herd immunity would apply and if so, to how many people, do you have to have symptoms that are hard or can it can asymptomatic people also have herd immunity? We hope we're going to get to a vaccine. I worry that the Chinese and the Indians are rolling out vaccines before they have adequate human trials, which means that the quality of the vaccines that lots and lots of people get may be considerably substandard and have second-order health effects that are negative. And it also means much more of a fight internationally. The biggest tragedy of coronavirus globally is the fact that the world is so uncoordinated, is so not working together either to ensure that people have treatment, that we have adequate medical supplies, that we have adequate economic response, or that we eventually have adequate vaccine. That is going to continue to make this much worse as a crisis than it otherwise would have been.
Now, here in the United States, of course, it is certainly good to see that the Trump administration, however late, is now tilting towards telling everyone you should wear a mask. If it was up to me, I would make mask wearing mandatory and I would enforce it and I would have significant fines if you don't. And I would also be looser in opening up economies. So that people could get jobs back, we could go back. I mean restaurants would be a challenge. Bars probably still no go because you can't keep masks on when you're doing that. But certainly stores, office places, all of that, places where people can come and get the economy moving. I want them to do it. But everyone has to wear a mask. And if not, it's really going to cost you. And yeah, you're going to lose some personal liberties, but you're going to maintain your job, your well-being. The economy will do better. And soon enough, we won't have to do it anymore because we'd then be able to get low enough numbers of new cases that we could do the contact tracing that we don't have the people for right now. We could do the quarantining, that we don't have the tests and the people for right now. You've got far fewer cases before the number of tests and contact tracing that America presently has is adequate to actually get to a "we've defeated this virus."
Short of that, I'm glad that the Trump administration is saying "wear a mask." That's Ivanka. That's Kevin McCarthy. Even Trump in his soon to be rallies, they're handing out masks to everyone and they're going to tell people that you should be wearing them. That's a good thing. And I wish it was happening three or six months ago, but better now than three months from now, especially for an administration that thinks they're losing on coronavirus and doesn't want to talk about it very much. I mean, you saw the Mount Rushmore speech, and this was a pretty significant electoral rally speech and coronavirus was really not even mentioned. And that's in large part because they recognize that it's not a winner for them. They're doing badly on it. So, given all of that, the fact that they are now pivoting towards "wear a mask and get everyone to do it," does show that they want to have more of a handle on this or they fear losing in November. And for the good of the American population and the global economy or the largest economy in the world, I'm really glad for that.
You know, even Dr. Fauci, who's someone I like quite a bit personally, but remember when at the beginning he was saying, "don't wear a mask, we're not sure does anything." And the reason he was saying that is not that he thought that was true. He knew it wasn't true. But America didn't have adequate numbers of masks. They were concerned people were going to have a run on them and there wouldn't be enough for people in hospitals. That's unacceptable in a country like the United States. A couple of months after we knew that there was a pandemic in place in China. And I mean yes, we lost a month because the Chinese covered it up. But we need to know better. We need to do better than that. So, deeply frustrating from my perspective. Plenty of blame to go around.
People asking me why I don't focus on the states, it's because mostly I focus on the national level and around the world. But certainly if you focus on the states big mistakes made here in my own New York in terms of getting people out of the hospitals and forcing those with coronavirus to be taken back in elderly homes, assisted living facilities led to vastly more people getting killed than otherwise would have happened. We've seen big mistakes and opening too fast in a lot of states like Texas and Florida, despite Centers for Disease Control guidelines, they were being ignored. And as a consequence, much more spread than we otherwise would have seen. These are horrible things and they're leading to the United States right now, leading the developed world in terms of numbers of cases and also having considerably more deaths per capita than in Japan, than in South Korea, than in Canada, than in Germany. And then in Europe as a whole, though there are European countries that have more per capita deaths than the United States does. But we should be leading.
We should be doing much better than Europe. Remember, the pandemic only hit the US in scale 10 days after it hit Europe. Therefore, we should have learned from them. Two weeks matters, an immense amount in a pandemic. Our numbers should be better. They're not. And why not? Because at every level of government, we've done a bad job. And the media and social media are also helping people not know what to believe, not know if this is something they should really worry about or if it's fake news. And when you're not leading with science, when the country is immensely divided, then you politicize coronavirus, too. And that ends up killing and enfeebling a lot of people.
Final thing I would say, it is certainly true that our death toll in the United States looks a lot better right now than our caseload. There are two things you really should focus on: First is that death is by definition a lagging indicator. And especially when mostly young people are getting the disease right now. But the next order people, when they come home, they have the disease. They don't know they have the disease because they're asymptomatic. And we don't test enough. 10 times more people have the disease than we know about in cases that older people will get it. So, then you'll actually have fatality rates go up. And also, let's keep in mind, we do not know what the long-term implications for health and for the economy of people that have this disease and don't die from it. And certainly, we've seen lots of people, including young people, continue to have significant challenges with their own personal health, with their breathing, with their sense of smell, with their energy levels, with heart, other issues for months. And we've only had six months and only three months in the United States with large numbers.
