Potential permanent changes from our experience with COVID-19
We recently asked our research staff and senior fellows for their thoughts on how Canada’s experience with COVID-19 and the related recession might permanently—at least the next five years—affect Canadians and our economy. In total, we received 19 submissions. Find below the final submissions as selected by our team (after adjusting for duplicates in certain areas such as trade and savings).
The severe loss of incomes and jobs resulting from the sudden shutdown of major parts of the economy will lead to a prolonged aversion to debt. This is likely to be especially marked in Canada, which for the last decade gorged itself on debt, ignoring the lessons from the United States and Europe of the damage inflicted by excessive borrowing just before the Great Recession. Canada entered this crisis with among the highest levels of household and business debt in the G20. Borrowing was encouraged by record-low interest rates and political leaders who did not caution Canadians about the risk debt poses, even at low interest rates, when jobs are lost and incomes plunge during the inevitable downturn. This experience will trigger a period of paying down debt across the economy, from households who bought high-priced homes in Toronto and Vancouver they no longer can afford to businesses in aerospace or the oil patch saddled with high debt as revenues plunge. This will impede economic recovery in Canada, similar to the U.S. hangover from its debt binge before 2008.
Skepticism of models and forecasts
In the early days of COVID-19, many respected scientists modelled doomsday scenarios, which the media was eager to report. For example, Neil Ferguson, an epidemiologist, and his Imperial College team issued a report, which estimated worse-case scenarios of 2.2 million U.S. deaths and 510,000 British deaths due to COVID. The media, including CNN and the New York Times, jumped on the doomsday predictions and the numbers were used by U.S. President Trump and U.K. Prime Minister Boris Johnson to shape policy. Thankfully (and responsibly), Ferguson clarified that the number of fatalities would probably be much lower with effective physical distancing. As of today (May 19, 2020), the World Health Organization puts COVID deaths at 89,272 in the United States and 34,796 in the United Kingdom. Unfortunately, environmental modellers haven’t been as responsible. Here at the Fraser Institute, our scholars have long pointed out the problems with environmental modelling and the proclivity to overstate the impact of CO2 emissions. Post-COVID, the general public (and the media) should exercise a heathier dose of skepticism towards doomsday environmental modelling and apocalyptic claims.
To offset a separate and more optimistic prediction, I offer a pessimistic counter-prediction, which is that we will be burdened by a much larger government sector for the foreseeable future. Government spending (as a share of the economy) could reasonably approach 50 per cent, meaning that before accounting for the effects of government regulations in our lives, government spending will represent half of the resources of our economy. Those programs and income transfers must be paid for either by taxes today or taxes in the future, which are disguised as deficits (i.e. borrowing) today. We may well see within the year another push by various governments, particularly the Trudeau Liberals, for higher income taxes, higher capital gains taxes, a new inheritance tax and perhaps even a new general wealth tax, all of which would impede entrepreneurship, investment, business development, employment creation and economic prosperity. The response to COVID-19 ushered in a period of much larger government, which will likely prove stubborn to reverse.
Lenin once said there are decades where nothing happens and weeks where decades happen. In this new era of the past few weeks, Canada has become less free. The lockdowns will eventually ease, but we have crossed a threshold. Canadians now want government to keep them safe—not just from foreign threats and violence, but from viruses and vicissitudes of life. Authorities have enthusiastically seized the moment. Politicians have assumed unprecedented powers not subject to legislative oversight and have suspended civil liberties. For the first time ever, officials have confined citizens, with their approval, to their homes. Municipalities issue citations for walking through the park, police enforce rules that do not exist, and health authorities surveil the sick. A crisis is an ideal time for the state to advance into territory from which it will not wish to retreat. In time, controls will loosen but old expectations have been swept away. In this new era, we will discover that leaders of all political stripes have more than a little Lenin in them.
Continued rise of trade protectionism
There are still people who do not believe in the globalized food supply chain, and the disruptions due to COVID-19 provide those people with ammunition for protectionism. There will be a rising tide of agricultural protectionism linked with the economic nationalism we’ve already observed in too many countries.
Less globalization, more localization
Economies will become less globalized and more localized. International trade will fall and protectionism—creating barriers to international trade to promote domestic industries—will increase. Protectionism was on the rise prior to the pandemic (consider the U.S.-China trade war) but COVID-19 will intensify this trend. Indeed, countries are already working to internalize supply chains to mitigate the risk of interruption from the potential COVID aftershocks and to reduce the potential economic damage from similar risks in the future. The World Trade Organization estimates that world trade will decline by between 13 per cent and 32 per cent this year. And the OECD estimates that foreign direct investment will fall by 30 per cent, at a minimum. The residual effects from the outbreak, including heightened fear and desire for self-sufficiency, will extend the damage to globalization beyond this year. Unfortunately, the retreat from globalization will make almost everyone worse off—prices will increase, innovation will slow and economic recovery will be tepid. Countries that facilitate investment and trade will be better off.
