Digitization Fueled by Easy Money and Covid Lockdowns Is a Form of MalinvestmentTags Booms and BustsWorld History
Dr. Pangloss in the present global health emergency is not the poor philosopher of Voltaire’s Candide but a storyteller of the bubble in “pandemic stocks.” The optimistic message is the same—even when disaster strikes, that is for the best in the best of all possible worlds. The bubble’s narrators maintain that the pandemic has powered an acceleration of technological progress, most of all digitalization. Innovatory changes which otherwise would have taken years, in fact decades, to unfold are now occurring within months or less. We should all celebrate.
This makes no sense on two levels.
First, even if it were true that an acceleration of technological change builds prosperity, we should subtract from any gain here the human and economic costs of the pandemic itself. Death, illness, impaired quality of life, many services no longer available or only in highly infection-risk form, resources diverted to defense or attack against the virus, forced idleness—these are all some of the costs which should be chalked up as negatives.
Second, the fact that the pandemic has accelerated technological change is not in itself necessarily a good thing. The pace at which we journey into the forest of the unknown is not always better for being quicker. Indeed, it is one function of the invisible hands to optimize the speed of this journey, which often means slowing it down. If the pandemic unleashes forces which cause these hands to malfunction (or in an alternative metaphor, to corrupt intricate price signaling of the capitalist economy especially in capital markets) then there are grounds for concern.
According to the storytellers, businesses under the exigences of the pandemic had no choice but to experiment with their workforces operating at home, and surprisingly they found out that this is eminently feasible and likely economic, at least in some degree. Without the pandemic they would have continued to proceed much more cautiously in such experimentation—the same conclusion as to feasibility and desirability would have been reached but over a much longer time period. The pandemic has caused the future to short-circuit into the present. A similar story is that older households that had previously been resistant to online shopping were forced by fear of disease—or by stay-at-home orders—to abandon bricks and mortar. They now find the change in their ways so beneficial that they will not go back to the store when the pandemic is over—it is good they were forced to experiment!
Needless to say, the most enthusiastic narrators of the forced technology progress stories are the spokespersons for the businesses which have ostensibly gained from this—for example, the cloud computers, the online retailers, the big tech monopolists. Against the background of monetary inflation, featuring powerful asset inflation, these businesses have enjoyed a fantastic market for their equity issuance. Zero and negative interest rates have stimulated desperation for yield among investors, who in consequence have discarded their normal skepticism about speculative narratives.
The Economic Stage Was Set before Covid-19
Even before the pandemic struck, it was plausible that years of asset inflation had sped up digitalization beyond the optimal pace. Firms able to raise capital on spectacularly cheap terms based on great technology narratives, including potential monopoly profits, could drive in the fast lane. This artificial edge allowed these firms to engage in predatory price action to knock out the competition from older or alternative technologies. These new digital technologies enjoyed networking and critical mass bonuses, which meant that once so many businesses and households had adopted them at least in part, it was too costly for them to turn the clock back when deep flaws emerged.
These defects included vulnerability to viruses and cybercriminality in general while sabotaging traditions of privacy. Perversely, the costs of building defenses against these new forces of destruction, plus in some cases the activities of the aggressors themselves, add to estimates of GDP. Even so, growth in living standards as measured on the basis of national income data continued to seriously underperform previous technology boom records (including the US in the mid-1920s or the second half of the 1990s), likely indicating the extent of malinvestment. Finally, the speed of the journey into the forest of digitalization meant that by the time a forceful political backlash had formed against related abuse of market power, the new monopoly rent seekers had already devastated the competitive field before them.
Fast-forward to the pandemic. The forced learning and experimentation which this has triggered are of dubious quality. The idea that businesses reorganizing their operations to fit working at home have found permanent efficiency gains is far from proven. The price mechanism has hardly had a chance to reflect the multitude of individual tradeoffs for workers, employers, and real estate owners. Yes, many households had little choice given their fear of catching disease other than to embrace online shopping, even if the monopoly hold here was already strong. How much better that experience would have been if there had been five Amazons and five Googles, rather than one each, and if brick-and-mortar competition had not meanwhile died, throttled in some cases by regulations including those implemented in response to the pandemic. The accelerated destruction of older technologies and the capital tied up in them by the forced pace of digitalization is a drag on prosperity.
The pandemic has gone along with a reinforcement of asset inflation, which in itself adds to these destructive potentials of technological acceleration. Desperation for yield, heightened by the Fed’s adopting 2 percent plus inflation as its policy target alongside radical new rate manipulation strategies, has gone along with a rise in speculative temperatures across key sectors of the equity market. These include areas where narratives circulate not only of immediate profit from pandemic but also of a big increase in long-term profits due to how the pandemic has accelerated technological change. Yes, there could be a postpandemic boom. We are likely to find, however, that the growth of prosperity well into the aftermath of the pandemic continues to disappoint us.