This essay was first published in the book, Aftershocks and Opportunites. It was written in 2020. I think it aged fairly well.
Is COVID-19 a great equalizer or a great divider?
COVID-19 is by no means an equalizing crisis. Indeed, one of the most significant lasting socio-economic effects of the crisis will be the opening up of the fault lines running underneath fragile modern society.
Specifically, the fault lines between rich and poor, young and old, and the welfare state itself.
The center may not hold.
The winner takes all.
Protracted lockdowns the world over have resulted in widespread economic destruction and wholesale unemployment. Despite all the government and central bank bailout and assistance packages to plug the economic holes, there is still a significant segment of the economy that falls into unaddressed gaps.
After decades of low wage growth compared to labor productivity growth, the global middle class is already fragile. Now, a deep economic shock is likely to see the survival of only the financially fittest. The result – the rich get richer, the poor get poorer, as only the richest individuals hold enough savings to fall back on. Similarly, only the biggest, most well-funded businesses have the reserves to survive the coming months.
At the individual level, the so-called “missing middle” (also known as the Precariat, or the precarious proletariat class) is particularly affected. This large segment of the lower-income tranches of the middle class is made up of freelancers, non-essential gig workers, and micro-entrepreneurs with unpredictable and insecure incomes. These workers perform tasks and provide services that cannot easily transition online. As such find themselves without any income at all for the duration of lockdown periods. The poorest, most vulnerable workers have the least resources to cushion themselves against the huge economic shock, and they are the most likely to lose their jobs and income. Even worse, this segment of the market was typically not covered by government-sponsored wage subsidies and their businesses may have been too small to qualify for big bailout money. As such, this group is at risk of falling below the poverty line in, particularly in developing nations, or into economic hardship or reliance on state welfare in more fortunate economies.
Then there is the effect on the middle class. Formerly, the middle class was defined by what it owned, its consumption. Today, we need to re-think what it means to be middle class.
An alternative “class” criteria of my own design suggests
- An independent class, that lives off savings and assets
- A co-dependent (formerly middle class) that has to trade (time/labour /goods) for survival)
- A dependent class that relies on private charity or state grants for survival
The co-dependent (middle) class drives the global economy, but it is highly fragile: 70% of households in developed economies saw their earnings drop in the past decade. And millennials – those born in the ’80s and ’90s will be the first (post world war, Western) generation to be poorer than their parents.
Notably, as Benjamin Franklin said, “when there is no middle class, there can be no democracy”. What he meant by this is that societies where workers do not have a stake in the financial rewards, or upside, of their own economies and their own contribution to that economy can hardly be considered democratic at all. A strong, financially independent middle class is essential for democracy and social stability. As more individuals find themselves dependent on the state for their livelihoods, the more powerful states become and the greater the threat of populism, nationalism, and authoritarianism.
At a business level, small to medium sized enterprises (SMEs) typically have much shorter cash runways and much less access to emergency credit than their larger counterparts. Furthermore, even the businesses that do survive the immediate economic shutdown period have to expect a long, slow recovery period ahead after lockdown lifts. This means preparing for a months, if not years, of lower profits and fewer cash-flush customers in a generally economically depressed environment. Only the biggest and best funded businesses are likely to survive.
The more SME’s fail, the more bigger businesses win, as the bigger survivors are able to take back market share and customers from their smaller competitors. This further enhances the effect of vicious circles for the smaller, poorer, and weaker and virtuous circles for the bigger, richer, stronger.
At an international level, poorer countries in developing markets across “the Global South” simply do not have the fiscal reserves to support their affected citizens and businesses in the same way that richer nations are able to. Among the poorest, most vulnerable communities on earth, there are no “helicopter” payments or bailout packages forthcoming to ease their suffering. Indeed, many emerging market governments will find themselves competing for IMF and BRICs bank loans to keep their populations fed. This of course will only increase the indebtedness of these nations and widen the gap between developed and developing markets and their respective citizens.
The end result is that COVID-19 will likely deepen the rich poor divide , both between international economies, and within national populations. This, in turn will serve to change and destabilise international relationship power dynamics, depending on which nations get funding and from what sources. It seems increasingly likely that funding for many African nations, for example, will come from the east rather than the west, indicating a power switch away from dollar hegemony ahead.
All this adds fuel to already-simmering tensions around growing intra-country and international global inequality.
Intergenerational conflict
The COVID-19 crisis has also magnified pre-existing intergenerational conflicts between the various generational cohorts competing for state resources.
To put it bluntly, while elderly people were dying on ventilators in the ICU, young people were seen partying on beaches for spring break.
In more concrete terms, an uncomfortable truth is that while the benefits of social distancing and lockdowns serve to protect the health of the elderly and physically vulnerable in society (the demographics most likely to suffer complications from contracting the virus), it is the younger generations who will bear the brunt of the economic short and long term fallout. As part of society’s dependent population, older people living off pensions or state welfare do not need to work to earn a living. Younger workers however, have to earn income to survive, and it is they that find themselves unemployed and without savings to fall back on. It is the younger generations too who will pay back the bailouts and stimulus packages in the form of excess tax burdens, reductions in public services, and, in all likelihood ,inflation, as the effects of monetary stimulus packages slowly make their way into market pricing models, over the coming decades.
This economic reality also highlights the fragility and limitations of the social security welfare safety net system that relies on young, growing populations to fund the benefits of older generations. That social contract breaks down, when younger generations realize they will not receive the same value of social welfare benefits in their own old age that they are currently funding for older generations. As the young begin to feel short-changed by their forebearers, they could rebel against tax-funded pension and medical aid schemes.
Already we can see the signs of the intergenerational divide growing. Younger political activists are lobbying to both lower minimum voting ages and implement maximum voting ages to reduce the political power of older demographics in their democracies.
The new social contract?
In short, COVID-19 is likely to deepen the divide between old and young, rich and poor, individuals and nations. Opening up these fault lines could destabilize the socio-economic contracts of both capitalist and social democratic nations, with as yet unknown consequences.
For this reason, perhaps the best name for this period in time should be the Great Separation.