Trendspotting: The COVID-19 Recession of 2020 Puts Globalization into Deep Freeze

NEWSWIRE: 4/13/20

• As international travel and commerce grind to a halt, some pundits are asking: Is this the end of globalization? The question is whether the COVID-19 pandemic, which may be triggering the sharpest decline in global trade we have ever seen in our lifetimes, is pointing us to the new normal. (The Wall Street Journal)
• NH: In this WSJ Saturday essay, Zachary Karabell, author of The Leading Indicators: A Short History of the Numbers That Rule Our World, concedes that the global pandemic recession of 2020 will cause a near-term cratering in global trade. But longer term, he remains solidly optimistic about the prospect for ever-more global interdependence. As reasons, he cites all the positive-sum, comparative-advantage nostrums that no doubt still appeal to a disproportionate share of the WSJ readership. He concludes, "Is it possible that we are truly at the end? Yes, but not likely. Globalization is dead. Long live globalization."
• To be sure, a lot depends on how we define "longer term." Karabell seems to define it very broadly. At one point he says he refuses to believe that we are seeing "the collapse of a broad historical trend that has endured through the Great Depression, World War II, the Cold War and innumerable other crises..." OK, he's got me there: If I am compelled to regard the Great Depression and WWII as mere short-term blips, then it's hard for me to raise any serious objection. In this case, Karabell is joining a constellation of other eminent authors who have sworn themselves to a creed of cosmic long-term optimism--the likes of Gregg Easterbrook, Matt Ridley, Steven Pinker, and Yuval Harari.
• But if, by long term, we're talking about a more foreseeable timespan--say, the next 3 to 10 years, then I think he is very mistaken.
• To begin with, Karabell never acknowledges that global trade already entered an era of regression over a decade ago. In 2008, on the eve of the GFC, global trade (exports plus imports, goods and services) peaked at 60.9% of global GDP. After falling hard as expected during the Great Recession, that quotient never regained its former level despite the longest global economic expansion in living memory. See the first chart below based on OECD data through 2018, updated with preliminary WTO data for 2019.
• From 1970 to 2008, global trade to GDP rose on average by 8.8 percentage points per decade. From 2008 to 2019, it has fallen by 1.5 percentage points. Quite simply, the trend in globalization hit a major turning point long before COVID-19 arrived. And this turning point coincided with a sea change in public attitudes toward globalization. (See our note on this seven years ago, "Globalism in Retreat.")
• What happened, at an economic level, is that most of the easy gains that came from forty years of tariff cutting (under GATT and WTO) came to an end when the average tariff rates on products approached zero. The remaining non-tariff (regulatory) barriers to trade have proven to be much harder to liberalize since most of them embody national differences in "acceptable" goods and services or political capture by favored firms. Since the Uruguay Round of WTO agreements, which went into effect in the late 1990s, the global momentum for trade liberalization has collapsed. See the second chart below.
• Meanwhile, at an ideological level, globalization as an ideal lost its luster on all fronts. On the left, "free trade" has been increasingly blamed for offshoring work, firing domestic labor, deregulating the workplace, breaking up communities, spoiling the environment, and enriching multinationals. On the right, "globalism" threatens to undermine national sovereignty, overrule regional values, subject societies to faceless "globacrats," and make us all "citizens of nowhere." In the middle, moderates came to agree that extended multinational supply chains can render any organization (like a business) vulnerable in case of any sort of unexpected disruption. The moderates didn't talk about right and wrong--but rather about complexity theory and tipping points.
• Eventually, all these arguments came to overlap each other. Thirty years ago, during U.S. presidential campaigns, every major candidate favored new trade deals. By 2016, every major candidate--Donald Trump, Bernie Sanders, and (eventually) even Hillary Clinton--opposed new trade deals.
• Now here comes the pandemic recession of 2020. And on top of the supply and demand shocks, which alone are sure to pull down hard on global exports and imports, here come the policy aftershocks that bolster anti-globalization rhetoric on every side. The left favors measures to protect the wages of domestic workers and to enhance the pandemic-fighting powers of national authorities. The right favors raising tall new walls against travel and trade across national borders. Even in progressive western Europe, the "free movement" Schengen Area is now honeycombed with new barriers.
• Both sides point with alarm to how quickly, in an emergency, nations will indeed prioritize their own interests. Medical equipment is being "hoarded" by national authorities. Entire industries have been paralyzed by global supply chain dependencies. Today's anti-fragile company is one with domestic-only suppliers and large inventories. These are painful lessons, and both sides seem to agree (see "From Globalization to Regionalization" in The Nation and "Globalization Bleeding" in The National Review) that they won't be forgotten any time soon. In the middle of the spectrum, see this essay in Foreign Policy: "The Coronavirus Is Killing Globalization as We Know It."
• IMO, they're right. Even more than in the last "great" recession, this new hit to globalization will endure long after the current "pandemic" recession ends--whenever that happens. In fact, I expect the historical headwind against global trade and cooperation that we first noticed in 2008 will probably last all the way until the end of the 2020s. As such, the turn against globalism--or, alternatively, the turn toward national populism and community solidarity--will coincide pretty exactly with the beginning and the end of the "Fourth Turning" in America, in Europe, and in South and East Asia.
• One more reflection. As I pointed out in an earlier note (see "How Epidemics Change History"), great eras of prosperity, mobility, and openness are often terminated by great epidemics. A devastating plague put an end to the Roman age of the Antonines in the 2nd century AD. And to the (Eastern) imperial resurgence under Justinian in the 6th century AD. And to the European high Middle Ages with the opening of the silk road to China in the mid-14th century AD. The Spanish Influenza of 1918-19, perhaps as much as World War I, turned the 1920s into a decade of isolationism and xenophobia--paving the way for the raging nationalist and authoritarian currents of the 1930s and 1940s.
• Most Fourth Turnings in history are not preceded or accompanied by a severe epidemic. Yet when it happens, the timing is rarely accidental. We all know that accelerating human mobility promotes political and economic innovation. Yet (as historian William McNeil points out in his classic Plagues and Peoples) we forget that it also promotes microbial innovation. The resulting pandemics typically end one era and begin another. Pandemics don't cause Fourth Turnings. But they can certainly become a mood accelerator.