So, I don't feel really good about the fact that we've got, you know, a few million cases in the United States and maybe 10 times that in actual numbers of people who got the disease. We have no idea what that's going to do to their health in 10 and 20 years time. Their life expectancy. Their ability to work. Their ability to live functional, happy, productive lives. So, none of this makes me particularly happy right now. But at least top down, you get a feeling like they're taking it more seriously now than they were two weeks ago. I think that's true with the governors. I think that's true with the president and the administration. That's better than the alternative.
WATCH: Post-coronavirus institutional and global order shifts, tradeoffs, and sustainability
Framing is important, time is relative, lots to talk about every week, while we are in the midst of what I think we will look back on and say is the first hopefully, only depression of our lifetimes.
This is getting much more politicized in the United States. Because there's an election coming up, but also because politically there's almost no way to turn. On the one hand, the death toll is going to be well over 100,00, and that was the frame of reference that President Trump said it would be a good job. We see Jay Powell, head of the Fed, who I think has done a very credible job through all of this, and speaks about it very credibly, and saying going forward that he thinks the third quarter, in fact, all of this year, is going to be economically very painful.
If you can't turn towards loosening because there are too many cases and too many people dying, but you can't turn towards opening the economy for that reason, and so the economy is going so much worse, well, best not to have an election. That's not an option either. Can't push it back. No, you'd have to change the law and that requires both passing both the House and the Senate. There's no possibility of that happening. So, really what it means is, number one: got to blame someone, China. And number two: it's going to get much nastier inside the United States.
I saw some of the hearings last week. I saw Dr. Fauci attacked by some, particularly Rand Paul, the senator from Kentucky, saying that he's not the be-all-end-all. As much as I like Dr. Fauci and I appreciate that he is a voice of sanity and reason, I do accept that he's not the be-all-end-all in the sense that if we're talking the economy, the doctors and scientists can't be the whole conversation. You wouldn't want them to be because they don't have the full range of expertise. I want the doctors and scientists to be the be-all-end-all in telling us how they think we should fight this coronavirus. What kind of treatments work and don't work? Whether or not we should wear masks? What kind of social distancing is important? How we're doing on the vaccine? What kind of medical care and facilities we need? How you do and don't treat assisted living facility? Something I wish that my own governor, Cuomo, had been listening to Fauci earlier, so that we wouldn't have been sending all of these people from hospitals into these care facilities, spreading the virus so much beyond capacity.
They have enormous value. I don't like it when the politicians get involved in trying to say what is and is not an effective cure. Second guessing the doctors around that. Whether it's Bolsonaro in Brazil or Trump here in the United States or Lukashenko in Belarus, or Magufuli in Tanzania.
When you talk about opening the economy, ending the lockdowns, you're not just talking about doctors anymore. You're also talking about expertise from economists, expertise from businesspeople, people that understand what it means if you keep these economies locked down. What worries me is we've gone from the first months of the crisis where we didn't know what we were dealing with, what kind of a virus, we had no parameters around testing, how broadly it expanded, didn't understand how it was transmitted, a time when you need to hear from almost exclusively the health care folks, to now, when you want the health care folks and all the people with economic expertise, because there's a real tradeoff. A tradeoff between how much you can open the economy and how many people will be endangered in terms of their health as a consequence of that. And how much you keep the economy closed and how much people are endangered as a consequence of that, literally endangered. In terms of being able to make ends meet, what it's going to cost to take care of people.
At the end of the day, governance in the United States and around the world is always about tradeoffs. How much you want to spend on one thing as opposed to another. On health care as opposed to unemployment. On a single portion of the population as opposed to another. So much of this crisis is being borne on the shoulders of those that can't afford it. The essential workers who can't work at a distance. Can't stay at home and still get paid. The ones that are delivering takeout meals and stocking the grocery stores and ensuring that there is first responder capacity to someone dialing in a crime or committing one or to someone going to a hospital. These people are not paid as essential workers. They're paid as dispensable workers. Is that going to change in three and six months and 12 months, in three years' time? It has to, because otherwise the ability to ensure sustainable consumption models isn't going to be fit for governance. The ability to consider yourself a representative democracy isn't going to be fit for governance in this country. On the other hand, the people that are most dispensable in terms of the companies as they open again and who do they and do they not need to make sure that they can continue to be profitable, so many of the layoffs that you've seen in the past two months are going to end up being permanent because companies will go bankrupt and others can't afford to keep these people employed.
