The COVID-19 Economy
Economic recovery from 2020 to 2035

Published on June 23, 2020 by Wojciech Gryc

We're seeing positive news about the COVID-19 economy this week, but many people are still suffering.

Where will this lead us in the coming 15 years?

A common narrative around the COVID-19 economic recovery is that it will be similar to the post-World War 2 (WW2) economic recovery.

  • After WW2, most Western countries had all-time-high debt-to-GDP ratios; ones higher than today.
  • Following WW2, government spending was cut significantly.
  • Combined with economic growth, Western governments outgrew their debt burdens.

I do believe there's a way out of the debt burden and economic slump, but have my doubts on the narrative above... Let's break down the post-World War 2 economy to better understand what happened.

  • Following the war, government spending was reduced to by 75%, mainly due to the spend not being required for financing and running the war effort.
  • The Baby Boom took place. The years 1946 to 1964 saw a birth rate that is over 3 times the rate today.
  • Consumer debt was non-existent. While statistics in Canada only go back to 1961, consumer debt back then was $16B -- more than 10x lower than today even when accounting for inflation1. The case was similar in the US.
  • The Baby Boom and associated spending, labor growth, and consumption meant the post-war economies grew rapidly and significantly outgrew their debt burdens.

These economic features won't be around after COVID-19. First, demographic trends are against us.

  • Today, population growth is non-existent in the West and the likelihood of a post-COVID-19 baby boom is basically zero.
  • Worse still, the number of people available for work will decline in the next 5-15 years as Baby Boomers retire.
  • Pension obligations will further strain finances in the West. Many municipalities and states in the US will have trouble meeting their pension obligations.

As consumers, we can't spend our way out of this economic downturn the way we did after WW2.

The post-COVID-19 economy will be very different from the post-WW2 economy. Fewer people able to spend combined with non-existent population growth means we'll have to find other means of achieving economic growth.

If consumer spend and population growth won't save us, then what will? Productivity improvements.

  • Economic productivity focuses on being able to generate more output from resources (i.e., capital, labor) over time.
  • If spend can't increase and population growth will be stagnant, we can still become more productive -- and need to do so at a faster rate than the cost of our debts and pension obligations.
  • The best way to do this is via technology investments -- improving our ability to produce via automation, efficiently use of raw materials and energy, and so on.
  • This also means investing in education to ensure companies and employees can innovate in the long run2.

In short, if we have a "New Deal" of some sort for the post-COVID-19 era, it should focus on technology and education. Government spending should specifically target productivity improvements driven by technological development and a better-educated workforce; one that can drive these innovations.


Footnotes

1. See the Bank of Canada's inflation Calculator: $1 in 1961 is equivalent to about $8.7 today.
2. Note that this also does not mean closing borders and protecting internal domestic economies. Doing so actually risks reducing productivity.

Sign up for our newsletter
Receive updates around stats, news, and analysis.


Visit the COVID-19 news tracker

© Chimera Information Systems Inc., 2020

Let's Chat