 

• According to the trade group IAB, overall ad spending for March and April is down precipitously (40%+) for digital, radio, print, TV, and outdoor platforms. The companies that are still advertising are treading lightly, with some adopting a completely new tone and others refusing to run their ads near outbreak-related news. (The New York Times)
• NH: Recessions have always been devastating to the advertisement industry. Last week, Hedgeye's Managing Director of Communications Andrew Freedman did a retrospective look at ad spending and recessions. See first chart below. It took four years after the 2001 recession to get ad-spending (in nominal dollars) back to 2000 levels. And after the 2008 recession, it took five years to get back to 2007 numbers. 
• During recessions, some types of spending (like consumer staples) are less affected while other types of spending (especially outlays with high investment accelerators) are more affected. Put ad spending in the "more affected" box. The large firms that do most of the ad spending generally regard it as a species of investment. Marketing and advertising is how you promote the long-term future of your brand. During recessions, when cash flow dries up, long-term priorities are typically put on hold. Falling ad spending will hurt all of the big marketing giants (WPP, Omnicom, Publicis, among others) as well as all the media giants that still rely on ad revenue to fund their content. 
• An additional blow to ad spending, unique to this moment, is "brand safety." (See "Do Brands Need Safe Spaces?") Most advertisers don't want their product associated with COVID-19 news coverage. So even when NBC or ABC or CNN get huge numbers of eyeballs reporting death counts, the word cloud algorithms are barring them from running many of the most lucrative ad messages. Presumably, once virus reporting gets to be part of our "new normal" routine, such concerns will fade.

• Millennials who came of age during the Great Recession are facing their second big economic crisis, and many of them aren’t prepared. Now solidly into their working lives, they have bigger debts and fewer assets to cushion the blow than earlier generations did at the same age. (The New York Times)
• NH: There is no question that Millennials are entering this economic crisis with less wealth than earlier generations had at the same age. In 1990, when Boomers were in their early to mid-30s, they owned 21% of US wealth. In Q4 of 2019, Millennials owned just 2.7%. I have been writing about the shift of net worth toward older age brackets for years. One result of this shift is that the young are more vulnerable during times of economic hardship. See "The Graying of Wealth" and "The Graying of Wealth in One Picture."
• But I am less worried about Millennials than I am about Gen-Xers. Millennials are still young, and a lot can change economically and politically between now and when they retire. Gen-Xers, on the other hand, have meager retirement savings--and are themselves lagging in net worth--while getting very close to retirement. They have less time to recover their losses. Additionally, Gen-Xers rely more on income from gig jobs than any other generation. See "Xers Rely on Gig Work Income." The pandemic has particularly hard hit the gig-economy as it relies heavily on face-to-face interaction, which social distancing has ended.
• While the CARES Act opens up unemployment benefits for head-of-household gig workers, it's hard to see contract work recovering rapidly until the economic shutdown is fully lifted--and that may take a while. In another bow to Gen-Xers, the CARES Act allows workers to withdraw up to $100K early from their 401-k's and IRAs without penalty. That may help relieve the Xers' current income needs. But it will condemn many of them to even greater retirement hardship down the road.

