Will the crisis boost productivity?

Economics has always struck me as a funny old social science. R epeated evidence suggests that the lack of certainty about economic relationships and the repeated inability for us economists to forecast accurately, is a constant reminder of its limitations. During my long years in professional finance I learned that, at best, my predictions would be correct about 60 per cent of the time. (I was proud of that success ratio.)

Against this, economics also has this remarkable habit of explaining things that have happened, including occasional moments of monumental change. This is probably down to the core premise of economics, which is about the allocation of resources.

In this regard, I have learned that not only crises happen, but society emerges from them. In that post-crisis world, the ensuing changes can come about as a consequence of improved policy. But often these changes are a result of a re-allocation of resources.

This idea has been in my head since the scale of the Covid-19 pandemic became apparent.  Going back to late January, when Covid was emerging in China, economists were citing the experience of SARS and other Asian infectious disease outbreaks. the consensus was that this would pass, just like those other outbreaks, and that we would experience a V-shaped recovery, just like those. Once the full horror of the Covid pandemic hit in March, this view fell away, and ever since, people who raise the possibility of a V-shaped recovery are regarded as out-of-touch lunatics. This sums up the dilemmas as forecasting pretty well. Because both outcomes could still be true.  

However,  based on all the aggregate global data, as well as from a significant number of economies, it looks as though a remarkable “V” has at least occurred through the 2 nd and 3 rd quarters of this year. Even here in the UK, the final estimate for the September monthly services PMI (purchasing managers index) was reported as 56.1 on October 5 th , slightly down from August’s very strong level, but higher than the so-called flash estimate, and dramatically higher than numbers presented through the dark days of March through April. 

Retail sales have also rebounded to levels higher than before the pandemic set in. And this is despite the new uncertainty, if not outright chaos that has engulfed the UK, as cases of Covid-19 picked up again in September. Similar data continues to arrive from elsewhere (although there is some softening from parts of the Euro Area) .  I present these most recent data points to highlight the inherent oddness of economics, and in this instance, just how strongly so many people feel that a V-shaped recovery is close to impossible. It is not. It might be very improbable and might be not a sustainable “V”, and it might not mean much to some segments of our society. But in terms of what is likely to happen with published GDP, I reckon it is likely, and these indicators are better evidence of it than anything I am aware of.

But this is not really my key point. The other, even more superficially ludicrous thing is the mounting evidence that this mess we are going through may be delivering a rather odd piece of good fortune — a permanent, much needed boost to productivity.

Since 2008, the effort by UK policymakers and their advisors to boost productivity  has been intense, but with little apparent benefit . During my own brief stint as an HMT Minister, I was immersed in these efforts, along with smart diligent staff. The same is true across much of the western world, and as the years have crept by, many have defaulted to the gloomy conclusion that we are stuck with persistent low productivity. 

With the exception of manufacturing, particularly the UK auto industry , the gloom mounted. Indeed, in the UK, the accumulated productivity “undershoot”  compared to the pre-2008 crisis trend is approximately 20 per cent. Not only is this dramatically higher than the absolute worst credible estimates of a hard Brexit for the UK, it explains partly, if not greatly, why real wages have been so stagnant over the same per iod. P olicymakers have been right to fret about it. As Paul Krugman once said, “productivity isn’t everything, but in the long run , it is almost everything”.

Along comes Covid-19, and what happens? T hose lucky enough to be able to work from home do so. They flee from their offices, encouraged to do so by government, occasionally despite government. There is naturally  deep concern about the state of central London , Manhattan  and other major city centres . But even so, parts of the UK service sector are performing at least as well as before , and often better . Moreover, most employees are saving considerable time not spent on wasteful commuting  and this appears to be contributing to more contentment. There are huge adjustment challenges from this sudden shift, especially in the services support sector , and it is possible that once a truly successful vaccine is introduced for everyone, perhaps this will tur n out to be temporary. 

But perhaps it may be not. In the late 1980s when I was working for Swiss Bank Corporation (SBC), the firm acquired O’Connor Partners, a firm that thrived on technology. This was my first introduction to both email and video conferences. The latter was supposed to be the great invention that would supersede the need for endless international journeys, often for meetings that turned out to be not so productive. As time passed, the technology got better, and I recall many a year when we would use improved versions of these systems at Goldman Sachs.

It must be the same for virtually all people whose job involves sitting at a desk . And here we are. W e have found out, courtesy of Teams and Zoom and co, that we can get by, actually quite easily . Direct individual meetings can sometimes not be matched, but for much of what we all need to do, they’re unnecessary. T hink of the benefits to each of us that accrue from this, especially for our personal and leisure times. 

Many who crave the return to pre-pandemic norms, point out that the absence of water cooler chats and the informal human brainstorming will harm human invention , and damage productivity. If these were never to take place, of course this would be true, but what’s to prevent  groups from meeting as part of much more persistent flexible working life , where we work from both home and the office, as part of a more balanced, healthy “new normal”?  

When many countries publish their July-September GDP data in coming weeks, it will result in some raised eyebrows, and many will say, this uptick won’t persist. When the productivity data for the same period appears some weeks later, hardly anyone will even notice . But we should, because it could show the beginning of an improvement that’s here to stay.