I keep thinking back to the 2008 financial crisis when there wasn't that much macro analysis politically. There was a sense that all the markets were moving up and down together. That's very macro. You wanted to understand the financial sector very deeply. You want to understand the central banks, what leverage was all about and mortgage backed securities that didn't make a lot of sense. How big the bubble actually was. You wanted that understanding. But beyond that, you know, that's what you needed to fix. You didn't necessarily need to talk to a whole bunch of people with expertise in different sectors around the economy.
Today, every person that touches an industry, every person that touches a piece of government has a piece of expertise that really matters to understanding this puzzle, because you shut down the entire global economy. And if you want to reopen it, reopen it through your leaders, reopen it through your business executives and reopen it through your workers and your consumers. Every piece of that needs to get back into place. That means everyone you talk to with a different part of expertise plays a role.
A CEO of a financial institution right now is worried about, how can they make money when so many of the small business owners are not able to pay credit card bills going forward? They're not able to make good on their leases or their mortgages, and what does that mean in an already a low interest environment, where banks have to maintain higher credit levels? How are these banks going to stay solvent in a year, in two years' time, as you see financial crises in developing markets?
When you talk to the tech firms who are making a lot of money right now, they're saying, "hey, we're running pretty well with people not being in place and we don't want to have any legal vulnerability, and if they can do the work, we can't tell these people they have to come back." So, if you're Twitter, work-from-home forever. If you're Facebook, if you're Google, at least until the end of this year and even then, it's going to be staggered, well, how much real estate do you need as a consequence? What about the people that work in physical plants and in the cafeterias, the janitors, sanitation, all of the people that make those spaces function, you won't need as many of them. You don't hire as many, what happens to those people?
I talk to people in food supply. They have a just in time supply chain, here in the United States and around the world. Suddenly that's a real problem because it's really efficient. The lines run really fast. And everyone is, these workers are all on top of each other, and well, how do you protect them? So, maybe you need to have them stagger in three different shifts over time, but are you going to pay them more if they're working in unusual shifts. Well, maybe you move towards automation. Or maybe you shut down the lines, you slow down the lines. And how do you maintain profit when that happens? What happens to these workers?
Open plan. I mean, here at Eurasia Group, space for a couple of hundred people, all open plan. That doesn't work when you're trying to keep people distant and safe from each other. You're going to have to completely rejigger the way that, you know, an accounting firm works, a consulting firm works, the big three out there. How many people are they going to need as a consequence of that? How are they going to maintain efficiency? It's not like people were just swimming on cash. Most of these profitability models, you know, were comparatively tight because it's a very competitive environment. And you see a lot of companies that go bankrupt in the best of times.
Every piece of the global economy doesn't just have to get through this shutdown, the lockdown, this incredibly challenging, unprecedented in our lifetimes disruption. A natural disaster to end all natural disasters in our lifetimes, this pandemic. But then when they come back, nothing is as it was. Nothing goes back to being the way it was. This doesn't make me existentially pessimistic. This doesn't make me feel like it's the end of society, but it does make me feel like the changes that are required are going to be much more dramatic, much more structural, and a lot more people will be displaced. So, government is going to have to play a much more interventionist and structural role, that we don't like so much in the United States. It's not efficient. Take your hands off. We don't want spiraling debt beyond where it already is. It makes me worried that the ability of big industry to be the answer, when government isn't there, doesn't have all the answers, is going to fall down on the job. They're going to have a real challenge doing it because they're going to be under a lot of pressure. And it makes me feel that the willingness of the average citizen in a lot of these democracies themselves going to feel like the system is increasingly not working for them.
Does that mean that I think the Chinese system somehow works better? Absolutely not. The Chinese are going to have much bigger problems themselves. This is the first recession that they've had since they've really started opening up. Zero growth for a year on top of the massive credit bubble that they have, not only spiraling debt that hasn't gotten productive gains in China from a sovereign perspective, but also the corporate, the staggering corporate debt that's not been linked to productive and efficient growth. The Belt and Road and defaults and the restructuring already needed in some of the poorest countries around the world. Now a lot of those economies that China has the greatest exposure to are going to collapse because they've got even bigger problems going forward. I wouldn't want to be counting my future on the sustainability of that massive credit bubble, either domestically in China or internationally.
Good news is that you have a disruption of this scale and it gives you that necessity and capacity, to change a lot of the institutions that increasingly weren't working. But let us not pretend that this is like 2008-2009, we'll spend a year or two and then things will bounce back. Because that's what happened, basically. The banks had to reform. But generally, we bounced back after 2008-2009. This is a very different scale of magnitude. And this is one we're going to have very different institutions and global order as we think about what it means to have sustainability in society going forward.