• On a lighter note, author Marc Bernard Ackerman recently listed the top 10 life skills Gen Xers learned as kids that are helping them to survive life in quarantine. They include familiar “latchkey kid” traits like self-reliance, but also qualities like “workplace flexibility” and “downward mobility.” (Boston)
• NH: It took a global pandemic, but Gen Xers are finally getting their moment in the spotlight. They’ve had a lot to say about this topic (see “Gen Xers Born for the ‘Home Alone’ Quarantine”). This piece comes from the 48-year-old senior digital editor at Boston magazine, who lays out the usual picture of, yes, watching TV by himself as a kid after school for hours, but also highlights how that self-reliance has aged with him: bouncing from one unglamorous retail job to another, managing his time as a teen entirely on his own, and making it through college without the help of the internet. It’s not just that Xers are good at entertaining themselves. It’s that they’re used to making the most of whatever’s thrown at them. Oh, now I’m working from home indefinitely? My kids aren’t going to school anymore? There are no grocery delivery slots available? No problem.
• Ackerman also jokes that Xers’ sense of skepticism has proved to be especially useful for times like these: “We have always questioned authority, societal values, and moral standards. Wouldn’t you if your parents left you in charge of your four-year-old sister on your 10th birthday? [..] When the government told us the risk was still low a month ago, what did we do? We bought out all the toilet paper at the big-box stores and never looked back.”

• Universities that rely on foreign students are facing the prospect of big financial shortfalls in COVID-19’s wake. In Australia, tens of thousands of students haven’t shown up for the fall semester, leaving administrators scrambling to offer remote work and find ways to cut expenses. (The Wall Street Journal)
• NH: For many universities around the world with a reputation for academic excellence (especially those in English-speaking democracies), selling higher education to foreign students has become a rapidly expanding source of revenue. Chinese families alone spend an estimated $40 billion annually on overseas tuition. Because western universities rarely offer these foreign students income-related assistance, they constitute a high-margin revenue source. See first chart below.
• The global pandemic recession of 2020 may be putting that revenue at risk. Massive foreign-student cancellations for the fall term in Australia, which runs from late February to early June, serves as a sort of early warning signal for northern-hemisphere colleges, whose fall terms don't start until September.
• In the United States, we will almost certainly see the first decline in foreign fall enrollments since 2005-06. During the decade since 2008, accelerating foreign enrollments helped state and private colleges weather the Great Recession--and also compensate universities for the steep decline in successive U.S. frosh cohorts born after 1991. But since the 2014-15 academic year, the growth rate in foreign enrollment has steadily decelerated. Last year, the growth almost disappeared. See second chart below.
• Why? Parents are growing more protective. U.S.-China relations have grown less friendly during the Trump era. And colleges in the UK, Canada, and Australia have worked hard to capture some of the U.S. market share. See "The Falling Stars and Stripes" and "Why Has Global Higher Ed Lost Its Luster?"
• This fall, the cohort decline in new U.S. 18-year-olds continues, albeit not so steeply. But the big difference between the last recession and the current one is that the big new influx of foreign students that rescued collegiate bottom lines back in 2009 and 2010 is likely to turn into a big exodus in 2020 and 2021.

• Pundit Bill Schur wants to know: “Does Joe Biden Have a Generation X Problem?” Biden’s recent poll numbers, he argues, reflect an unusual pattern of support: A majority of younger and older voters say they’ll vote for him, but the majority of middle-aged voters won’t. (RealClearPolitics)

• NH: This article suggests that Biden's support by age group is V-shaped. He is liked by the youngest and the oldest but not by the middle-aged. Yet in truth, it's more of a J-shape. Millennials support him decently, Gen-Xers the least, and early Boomers/Silent the most. A March Washington Post/ABC poll perfectly illustrates my point. 51% of those under 40 said they will vote for Biden. Only 39% of those in their 40s and 45% of 50-64-year-olds say they will vote for the former VP. Support then rises to 57% of the 65+ age group.
• Readers of the Fourth Turning can probably guess why Biden's support is so low among Gen-Xers. Each generation is the archetypal opposite of the two-apart generation that raises it. Which generation raised Gen-X? The Silent Generation, of which Joe Biden is a member in good standing. Joe believes in the process. He is loyal to the establishment. He has risen patiently through the ranks. He takes few risks and rarely thinks outside the box. All of these qualities may actually explain why most generations now feel pretty comfortable about Joe. (See "Last Chance for Silent Generation to Lead.") But they also explain why Xers are holding back. In the world of politics, Joe Biden is the closest thing we have left to Mister Rogers--and most Xers probably feel America needs a leader a bit bolder and more decisive. (See "Did Mister Rogers Really Influence Gen X?") 

