Wounds Heal, Scars Last

Drive past the Pentagon and there is no trace of the plane that crashed into its walls almost 19 years ago. But drive three minutes down the road, to Reagan National Airport, and the scars of September 11th are everywhere. Shoes off, jackets off, belts off, toothpaste out, hands up, and empty your water bottle.

We’ll recover from COVID-19, however long it takes. Stores will reopen, businesses will rebuild. The wounds will heal just like they did after September 11th.

But what about the scars?

What will stay with us, psychologically and culturally, long after we return to work?

No one knows for sure, because no one knows how the pandemic will play out.

But what’s occurred already in the last two months is enough to ponder a few ways we’ll remain scarred after our wounds heal.

Two that stick out to me:

1. A generation of super-savers who avoid leverage and are less swayed by opportunity costs.

The economy had almost a year of slow decline and warning signs before it crumbled in the fall of 2008. Bear Stearns collapsed six months before Lehman Brothers fell, and massive job losses began five months after Fannie Mae and Freddie Mac imploded.

This time couldn’t be more different. The speed of decline is unprecedented. Think of the business that went from record sales in February to facing bankruptcy in March. Or the retirement account that lost a third of its value in two weeks.

Economic decline is painful. An economic crash is devastating. But overnight collapse is in a league of its own.

Optimism relies on having confidence in what the future will look like. The longer your field of vision, the better. The severity of our decline, particularly unemployment claims, is already unprecedented in modern times. But it’s the speed of decline that will leave its mark, convincing a generation that no matter how secure they feel today, it can be gone tomorrow. Literally, tomorrow.

Frederick Lewis Allen wrote of the generation who went through the Great Depression:

It marked millions of people–inwardly–for the rest of their lives. Not only because they or their friends lost jobs, saw their careers broken, had to change their whole way of living, were gnawed at by a constant lurking fear of worse things yet; but because what was happening to them seemed without rhyme or reason. Most of them had been brought up to feel that if you worked hard and well, and otherwise behaved yourself, you would be rewarded by good fortune. Here were failure and defeat and want visiting the energetic along with the feckless, the able along with the unable, the virtuous along with the irresponsible.

Economist John Graham once studied a group of corporate managers who worked through the Great Depression, and found it left them far more conservative:

Depression experience appears to have affected the preference to use debt, even after the economic environment improved: Firms that were highly levered during the Depression use relatively little debt in the 1940s. Moreover, this behavior appears to be individual-specific because the use of debt increases in the 1940s at companies for which the Depression-era company president retires or otherwise leaves the firm.

Another team of researchers measured how the depression generation thought about the stock market later in their lives:

The average participation rate for the generation that experienced the 1930s Great Depression as teenagers or adults is 13%, significantly lower than the rates of all other cohorts, which range from 26 to 32%. The 1931-1940 cohort, which experienced the post-war boom years during their young adult life, has a participation rate at age 36-45 that is more than twice as high.

What we’ve been through this year is not the Great Depression. But this time we also have the lingering scars of 2008. The Great Recession shook people, but the prevailing idea was that it was a once-in-a-lifetime event. Now that we’ve been smacked harder just a decade later, a generation may be left convinced that this is the normal path of economic life.

Will that leave them wanting to save more cash?

Use less debt?

Take fewer risks?

Not be bothered by the opportunity cost of sitting in safe investments as the world around them progresses?

Perhaps we’ll go from a generation that valued efficiency to one that values empty hospital beds, spare manufacturing capacity, and stockpiles of everything from cash to canned food.

Lewis Allen described the Great Depression generation as having “learned from bitter experience to crave security.”

It happened 90 years ago. I suspect it will happen again.

2. Greater desire for a strong social safety net, driven by a realization that even extreme preparation cannot fully prepare you for unforeseen systemic shocks.

The post-war years were an economic boon for the United States. Europe, physically destroyed, was a different story. In 1947 Hamilton Fish Armstrong reported in Foreign Affairs magazine about life in Europe:

Every minute is dedicated to scrounging enough food, clothing and fuel to carry through the next 24 hours. There is too little of everything – too little paper for newspapers to report more than a fraction of the world’s news; too little seed for planting and too little fertilizer to nourish it; too few houses to live in and not enough glass to supply them with window panes; too little leather for shoes, wool for sweaters, gas for cooking, cotton for diapers, sugar for jam, fats for frying, milk for babies, soap for washing.

After World War II John Maynard Keynes predicted countries wrecked by war would go on to have a “craving for social and personal security.”

Which is exactly what they did.

Historian Tony Judt writes of post-war Europe:

Only the state could offer hope or salvation to the mass of the population. And in the aftermath of depression, occupation and civil war, the state—as an agent of welfare, security and fairness—was a vital source of community and social cohesion. Many commentators today are disposed to see state-dependency as the European problem, and salvation from-above as the illusion of the age. But for the generation of 1945 some workable balance between political freedoms and the rational, equitable distributive function of the administrative state seemed the only sensible route out of the abyss.

In Europe everything from generous unemployment insurance to universal healthcare surged after the war in ways that never caught on in America.

Historian Michael Howard has said, “War and welfare go hand in hand.” Perhaps that’s because even the most financially prepared, the most risk-averse, and those with the most foresight can be completely crushed by war. Europeans did not get to choose whether they wanted to be caught up in World War II – it became the most pressing issue of their life whether they supported it or not, and crushed their sense of control whether they prepared for it or not.

COVID-19 is similar.

In 2008 it was reasonable to point your finger at those who took excessive risks and say, “Sorry, pal.” The idea that destinies were chosen, for better or worse, strengthened the argument that you must accept the consequences of your actions.

What we’re dealing with now is different. Like a war, it affects everyone at the same time in a more universal way than a typical recession.

Business moats and brand awareness don’t matter when your customers are ordered by law to stay in their homes. Verifying borrowers’ income loses its effectiveness when all borrowers stop being paid at once. Being risk-averse has little meaning when risk is a virus 0.12 microns in size that infects indiscriminately.

Joe Weisenthal of Bloomberg elaborated yesterday:

Even if an individual company could plan for the instant pulverization of 100% of their revenue for a period of time, it wouldn’t matter on a macro level. It’s the “at once-ness” of a global pandemic which requires the government to be the insurer of last resort … Imagine what would happen to an auto insurer if literally every car in America got into one gigantic pileup at the same time. That’s basically what’s happened.

When people feel the correlation between their decisions and their outcomes is high, there’s less desire for a strong social safety net. But when something impacts everyone at once, and can ruin the careful as much as the reckless, there’s a history of people coming together to support a public backstop. We saw that Wednesday, when a $2 trillion rescue package passed the Senate 96-0. I suspect we’ll be seeing more of it for years to come.

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