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Covid economy: What economists got right (and wrong)

  By Robin Levinson-King
  BBC News

  Published
         13 hours ago

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    * [51]Coronavirus pandemic

  Waitress serves customers while masked image copyrightReuters
  image captionAcross America, many are back to work as pandemic
  restrictions ease

  What a difference a year makes. When the pandemic began, [52]the BBC
  spoke to some economists to make sense of what was happening to the US
  economy. We went back to those same experts to see how things played
  out, and what they're keeping their eye on in the future.

  At the time, they all said they thought the country would fare better
  than it did the last time it was faced with widespread economic
  uncertainty, during the 2008 economic recession.

  But they also had some worries, about how much the government would
  intervene and how effective the country's vaccine programme would be.

Prediction: Governments would have to intervene

  When the pandemic hit the US hard in the spring of 2020, everything
  ground to a halt.

  In a single month, 17 million Americans lost their job, and the gross
  domestic product (GDP), which is how economists measure the total value
  of a country's products and services, declined by $2.15tn (£1.55tn).

  The country hadn't seen a dip like that since the 2008 financial
  collapse.
  GDP has rebounded after a startling dip in 2020 image copyrightBBC News

  And like during the financial crisis, the US government needed to act
  quickly to avoid further damage, says Todd Knoop, an economist who
  researches the history of recessions at Cornell College.

  When the BBC spoke with Mr Knoop last June, he was hopeful government
  spending and monetary policy would keep the economy from totally
  collapsing.

  So what actually happened?

  Mr Knoop's prediction was right on the money. Congress passed a series
  of aid packages worth trillions of dollars. He believes these supports,
  which included direct payments to Americans and extended unemployment
  benefits, helped keep many people afloat even when they were out of
  work.

  "In almost every factor, things have turned out better than worst-case
  scenario, and that's great," says Mr Knoop now.

  The GDP has rebounded, 6.4% in the first three months of the year.

  While the unemployment rate is still higher than it was pre-pandemic,
  about 15 million Americans went back to work, which is also good news.
  Unemployment rate continues to fall after April 2020 high image
  copyrightBBC News

  Campbell Harvey, an economist at Duke University, agrees.

  Last June, he likened the pandemic to a hurricane, which wipes out
  businesses and homes indiscriminately. Pandemic spending is akin to
  disaster relief, he argued.

  But even with government aid, many small businesses have gone under or
  are struggling, he says, and that will leave a mark on the economy as a
  whole.

  "They don't make the headlines - you've never heard of them, they might
  be like a two-person operation, but that's some damage," he says.

Prediction: Some industries wouldn't make it

  During the first wave of lockdowns and stay-at-home orders last spring,
  Mr Knoop says it was clear that industries that relied on in-person
  customers - like travel and some retail - were going to struggle, while
  others would more easily adapt to the "new normal".

  "This is really destroying people and it's destroying human systems, in
  the way we share ideas and technology and interacting with each other,"
  he said at the time.

  What actually happened:

  Mr Knoop was right - the pandemic decimated some industries and boosted
  others.
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  Tech-heavy companies that delivered products or services to people's
  homes - like Amazon, Netflix, and Shopify —thrived.

  Amazon tripled its profits during the pandemic, making founder Jeff
  Bezos's personal wealth grow to $202bn according to Bloomberg's
  Billionaire Index.
  Number of economically inactive Americans is still rising image
  copyrightBBC News

  Meanwhile, entire industries like hospitality and transportation saw
  widespread collapse, with millions still out of work.

  [55]The National Restaurant Association says their industry lost $115bn
  in sales when comparing 2020 sales to 2019, while the aviation industry
  has received about $55bn in bailout money from the federal government.

Prediction: The economy would rebound with a vaccine

  When the Dow Jones dropped nearly 3,000 points in a single day on 16
  March 2020, many panicked.

  But Mr Harvey predicted that as soon as viable vaccines emerged, the
  economy would rebound.

  "There is light at the end of the tunnel, and that light was being
  driven by a vaccine," he says.

  What actually happened:

  Wall Street did rebound - and then some.

  The stock market has gone on to reach record highs since that record
  low on that March day, with the Dow Jones almost doubling in a year,
  reaching an all-time high of 34,200.67 points on 16 April, when almost
  40% of Americans had received at least one dose.
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  While this boom is even bigger than Mr Harvey expected, he remains
  cautious about what this means for long-term economic recovery.

  "Essentially the stock market has come to the view that the pandemic
  didn't happen. It's like oh, we're just back to exactly where we were.
  That is hard to buy," he says.

  Mr Harvey says market's dizzying rebound, combined with low interest
  rates, has led many people to make decisions with "rose-coloured
  glasses", from buying their dream home in the country to taking out a
  big loan on their business - and that could lead to more economic
  trouble down the road if the economy hits rocky waters again.
  Dow Jones continues to rise despite pandemic image copyrightBBC News

  Something that could trigger another recession would be if new variants
  prove resistant to vaccines, or if there was a problem in vaccine
  delivery.

  Mr Harvey is critical of how Western nations have hoarded vaccines,
  noting that the longer other countries wait for vaccines, the longer
  the virus has to mutate.

  "There really is no border when it comes to a pandemic," he says.

  "It's global, and the longer you wait in terms of vaccination, the
  higher probability you have of these variants that are much more
  contagious and much more deadly."

What comes next?

  While both Mr Harvey and Mr Knoop think the economy has made a strong
  recovery this past year, they also have concerns about the future.

  "Some of these risks are bigger today than they were a year ago, and
  that leads me to be cautious about the path forward," Mr Harvey says.

  One of Mr Harvey's biggest concerns is the risk of unexpected
  inflation, not necessarily in the short term, but in the years to come.
  US inflation hits record high since 2008 image copyrightBBC News

  When governments borrow money to inject the economy with additional
  spending, as they have done, it can trigger a rise in both interest
  rates and the prices of ordinary goods.

  "People believe you can just spend and there is no consequence - there
  is a consequence, we're just expropriating from our children and
  grandchildren," he warns.

  For Mr Knoop, his long-term concern is about how uneven the country's
  economic recovery has been. Some people have thrived, while others have
  struggled, often along long-established fault lines of inequality such
  as race and gender, he says.

  "A year ago I would have anticipated inequality getting worse but the
  part of inequality I maybe wouldn't have appreciated is how well people
  at the top have done during Covid," he says.

  "I never would have expected the stock market to go so high, the
  real-estate boom to go up - people that had wealth before Covid have
  actually done very, very well."
  The unemployment rate for African Americans has not fallen fast as it
  has for white Americans image copyrightBBC News

  Meanwhile, many lower-paid workers in the service industry have seen
  their jobs disappear or their hours cut back, or if they are essential
  workers, they've had to put their health and safety on the line to go
  to work.

  This widening inequality is bad news for the economy, Mr Knoop says,
  because it negatively effects so many aspects of our society, such as
  health, wealth, education and crime.

  "Inequality is bad for economic growth - it's bad for economic growth
  today, it's bad for educational outcomes which means worse economic
  growth in the future," he says.

Related Topics

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