• The humanization of pet food is reaching new heights, with companies rushing to offer more organic and upscale options. At this year’s Global Pet Expo, the selections included frozen yogurt, sweet potato fries, and macarons. (Los Angeles Times)
• NH: In 2018, I noted that Petco was removing artificial colors and ingredients from all of its products. (See “Petco Goes Au Naturel.”) Less than a year later, the company launched its next big venture: in-store kitchens, where chefs prepare fresh, human-grade food for pets daily. It’s hard to distinguish what’s on the menu there--turkey and whole wheat macaroni, chicken and white rice, beef and potatoes--from what might be served to people tonight. We’ve come a long way from gravy-flavored kibble.
• But even this is old hat compared to what pet food makers are rolling out now. Scottish salmon? Granola? French macarons? Kansas City BBQ? I’ve said it before: There seems to be no ceiling for what Americans will spend on their pets. (See “Nothing But the Best for My Fur Baby.”) Apparently, the industry won’t rest until the owners would rather eat the pet food themselves--regardless of what the pet thinks.

• The latest Pew survey on social trust indicates that several measures of trust  have improved among Americans since 2018. But in keeping with earlier surveys, the age gaps are huge, with trust declining sharply moving down the age ladder. (Pew Research Center)
• NH: Social scientists have often observed that basic measures of trust (such as a "Yes" answer to the question, "Can most people be trusted?") tend to be positively and strongly correlated with income, education, and (in recent years) age. They also tend to be higher in whites than in blacks or Latinos. See the first chart below.
• In their response to the pandemic shutdown, Pew finds that low-trust people are least likely to think that fellow citizens and public officials are doing a good job (except for Donald Trump, where they are tied with high-trusters). They are most likely to feel that leaders are exaggerating the crisis. And they are most likely to report feeling anxious, depressed, or alone (perhaps in part because they are more likely to live alone). See the next three charts.
• Millennials are over-represented among the low trusters. (And Boomers and Silent are under-represented.) That makes sense if you think about how protectively Millennials were raised (always worrying about "stranger danger") and about their aversion to personal risk-taking. But it also gibes strangely with the Millennial attachment to family and local ties--or to their advocacy of government that provides a greater sense of national community. 
• The answer, clearly, is that Millennials aspire to a much closer sense of trusted community than they feel is available in America today. And that Boomers and Silent feel pretty OK with the sort of trusted community we now have. After all, it works for them. In this sense, many low-trusting Millennials may have something in common with many disaffected older Trump populists. When asked simply, "Does the system we now have work for you?" their first answer is, "No, it doesn't."

• Early-wave Millennial author Elizabeth Segran has an encouraging message for new entry-level workers: You will get through this. In a letter, she reflects upon graduating into the post-2008 job market and how a patchwork of short-term gigs led her to the full-time position she dreamed of. (Fast Company)
• NH: Segran, a writer at Fast Company, addresses her pep talk to “recent college graduates, interns, and entry-level workers.” During the Great Recession, she says, she was just like them: new to a job market in turmoil and facing an uncertain future. She ended up taking temp positions to pay the bills, but her dream was to have a meaningful career. She urges those who can’t find their dream job to be flexible and see every opportunity for work as a stepping stone toward their career.
• The tone Segran takes here is a nice counterpoint to the persistent myth that young people are inveterate job hoppers. She writes: “Many of us spent years job-hopping and doing gig work in our quest to find stable careers that made us happy. But here’s the thing: We survived it. Most of us did end up in long-term, meaningful careers. It just took a bit longer for us to get here.”
  
  

DID YOU KNOW?

Quarantine Baking on the Rise. In recent weeks, household essentials like toilet paper and cleaning products have become rare finds on grocery shelves. Now there’s one more item to add to the list: flour. The pandemic has spurred an upswell of interest in home baking, with many turning to bread and baked goods to pass the time and calm their nerves. Bonus: Like the other at-home craze, Animal Crossing, baking works as either a solo or a family activity. At the start of April, global Google searches for “yeast” and “brioche” had risen 300% compared to a month ago. “Cookies” and “cake” were up 83% and 58%, respectively. In France, according to Nielsen, sales of flour were up 160% YoY in March, putting it on par with other staples like rice (also up 160%) and soap (220%). Meanwhile, in San Francisco, one resident’s decision to share free bags of sourdough starter via a telephone pole has inspired a dozen similar offerings around the city.