T.HE CHOLERA The pandemic of the early 1830s hit France hard. In one month, nearly 3% of Parisians were wiped out, and hospitals were overwhelmed by patients whose ailments the doctors couldn’t explain. The end of the plague sparked an economic revival, and France followed Britain in an industrial revolution. But as anyone who has read Les Misérables knows, the pandemic has also contributed to another type of revolution. The city’s poor, hardest hit by the disease, competed against the rich who had fled to their country houses to avoid contagion. France experienced political instability for years thereafter.
Even if the Covid-19 is raging in poorer countries, the rich world is now on the verge of a post-pandemic boom. Governments are lifting home stays as vaccinations reduce hospital stays and deaths from the virus. Many forecasters expect the American economy to grow more than 6% this year, at least four percentage points faster than before the pandemic. Unusually rapid growth has also been recorded in other countries (see Figure 1). The economistAnalysis of GDP Data for the G7 economies dating back to 1820 suggest that such synchronized acceleration relative to trend is rare. This has not happened since the post-war boom of the 1950s.
The situation is so unusual that economists turn to history to learn what to expect. The record suggests that after periods of massive non-financial disruptions such as wars and pandemics GDP jumps back. It offers three more lessons. First, while people enjoy going out and spending money, uncertainty lingers. Second, crises encourage people and companies to break new ground to improve the structure of the economy. Thirdly, as “Les Misérables” shows, political upheavals often occur with unpredictable economic consequences.
Take consumer spending first. Evidence from previous pandemics suggests that in the acute phase, people will behave like they did last year from Covid-19 and accumulate savings as spending opportunities disappear. In the first half of the 1870s, during a smallpox outbreak, the household saving rate doubled. Japan’s savings rate more than doubled during the First World War. In 1919-20, when the Spanish flu raged, Americans stowed more money than in any subsequent year up to World War II. When that war broke out, savings rose again and households accumulated around 40% additional assets in 1941-45 GDP.
The story also provides a guide to what people do when life returns to normal. Spending is rising, leading to a rebound in employment, but there aren’t many signs of a surplus. The idea that people celebrated the end of the Black Death through “wild fornication” and “hysterical glee,” as some historians assume, is (probably) apocryphal. The 1920s were anything but roaring, at least initially. On New Year’s Eve 1920, after the threat of the Spanish flu had died down, “Broadway and Times Square looked more like they used to, according to a study,” but America still felt like “a sick and tired nation.” A recent paper by the Goldman Sachs bank estimates that American consumers spent only about 20% of their excess savings in 1946-49. These additional spending certainly contributed to the post-war boom, although the government’s monthly “business” reports in the late 1940s were still dominated by concerns about an impending slowdown (and the economy actually slipped into recession in 1948-49). Beer consumption actually went down. Consumer caution may be one reason why there is little evidence of a pandemic-induced surge in inflation (see Figure 2).
The second great lesson from the post-pandemic booms relates to the “supply side” of the economy – how and where goods and services are produced. Although people seem less interested in frivolity overall after a pandemic, some may be more willing to explore new avenues to make money. Historians believe the Black Death made Europeans more adventurous. Piling on a ship and setting sails for new lands seemed less risky with so many people 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”. A study by the American National Bureau of Economic Research published in 1948 found that the number of startups boomed from 1919 onwards. Today, business start-ups are picking up again in the rich world as entrepreneurs seek to fill gaps in the market.
Other economists have linked pandemics to yet another change in the supply side of the economy: the use of labor-saving technology. Bosses may want to limit the spread of disease, and robots don’t get sick. A contribution from researchers at IMF addresses a number of recent disease outbreaks, including Ebola and SARSand notes that “pandemic events are accelerating the adoption of robots, especially when the health effects are severe and associated with a significant economic downturn”. The 1920s was also an era of rapid automation in America, particularly telephone operations, one of the most common tasks for young American women in the early 1900s. Others have made a connection between the Black Death and Johannes Gutenberg’s printing press. There is still little clear evidence of an increase in automation due to Covid-19, although there are numerous anecdotes.
But whether automation is taking jobs away from people is another question. Some research suggests that workers are actually better off after pandemics. A paper released by the Federal Reserve Bank of San Francisco last year found that real wages are trending upward. In some cases, it does so through a macabre mechanism: the disease kills workers and leaves survivors in a stronger bargaining position.
In other cases, however, rising wages are the product of political change – the third great lesson from historical booms. When people have suffered in large numbers, attitudes towards workers can change. This time it seems to be happening: Policy makers around the world are less interested in cutting public debt or staving off inflation than they are in reducing unemployment. A new paper by three scholars from the London School of Economics also finds that covid-19 has made people across Europe more unequal about inequality.
This pressure has in some cases led to political unrest. Pandemics expose and accentuate pre-existing inequalities, leading those on the wrong side of the business to seek remedies. According to a study, Ebola increased civil violence in West Africa by 40% in 2013/16. Current research results from the IMF looks at the effects of five pandemics, including Ebola, SARS and Zika in 133 countries since 2001. It notes that they have led to a significant increase in social unrest. “It is to be expected that riots in places where they previously existed can re-emerge once the pandemic subsides,” researchers write in another IMF Paper. Social unrest appears to be peaking two years after the pandemic ended. Enjoy the coming boom while it lasts. It can’t be long before history changes. ■
A version of this article was published online on April 25, 2021
This article appeared in the Finance & Economics section of the print edition under the heading “Money, Machines and Chaos”.