What history tells you about post pandemic booms

Past disasters offer a guide to what will happen once life gets back to normal. Many countries are in for unusually fast economic growth

People spend more, take more risks—and demand more of politicians | Finance & economics

THE CHOLERA pandemic of the early 1830s hit France hard. It wiped out nearly 3% of Parisians in a month, and hospitals were overwhelmed by patients whose ailments doctors could not explain. The end of the plague prompted an economic revival, with France following Britain into an industrial revolution. But as anyone who has read “Les Misérables” knows, the pandemic also contributed to another sort of revolution. The city’s poor, hit hardest by the disease, fulminated against the rich, who had fled to their country homes to avoid contagion. France saw political instability for years afterwards.

Today, even as covid-19 rages across poorer countries, the rich world is on the threshold of a post-pandemic boom. As vaccinations reduce hospitalisations and deaths from the virus, governments are lifting stay-at-home orders and loosening rules on social mixing. Many forecasters reckon that America’s economy will grow by around 7% this year, roughly five percentage points faster than the pre-pandemic trend of just over 2%. Other countries are also in for unusually fast growth (see chart 1).

The Economist’s analysis of GDP data for the G7 economies back to 1820 suggests that such a synchronised acceleration relative to trend is rare. It has not happened since the post-war boom of the 1950s.The situation is so unfamiliar that economists are turning to history to get a sense of what to expect. The record suggests that, following periods of massive non-financial disruption such as wars and pandemics, GDP does tend to bounce back. But it offers three further lessons. First, while people are keen to get out and spend, uncertainty lingers for some time. Second, the pandemic encourages people and businesses to try new ways of doing things, upending the structure of the economy. Third, as the example of “Les Misérables” shows, political upheaval often follows, with unpredictable economic consequences. headtopics.com

Take consumer spending first. Evidence from earlier pandemics suggests that during the acute phase people behave as they have during the past year of covid-19: accumulating savings as spending opportunities vanish and it becomes risky to go outside. In the first half of the 1870s, during an outbreak of smallpox, Britain’s household-saving rate doubled. Japan’s saving rate more than doubled during the first world war. In 1919-20, as the Spanish flu raged, Americans stashed away more cash than in any subsequent year until the second world war. When that war hit, savings rose again, with households accumulating additional balances in 1941-45 worth some 40% of GDP.

History also offers a guide to what people do once life gets back to normal. Spending rises, prompting employment to recover, but there is not much evidence of bacchanalian excess. The popular notion that people celebrated the end of the Black Death by “wild fornication” and “hysterical gaiety”, as some historians suppose, is (probably) apocryphal. The 1920s were far from roaring, at least at first. On New Year’s Eve 1920, after the threat of Spanish flu had decisively passed, “Broadway and Times Square looked more like the old days”, according to one study, though America nonetheless felt like “a sick and tired nation”. A recent paper by Goldman Sachs, a bank, estimates that in 1946-49 American consumers spent only about 20% of their excess savings. That extra spending certainly pushed the post-war boom along, though the government’s monthly “business situation” reports in the late 1940s were nonetheless filled with worry of an impending slowdown (and indeed the economy went into recession in 1948-49). Beer consumption actually fell in those years. Cautious behaviour from consumers may be one reason why there is little historical evidence of pandemic-induced surges in inflation (see chart 2).

The second big lesson from post-pandemic booms relates to the “supply side” of the economy—how and where goods and services are produced. Though, in aggregate, people appear to be less keen on frivolous fun following a pandemic, some may be more willing to try new ways of making money. Historians believe the Black Death made Europeans more adventurous. Piling on to a ship, and setting sail for new lands, seemed less risky when so many people were already dying at home. “Apollo’s Arrow”, a recent book by Nicholas Christakis of Yale University, shows that the Spanish flu pandemic gave way to “increased expressions of risk-taking”. Indeed a study for America’s National Bureau of Economic Research, published in 1948, found that the number of startups boomed from 1919. Today new business formation is once again surging across the rich world, as entrepreneurs seek to fill gaps in the market.

Other economists have drawn a link between pandemics and another change to the supply side of the economy: the use of labour-saving technology. Bosses may want to limit the spread of disease, and robots do not fall ill. A paper by researchers at the IMF looks at a number of recent outbreaks of diseases, including Ebola and SARS, and finds that “pandemic events accelerate robot adoption, especially when the health impact is severe and is associated with a significant economic downturn.” The 1920s were also an era of rapid automation in America, especially in telephone operation, one of the most common jobs for young American women in the early 1900s. Others have drawn a link between the Black Death and Johannes Gutenberg’s printing press. There is as yet little hard evidence of a surge in automation because of covid-19, though anecdotes abound of robots springing up. headtopics.com

Whether automation deprives people of jobs, however, is another matter. And some research suggests that workers in fact do better in the aftermath of pandemics. A paper published last year by the Federal Reserve Bank of San Francisco finds that real wages tend to rise. In some cases this is through a macabre mechanism: the disease culls workers, leaving survivors in a stronger bargaining position.

In other cases, however, rising wages are the product of political changes—the third big lesson of historical boom periods. When people have suffered in large numbers, attitudes may shift towards workers. That seems to be happening in this pandemic: policymakers across the world are relatively less interested in reducing public debt or warding off inflation than they are in getting unemployment down. A new paper from three academics at the London School of Economics also finds that covid-19 has made people across Europe more averse to inequality.