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The New Normal Part 7: The Impact & Probable Outcome

By: John Norris

The Impact and Outcome of the New Normal

While economists might not agree on an exact definition or formula for recession, most everyone understands the basics of what one is: a general slowdown in economic activity. Usually, this is due to a decrease in demand relative to the growth in supply. There can be any number of reasons for the former, but there is only one real remedy: slowing the growth in supply in order to reach the market equilibrium price for demand.

Put another way: a slowdown in demand leads to a reduction in supply. Traditionally, production workers have borne an outsized brunt during recessions, as factories and construction sites cooled their output, or supply. This led to job losses and eventual innovations in manufacturing and building processes in order to drive down costs. Unfortunately, these efficiencies, borne out of necessity, generally meant fewer job openings for semi and unskilled labor when employers began hiring again.

These enhancements in productivity (usually involving the use of more advanced technologies) are big reason why real output in manufacturing has INCREASED 63.6% from 1Q 1987 through 1Q 2020 while manufacturing employment has DECREASED 26.9% over that same time frame. This according to the FRED economic research arm of the Federal Reserve Bank of St. Louis.

Intuitively, the least productive employees are usually the first to lose their jobs. Ordinarily, these are either those workers with fewer skills or those who are getting paid too much for their level of skill. As a result, recessions have historically had a pernicious habit of forcing less skilled and less profitable workers out of a job.

While not the norm, a supply shock can also lead to a recession. This is when the production and/or supply of good & services in an economy decreases at a more rapid rate than demand, or ceases for some reason. This is what happened during our attempts to stop the spread of COVID19: governments shut off the supply spigots when they locked down local economies. Since this was by mandate, as opposed to market forces, the service side of the US economy was hit more rapidly and more completely than the production side. After all, demand didn’t dry up as completely or as quickly as supply did. It would have been almost impossible to have done so.

Almost overnight, jobs in the retail, leisure & hospitality, and transportation industries vanished. After all, it is hard for employers to pay employees when the powers that be determine their businesses have to close in order to stem the spread of an incurable virus. No revenue almost always means no paychecks.

Perhaps not surprisingly, the first workers to lose their jobs in the service sector were the least productive, as employers desired to keep their best employees on staff for when things returned to normal. As with the manufacturing industry, those with lesser skills or overpaid for their level of skill were the first to go. Whether they will all come back will depend on:

  1. When the economy fully and completely reopens.
  2. When demand ultimately gets back to where it was previous to the pandemic.
  3. Whether their employer can stay open until then.

Longer-term, the underlying question is: will consumer behavior be different in the new normal.

As I type, no one really knows. However, if history serves as a guide, the most highly educated, the most productive, the most highly or uniquely skilled, and the most creative US workers will probably do just fine. They almost always do. The reason is simple: labor competes the same way businesses do, either on price or on product. Since governments at all levels set minimum wage requirements, it is almost impossible for labor to compete on price alone. As a result, US workers are increasingly in two camps: those that can compete for highly skilled and highly compensated jobs and those who can’t.

Therefore, as is the case with all recessions and other economic slowdowns, the less educated, the less skilled, and the less profitable participants in our workforce will be most impacted by the COVID19 pandemic.

If only a portion of the predictions we have made in this series comes to pass, workers around the world will have to adapt to the changes in the new normal or have the global economy leave them behind. Since the new normal we envision involves an increased use of technology in how we live our lives and conduct business, the average worker will have to become more proficient in their use of it. Even jobs which you wouldn’t imagine would use much advanced technology, like massage therapists, will have to make full use of it to better market themselves, book appointments, and even bill their clients.

To that end, I can’t count the number of times I have opted for the vendor at the farmers’ market or antique mall who uses a payment method like Square or Venmo over the ones who don’t. While this might seem like a relatively minor adaptation of technology, the ones who adopt it first will have an advantage over their competition. Trust me, the booths that take Square always close earlier than the ones that don’t.

Essentially, the workers who adapt the best will find they won’t be as constrained by corporate structure as they were previously. In this environment, the creative among us should thrive. They have always had the idea generation; however, their adaptability and increased use of technology will give them access to more efficient production and distribution channels. For example, it isn’t terribly difficult to envision an industrial designer manufacturing their ideas using a 3-D printer, and selling their products through a number of different outlets.