New world reorder
The effects of COVID-19 will include a transformation of the international order and Canada’s role in it. First, the meteoric rise of China with its aspirations of world leadership and greater respect will come to a crashing halt. China’s delay in alerting the world to the extent of the outbreak while simultaneously scouring the world for PPEs is not the leadership and stewardship one expects to see. Second, the abdication of global leadership and retreat by the United States is nearly complete, reinforced by its chaotic handling of its own public health situation. Third, the Europeans, given what has transpired with both China and the U.S., will assert more leadership, engagement and involvement in world affairs though they will not always sing with one voice. The result will be an even more competitive and multilateral world order with Russia, Saudi Arabia and India constituting additional elements of change and disruption. Canada can benefit, but must be nimble in this changing world. We must engage with all on our own terms while also championing small open economies along with Australia, New Zealand, Taiwan and the Scandinavian countries.
Declining home ownership
North American home ownership will likely decline, thanks largely to increased risk aversion, as others have noted. Home ownership not only concentrates risk in a single asset, but also potentially locks people into particular real estate markets. This lack of mobility can be frightening during an economic crisis that might require one to eventually relocate for work, and the lack of liquidity can present major challenges for homeowners. A second economic crisis in just over a decade could not only dissuade people from purchasing their own homes, but also make rental properties less appealing to individual investors. The flip side of this is that private equity (PE) funds and real estate investment trusts (REIT) have become important parts of major housing markets, with PE funds having invested in single-detached houses in the wake of the financial crisis and REITs becoming popular investment vehicles for those seeking stable income (such as pension funds). The upshot of this shift is that housing risk will be more broadly distributed. It might also result in households having more diversified assets. With real estate declining as a factor in retirement planning, households might divert more savings towards other assets.
Accelerated transition to e-commerce
There will be an accelerated shift towards more convenience and flexibility in our everyday lives. In recent years, consumer preferences have evolved to emphasize the ability to enjoy products and services from the comfort of our own homes. The rise of Amazon, Netflix and food delivery apps are just a few examples. COVID-19 will force both consumers and businesses to accelerate this transition and expand convenience to other areas of the economy. E-commerce will become the norm for businesses that want to thrive, while the number of brick and mortar stores will decline. Canadians will demand more online options for grocery shopping, take-out, liquor from restaurants and bars, electronic products, furniture, etc. This will require companies to compete by providing faster and higher-quality delivery options, changing their marketing schemes and upgrading their websites to increase capacity.
Greater recognition of voluntary collective action
This may be more wishful thinking than a prediction, but I believe Canadians will be, at the very least, more aware of the power and effectiveness of local voluntary organizations and the charitable potential of their neighbours. Too often policy debates in Canada (and elsewhere) ignore the vast array of non-profits and charities delivering vital goods and services to some of society’s most vulnerable people, independent of government. They also ignore the daily charitable acts between neighbours. I doubt there’s one Canadian who hasn’t heard a story about a neighbour helping another, whether it was getting groceries or simply checking in to say hello to a lonely elderly neighbour. Indeed, this empathetic connection between people, which Adam Smith famously identified in 1759, has been witnessed every night at 7 p.m. when Canadians across the country bang on pots in appreciation of frontline workers, particularly health-care workers. Recognizing and potentially harnessing the charitable impulses of Canadians both individually and through formal non-profit organizations could revolutionize how we collectively take care of one another and in doing so enrich our communities.
Changing workforce conditions—accelerated rise of telecommuting
Although many workers value human interaction in the office and will wish to return once it’s safe, others will value the convenience of working from home, not having to commute and spending less on child care. As a result, a significant portion of the workforce will demand flexibility to exclusively work from home or split time between the office and their home. Employers have now had a trial run with this dynamic and must adapt to both attract and retain workers. Consequently, companies must spend more money and time on information technology including quality remote connections, cyber security and troubleshooting procedures. Companies will also face challenges instilling strong corporate cultures and maintaining relationships with employees as the workplace dynamic shifts.
Heightened demand for health-care reform
COVID backlogs represent an opportunity to improve provincial elective surgery wait times and delivery. The mass cancellation of elective surgeries to prepare hospitals for an influx of COVID patients has revealed the fragilities of Canada’s health-care system. In light of the multi-year backlogs, provincial health-care systems must somehow triage, plan and deliver these procedures. We’re already seeing calls to overhaul health care so that the booking of procedures occurs with integrated surgical and health-care teams instead of single referring physicians. For provinces who have lagged behind, we’re also likely to see an increased push for a centralized list for triage and surgical bookings. Lastly, many Canadians will, for the first time, receive care at private institutions partnering with the provinces. This is an opportunity to demonstrate the positive collaboration between these two sectors. If done correctly, these partnerships could change the conversation around the role of the private sector in our health-care system.
Balance sheet regulation of firms
Experiences from the two recent crises—the 2008 financial crisis and the 2020 COVID-19 pandemic—illustrate government’s proclivity to bail out big corporations. The justification for bailouts is that big corporations have a "systemic" role and their bankruptcies can result in a wave of bankruptcies, massive unemployment and slower economic recovery. Whether the justification is valid or not, past experiences prove that governments offer bailouts in times of crisis, incentivizing firms to take on more debt and risks than they would in the absence of an expectation of a bailout (what we refer to as “moral hazard” in economics). However, the balance sheets of the federal and most provincial governments are deteriorating rapidly due to the recession. There’s a real risk that governments will turn to micro-regulations to ensure firms will be less dependent on government bailouts in the future. The potential regulations would likely focus on capital requirements—more equity financing instead of debt. Moreover, companies may be regulated by liquidity requirements such as holding more cash (safer assets) for rainy days.
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