Coronavirus and America’s economic miracle
No one likes private equity; just ask Mitt Romney, the Utah senator who made his fortune at Bain Capital in the 1980s and ’90s. But private equity does change the world, sometimes for the better. Private equity firms buy distressed and undervalued companies, reorganize their systems and processes, restructure their finances, lay off redundant workers, bring in new and more efficient technologies, leverage them to the hilt, and then, exit — sort of like what the novel coronavirus is doing to America.
Without question, the American economy has been fundamentally changed over the past few months — perhaps, for the better. Only the virus could clean house so quickly.
Clearly, capital has been redistributed at warp speed. The market lost trillions of dollars in the blink of an eye, but has begun to recover it remarkably fast. And many companies are gone and will not be the companies to whom investors return during the recovery. Many companies were poorly managed; many had terrible business models that were beginning to fail under the pressure of changing consumer tastes and new technology. Many were over-leveraged and on the brink of collapse, or simply had too many workers and too much bureaucracy that was grinding them down. All they needed was a small nudge to push them over the cliff. The coronavirus lockdown gave them that shove.
The result is a transformed American economy. Retail equals Amazon and food home-delivery, with much large-scale and outdated “brick and mortar” retailing in the trash bin. Business equals Zoom meetings, telemedicine, and online contract signings. Manufacturing means increased artificial intelligence and related automation. All are short-term adaptations to the virus. All likely to become the long-term, permanent framework of the American economic engine. In three short months, much of American business overcame 20 years of inertia and entered the 21st century. It is the quickest updating of American industry in 100 years. The virus drove that change, and almost exclusively in America.
It could not have happened without the federal government. While the enormous rise in unemployment is an unprecedented social catastrophe, it has been cushioned to some degree by a massive leveraging of America’s finances. Washington pumped trillions of dollars into the economy to help small businesses and the unemployed. While not sufficient to prevent a tremendous amount of personal pain and suffering, it provided enough of a buffer to prevent likely social unrest during a huge economic and industrial transformation. It also re-energized a flagging banking industry. So far, it seems to have worked. Surviving businesses will be, on average, stronger and better run. And, as with previous, well-capitalized American industrial overhauls, the consistent result should be more and better jobs and lower unemployment.
The only sector that did little to change and adapt is state and local government. Inexplicably, many states, counties and cities — most notably in blue states — refused to reduce their budgets or significantly cut their government staffs. In effect, private-sector workers, laid off during the lockdowns, were struggling to pay rents and mortgages and losing their life savings. At the same time, government workers not under lockdown, whose salaries were paid through the taxes on those private businesses and workers, were experiencing far less hardship. How unfair is that? These same governments will try to raise taxes on recovering, struggling, private-sector businesses and taxpayers, in order to continue to pay government workers’ salaries and benefits. Is that the true face of blue-state “progressive” politics? In the end, many of these states may pay a big price.
One of the signature results of the COVID-19 recovery may be substantial migration. As American industry restructures, business and investment will gravitate toward states that managed their policies sensibly and their financial affairs responsibly. As big-spending states (largely blue) try to cover their huge budgets through higher taxes on the remaining struggling businesses, capital will shift to states with more reasonable governments and lower taxes (largely red states). As the capital flows, the jobs flow, the people flow and the tax revenue flows, leaving the high-tax blue states in a death spiral. If you were to pick the craziest year to have a census, 2020 would be it, because population and demographics are about to radically change. The census will be nonsense.
Finally, restructuring geopolitics: The coronavirus originated in China, and China’s attempts to mislead the world about its emergence may have been intentional or accidental. In any case, at some point the Chinese government ran the numbers and decided that the virus could improve China’s geopolitical position relative to America — that China could recover faster and come out stronger than America, replace the dollar as the world’s reserve currency, and take a big stride towards “world domination.”
But, not so fast. The story of America’s transformation is not complete, and it may emerge significantly more efficient and powerful. By contrast, China cannot make this transformation as quickly because transforming its labor-intensive economy under the confines of its vertical (state-driven) capital markets is virtually impossible without explosive political instability. Bottom line: Excessively clever, asymmetric, geopolitical strategies sometimes backfire.
The coronavirus’s economic overhaul is painful, but the ultimate results may be surprisingly good — and uniquely American. And, neither the White House nor Congress can completely mess that up.
Grady Means is a writer (GradyMeans.com) and former corporate strategy consultant. He served in the White House as a policy assistant to Vice President Nelson Rockefeller. Follow him on Twitter @gradymeans1.