Prior to the COVID19 pandemic, the so-called ‘gig economy’ was becoming increasingly sophisticated. According to Investopedia.com, key takeaways of a gig economy are:

  • The gig economy is based on flexible, temporary, or freelance jobs, often involving connecting with clients or customers through an online platform
  • The gig economy can benefit workers, businesses, and consumers by making work more adaptable to the needs of the moment and demand for flexible lifestyles.
  • At the same time, the gig economy can have downsides due to the erosion of traditional economic relationships between workers, businesses, and clients.

If left undisturbed, the gig economy will flourish in the new normal which follows. Younger workers will make full use of existing technology to perform handyman jobs, babysit, run errands for clients (Shipt comes to mind), drive for ride-share companies like Uber or Lyft, make deliveries for companies like Amazon Flex, and even do creative and professional work on platforms like Fiverr and SpareHire. Companies will also get into the act and develop their own ‘gig economy’ applications. This will ultimately reduce the need for FTEs (full-time employees) moving forward. Again, this assumes the powers that be leave the gig economy undisturbed.

Unfortunately, politicians will probably put pressure on ‘gig employers’ to turn their 1099 contract workers into W-2 FTEs, with benefits, especially at the state and local levels. Obviously, this defeats the purpose and benefits of the gig economy, and will limit the opportunities for workers (especially younger ones) as the economy slowly adopts to the new normal. As is often the case, well-intentioned actions will have ironic consequences.

Further, the powers that be at all levels of domestic government will enact or otherwise pass a number of new rules/regulations in attempt to mitigate job and income losses during subsequent pandemics and/or economic downturns. Necessarily oblivious to the fact government mandated lock downs were the proximate cause of the economic downturn, politicians will concoct all sorts of restrictions and procedures which will inhibit companies from operating efficiently. Many of these will be innocuous sounding and supposedly in the public good, such as limiting the number of people in a store to a pre-determined level. However, the costs associated with these rules will be enough to be a burden on many small businesses or branch offices of larger employers.

Globally, emerging economies will likely struggle with the new normal. As the former 1st World struggles with its debt load and its own problems, former 3rd World countries will lack access to capital and markets for their limited goods and services. As we discussed in a previous segment, some countries will benefit from China’s Belt & Road Initiative, but China will be quick to jettison those which don’t fit into its longer-term plan. It was one thing to ‘throw money around’ to limit the Western world’s influence. However, as the latter retreats from low income countries, Beijing won’t feel as compelled to help those countries which don’t have any real value to the Middle Kingdom.

When you look at everything together, the new normal will benefit those:

  1. who have access to capital
  2. who are relatively well-educated, trained, and/or creative
  3. that are easily adaptable, especially when it comes to technology.

Those that don’t meet or have these characteristics will be detrimentally impacted, and fall even farther behind.

As a result, the collective new normal(s) in this series will likely widen the existing gaps in both income and wealth, both domestically and internationally, between the haves and the have nots. This will cause societal strife, as we have already seen in the United States. It is highly likely there will be regime change in a number of less developed countries, as their governments are either unwilling or unable to adapt to this rapidly changing world. Unfortunately, there will be a power vacuum in the many of these, which will devolve into some level of anarchy and lawlessness. As a result, many of these people will continue to fall even farther behind.

In the end, those most impacted will be the same as they usually are during periods which change how we live our lives and conduct business: the less skilled, the less educated, and the less adaptable to change, for whatever the reason. The last several new normal have led to a greater reliance on technology and bigger government. The most competitive among us relied on the former, and the less competitive on the latter. This has helped lead to inequalities in our society and economy, as technological advancements are much better generators of wealth than government societal programs.

Unfortunately, this will continue, and might even accelerate despite the best efforts of politicians to counter the trend. The reason is simple: mandating competitiveness and/or adaptability doesn’t make it so. The best way of decreasing income and wealth inequalities is increasing the supply of workers who can compete on product, or the quality of their output. There is ample demand in the economy to accommodate many, as is evidenced by too much money ending up in the hands of too few. This will require more effective training and education in order to make semi and unskilled US workers more competitive. However, this would be an unpopular position as it would require significant additional work from the least productive in our economy AND an admission from government it isn’t doing an effective job ensuring the most vulnerable are still economically competitive.

As such, in closing, the low hanging fruit is, again, this new normal will be a lot like previous new normals in its impact on much of society. After all, those that don’t learn form history are doomed to repeat it, and, as we all well know, human beings can be awfully stubborn.

Read the full New Normal series here:

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