The Outlook for the Post-COVID Economy

Even as it slowed down the global economy in early 2020, the pandemic accelerated technological and organizational trends that have the potential to spur a robust recovery.

In an article he cowrote in Foreign Affairs in July, Nobel laureate Michael Spence asserted, “Surprising as it may seem, out of the deepest economic crisis since World War II could come a new era of productivity gains and prosperity.” Toward the end of summer, Spence remained cautiously optimistic about the prospects for long-term growth — though he cautioned that factors like the Delta variant, slow global vaccine rollout, and extreme climate events are creating significant headwinds.

How’s the outlook for economic growth right now?

Three months ago, I would have said we have a recovery well underway. Now, I would say the Delta variant is a major setback in multiple dimensions. We’re going to have to revert to some sort of restrictive measures. And when I say “we,” I mean everywhere. And that puts the countries that are further down in the vaccine queue further back.

It’s very difficult to see a fully functioning global economy where a significant part of it is defective, in the sense of not being able to function normally. When you add to that the astonishing collection of extreme climate events — I don’t think you can prove yet that they are a big headwind to immediate economic growth, but I think it’s getting close — the bottom line is that it’s a much weaker picture right now.

What’s been driving the recent gains in productivity?

The entrepreneurial activity and the supportive entrepreneurial ecosystems were once mostly in Silicon Valley or a small number of centers in the U.S. Now they’re global. That’s a very big change; it’s occurred at astonishing speed in the last 10 to 15 years. If you combine the accelerated adoption of technology and willingness to experiment and try new modes of dealing with things during the pandemic — working remotely, distributed operations, telehealth — you’ve got a big change.

Productivity and economic performance are a function of a lot of different things. We tend to call it technology, but it’s really institutions and how well they work and how much human capital you have. There are some pretty powerful forces loose — only partly related to the pandemic — that create the possibility that you could have significant positive change in the dynamics.

Productivity can be the result of increased output or the result of fewer hours worked. Could you talk more about these two sides of the picture?

This is mainly a question about digital technologies. A digital transformation is coming; in fact, it is already underway. That’s pretty clear. A lot of jobs are going to change, and that will require different skill sets. At a deeper level, digital technologies can be thought of in two ways: They augment human beings and they replace them, and you can see both at the same time. There’s a set of uncertainties about how precisely that’s going to happen and what its impact on the distribution of income and wealth will be. The pandemic certainly made existing inequalities worse, and it accelerated the digital transformation.

Given the current uncertainty, what can businesses and government do to ensure that they don’t squander the positive changes that have taken place in the last 18 months?

It’s still possible to paint a fairly realistically positive scenario. I think businesses will see the rates of return on various kinds of investment rise as government creates assets, whether it’s physical or digital infrastructure, logistics, high-speed trains, human capital. The natural thing for the business sector will be to seize those opportunities. If governments borrow too much and spend too much, they can crowd out business investment. But I think that this kind of investment, starting from a low base, crowds in private sector investment. That is a virtuous cycle and is part of the optimistic story. It’s very hard to tell the optimistic story if the government is missing in action. It’s just too important a player on the economic playing field as an investor.