26 February 2021
Joe Davis
Vanguard's Chief Economist
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Envisioning a Post-Pandemic Future
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The American mathematician Claude Shannon famouslyestablished a lower bound for the number of possible moves in a typical chessmatch: around 10120. That’s 10 with 119 zeroes after it. Reflecting on when theCOVID-19 crisis began to unfold across the globe, I think the Shannon numberadequately captures the breadth of possible economic outcomes at the time.

As the crisis has evolved, however, two things have becomeclear: the pandemic has accelerated some trends already in place, and COVID-19will have implications that are opaque now but that will become undeniablyclear and meaningful over time.

The future accelerated

Before the pandemicsent office staff flocking to home workstations, employers were taking anincremental approach to remote work. Recent improvements in office technologieslet them untether workforces on a timetable of their choosing. The pandemictook the decision out of employers’ hands.

Similar to how issuers can recall certain bonds whenconditions allow them to reissue on more favorable terms, the pandemicfunctioned as a call option on employers’ incrementalism. No longer couldwork-from-home arrangements serve as controlled experiments in productivity;they became indispensable. Ready or not, employers for the most part havesuccessfully enabled secure and efficient work from home and redefined teamdynamics. The office will never be the same. Meanwhile, significantly reduceddemand for office square footage, which had grown on a per capita basis for 50years, stands to redefine our cityscapes and suburban makeups.

Similarly, the pandemic has ground business travel to ahalt. Historically the most profitable business for airlines and hotels, suchtravel has been replaced by video conferences and virtual collaboration tools.Such a development tests airline and hotel business models that rely onless-price-sensitive business travelers to help keep leisure travelers’ costslow.

COVID-19 has also accelerated the challenges facingrestaurants and brick-and-mortar retailers. E-retail and food delivery, alreadygrowing in popularity before the pandemic, have become essential to consumersworried about face-to-face interaction. As with office work and air travel,restaurants and retail may not overcome heightened consumer reluctance until aneffective vaccine or treatment is developed—something we’re not expectingbefore 2021. In some cases, the damage could be permanent.

Interestingly, changes to commercial real estate, or atleast how we invest in it, had already been occurring in plain sight. Over thelast decade, office and retail constituents have fallen from 39% to 19% ofequity REIT assets, while residential, infrastructure, and data centers—sectorsthat are likely to benefit from the pandemic—now make up 45%.1

Post-pandemic questions

Although some implications of the post-pandemic world areevident, others, for now, are more opaque:

Will massive stimulus, supply-chain disruptions, and pent-updemand give rise to inflation that has eluded developed economies for a decade?

Is the globalization trend that has defined the post-WorldWar II era ending, and what would that mean for trade and economic growth?

With interest rates pinned at historic lows and deficits andbalance sheets expanding, what can central banks do to support employment andprice stability?

And what becomes of inequality, a statistically significantdetractor from a nation’s economic health that increased after the 2008 globalfinancial crisis?2 Our current crises (both health and economic) aredisproportionately affecting people of certain races and socio-economic groups.Though I’m encouraged by emerging conversations that are both thoughtful andaction-oriented, it’s not yet clear whether the pandemic will accelerate orreverse the inequality trend.

These questions will demand our attention and continue toact as source material for this blog in the months and years ahead. It islikely that answers to some of these questions will materially affect thetrajectory of others. In that sense, the number of possible moves left in ourchess match still includes a whole lot of zeroes.



1 Based on the FTSE Nareit All REITs Index. Data from 2010are as of December 31, 2010, and data from 2020 are as of July 31, 2020. In2010, residential, infrastructure, and data centers made up 14%, 0%, and 0% ofthe index, respectively.

2 Cingano, Federico, 2014. Trends in Income Inequality andits Impact on Economic Growth. OECD Social, Employment and Migration WorkingPapers No. 163. Paris: OECD Publishing; available athttps://doi.org/10.1787/5jxrjncwxv6j-en.





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