An Economic Soap Opera: A GSU Expert's View of the Pandemic
As Governors across the nation work to determine how to begin lifting shelter-in-place regulations, the issue of the economy’s survival has played a pivotal role. Governors State University Finance Professor Michael Williams predicts the damage the pandemic will have on the already tenuous economy.
“If we were on a boat in the ocean and we discovered a hole, it would be fixable. But with our current economy, we’re in a leaky boat with five to ten different holes in a hurricane,” Dr. Williams explains.
Williams speculates that the economy could take even longer to recover from the pandemic because it was still vulnerable from the Great Financial Crash of 2008-2009 when the COVID-19 broke out 10 years later. Comparing the shaky economy to a dramatic soap opera, Williams said this ending was predictable.
Prior to the pandemic, four risk precursors were in effect. Williams refers to them “four huge drums of gasoline surrounded by sparks.”
1. “Debt-fueled zombie companies”
Williams said these companies were in existence only because cheap credit existed. While the companies had the façade of financial feasibility, their reliance on credit and international supply chain, now damaged by the pandemic, meant their position was perilous.
2. “Capital Misallocation”
With the Federal Reserve bailing out private companies for a second time in as many decades, companies that should be succeeding or failing on the merits of their businesses are, instead, being artificially propped up.
3. Consumer Vulnerability
As tremendous debt became a societal norm, post-recession 2008, consumers were at their margin in terms of financial feasibility and sustainability. This left consumers ill prepared to react to catastrophic events such as job loss or costly a health crisis.
4. Social Consumer Habits
The middle class was still attempting to recover and lacked the financial safety nets of previous generations. “There have been arguably 20 years of inequality increasing over time, mainly due to the labor effects of globalization. The middle class does not have the kinds of opportunities they had 30-40 years ago,” said Williams.
Now that COVID has hit, Williams reports seeing sparks in all sectors: demand, supply, financial and systems such as supply chain.
The erratic buying patterns of the COVID consumer offers one such problem.
“Even if a magic wand was waved and the pandemic was gone tomorrow, we would still have consumers who are permanently impacted by the last couple of months. We have a scarred consumer, who was overextended even before COVID hit,” Williams said.
With unemployment rates reaching depression-era levels of 30 million people looking for work, demand is being affected as consumers struggle to cope. “Even if companies are doing fine, their customers have been ripped from under them,” said Williams.
As the consumers are being hit by the pandemic, and many have begun hoarding, Williams predicts that consumption patterns will be permanently altered by the pandemic.
Despite the above, Williams sees a bright spot in all of the potential gloom: an opportunity to chart a course for a better tomorrow.
“We have the rare opportunity to sit back and take a deep breath––when we're not in the middle of trying to save a job or care for our children––to think about where we are, and how we want to spend the next 30 years. How can we improve things? Do we want to keep burning the candle at both ends or find something more sustainable, economically and socially? This is an opportunity to perfect on what we have. If managed correctly, we could come out of this in a better place than where we started,” Williams said.