The "Shut In" Economy







Take Aways:

1. Periodic lockdowns may continue from time to time. It may now be a part of life.

2. Lockdowns and social distancing have accelerated the growth of the so called "shut-in economy". Get to know that term.

3. Growth in remote working and remote learning will accelerate. Understandably those whose livelihoods are threatened by these trends are not pleased to hear this. But they would be wise to prepare anyway.

4. E-commerce will continue to boom. Think Amazon. Think food delivery services.

5. New safety measures will seem intrusive and may compromise personal data but increased surveillance will be deemed necessary. Get used to it.

6. People with reduced access to health care, or who live in more disease-prone areas, will now also be more frequently shut out of places and opportunities open to others.


7. Workers negatively impacted by the "shut-in economy" will see their situations become even more precarious. Start adapting quickly.

8. The world has changed many times, and it is changing again.


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This section is inspired by and references an article in the Harvard Business Review called -
Understanding the Economic Shock of Coronavirus by Philipp Carlsson-Szlezak, Martin Reeves and Paul Swartz

As the coronavirus continues its march around the world, governments have turned to proven public health measures, such as social distancing, to physically disrupt the contagion. Yet, doing so has severed the flow of goods and people, stalled economies, and is in the process of delivering a global recession. Economic contagion is now spreading as fast as the disease itself.

In the previous section it was suggested that this is not a temporary disruption. It may in fact be the the start of a completely different way of life.

The concept of a recession can be overly simplistic. All it says is that expectations have flipped from positive to negative growth, at least for two consecutive quarters.

We need to understand the shape of the shock — what we call “shock geometry” — and its structural legacy. What drives the economic impact path of a shock, and where does Covid-19 fit in?

To illustrate, consider how the same shock —the global financial crisis — led to recessions with vastly different progressions and recoveries in three sample countries:

- V-shape. In 2008, Canada avoided a banking crisis: Credit continued to flow, and capital formation was not as significantly disrupted. Avoiding a deeper collapse helped keep labor in place and prevented skill atrophy. GDP dropped but substantially climbed back to its pre-crisis path. This is typical of a classic “V-shape” shock, where output is displaced but growth eventually rebounds to its old path.

- U-shape. The United States had a markedly different path. Growth dropped precipitously and never rebounded to its pre-crisis path. Note that the growth rate recovered (the slopes are the same), but the gap between the old and new path remains large, representing a one-off damage to the economy’s supply side, and indefinitely lost output. This was driven by a deep banking crisis that disrupted credit intermediation. As the recession dragged on, it did more damage to the labor supply and productivity. The U.S. in 2008 is a classic “U-shape” — a much more costly version than Canada’s V-shape.

- L-shape. Greece is the third example and by far the worst shape — not only has the country never recovered its prior output path, but also its growth rate has declined. The distance between old and new path is widening, with lost output continuously growing. This means the crisis has left lasting structural damage to the economy’s supply side. Capital inputs, labor inputs, and productivity are repeatedly damaged. Greece can be seen as an example of L-shape, by far the most pernicious shape.

So, what drives “shock geometry” as shown above? The key determinant is the shock’s ability to damage an economy’s supply side, and more specifically, capital formation. When credit intermediation is disrupted and the capital stock doesn’t grow, recovery is slow, workers exit the workforce, skills are lost, productivity is down. The shock becomes structural.

V, U, L shocks can come in different intensities. A V-shaped path may be shallow or deep. A U-shape may come with a deep drop to a new growth path or a small one.

Where does the coronavirus shock fit in so far? The intensity of the shock will be determined by the underlying virus properties, policy responses, as well as consumer and corporate behavior in the face of adversity. But the shape of the shock is determined by the virus’ capacity to damage economies’ supply side, particularly capital formation. At this point, both a deep V-shape and a U are plausible. The battle ahead is to prevent a clear U trajectory.

