People are wrongly thinking about the slow recovery from the virus as a reallocation shock, with demand pivoting away from leisure/hospitality, tourism, arts/recreation/entertainment. This is a very incomplete underestimate of the challenge...
It is really three reallocation shocks. First, is the pandemic crisis mode where businesses have to figure out how to survive on a mix of shutdowns, partial openings, PPP, and other stimulus...
This economy has its own allocation of labor and capital, with more in groceries and delivery. Next we have phase 2 where the economy is recovering, where the Highly Affected Sectors (leisure/hospitality, tourism, arts/recreation/entertainment) recover some amount but incomplete
For a numbers sake, let’s say 60% demand levels. This means the economy must reallocate into a temporary allocation of labor and demand across industries, with both out of highly affected sectors and (at best) spent elsewhere.
The optimistic theory is this reallocation must happen and will be somewhat minimally painful. But what is missed is that this is NOT the last reallocation, it is only temporary. The third reallocation is after the vaccine when demand returns to Highly Affected Sectors
Thus the challenge we put to the economy is, after one short extreme reallocation that has depleted cash and stressed balance sheets & credit, move to a different TEMPORARY reallocation, and reallocate again a year or so later to something like where we started.
Think of what this implies for phase 2 reallocation. We think firms will invest, expand, and hire to absorb labor and demand from losses in the Highly Affected Sector, even though this is TEMPORARY
And then in the phase 3 reallocation, we expect a group of sectors that has just gone through a massive wave of bankruptcies and credit destruction to invest, expand, and hire to absorb all that demand back.
How smooth do you think three massive reallocations in under two years will go exactly?
Consider this when someone attempts to frame this merely as a shrinking of highly affected sectors and an expansion elsewhere. Absolutely not the case