So let us now discuss this in more practical terms.  In any scenario, the short term will be hugely damaging to businesses that rely on people coming together in large numbers: restaurants, cafes, bars, nightclubs, gyms, hotels, theaters, cinemas, art galleries, shopping malls, craft fairs, museums, musicians and other performers, sporting venues (and sports teams), conference venues (and conference producers), cruise lines, airlines, public transportation, private schools, day-care centers. That is to say nothing of the stresses on parents thrust into home-schooling their kids, people trying to care for elderly relatives without exposing them to the virus, people trapped in abusive relationships, and anyone without a financial cushion to deal with swings in income.

But there would be on innovation. Innovation or adaptation. Gyms could start selling home equipment and online training sessions, for example. We’ll see an explosion of new services in what’s already been dubbed the “shut-in economy.” 

Many people and companies realise that they had more to offer them than they had realised. Zoom, an online videoconferencing service is exploding.  Now it is providing hundreds of millions of people a day not just with meetings, but with Tai Chi classes and “quarantinis”. Slack and Microsoft’s Teams are gaining many converts. No one expects the amount of distance working ever again to be as low as it was before the virus hit.

Restrictions put in place during the sars outbreak of 2003 helped accelerate China’s embrace of e-commerce. Covid-19 is having a similar effect, even in economies where e-commerce is already common. Chris Grigg, boss of British Land, one of Britain’s biggest retail and office landlords, says that as a result of covid-19 his company has brought forward by several years the time when it expects the share of shopping done online in Britain to double from its current 20%—already among the highest levels in the world. 

The pandemic may not just highlight the convenience of online life; it may also make some of its drawbacks less disturbing. Germans, who have historically well-founded privacy concerns, are resistant to anything that looks like “surveillance capitalism”. But Karl Haeusgen, chairman of hawe, a maker of hydraulic pumps, says an app that helped maintain public health by tracing covid-19 infections could make them less protective of their data. If that were the case, they might become converts to other data-driven business, too.

This trend will be good news for giants of the tech scene such as Alphabet, Amazon and Apple. So will other factors. The need for economic resilience will be added to the arguments against breaking up the biggest tech companies. If the tech world continues to splinter into rival Chinese and Western camps each side will want its champions.

As the world gets back on its feet, big firms will have better access to capital markets, giving them an extra edge over smaller competitors. And across the world there will be one increasingly big customer, too—the state.  Governments will be the demand engine in many economies for the next couple years.

In the near term, we may find awkward compromises that allow us to retain some semblance of a social life. Maybe movie theaters will take out half their seats, meetings will be held in larger rooms with spaced-out chairs, and gyms will require you to book workouts ahead of time so they don’t get crowded.

Ultimately, however, I predict that we’ll restore the ability to socialize safely by developing more sophisticated ways to identify who is a disease risk and who isn’t, and discriminating—legally—against those who are.

We can see harbingers of this in the measures some countries are taking today. Israel is going to use the cell-phone location data with which its intelligence services track terrorists to trace people who’ve been in touch with known carriers of the virus. Singapore does exhaustive contact tracing and publishes detailed data on each known case, all but identifying people by name.

We don’t know exactly what this new future looks like, of course. But one can imagine a world in which, to get on a flight, perhaps you’ll have to be signed up to a service that tracks your movements via your phone. The airline wouldn’t be able to see where you’d gone, but it would get an alert if you’d been close to known infected people or disease hot spots. There’d be similar requirements at the entrance to large venues, government buildings, or public transport hubs. There would be temperature scanners everywhere, and your workplace might demand you wear a monitor that tracks your temperature or other vital signs. Where nightclubs ask for proof of age, in future they might ask for proof of immunity—an identity card or some kind of digital verification via your phone, showing you’ve already recovered from or been vaccinated against the latest virus strains.

We’ll adapt to and accept such measures, much as we’ve adapted to increasingly stringent airport security screenings in the wake of terrorist attacks. The intrusive surveillance will be considered a small price to pay for the basic freedom to be with other people.

As usual, however, the true cost will be borne by the poorest and weakest. People with less access to health care, or who live in more disease-prone areas, will now also be more frequently shut out of places and opportunities open to everyone else. Gig workers—from drivers to plumbers to freelance yoga instructors—will see their jobs become even more precarious.

The world has changed many times, and it is changing again. 

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