How to prevent a K-shaped economic recovery

By Johanna Leggett

In the early days of the COVID-19 pandemic, many economists were hoping for a V-shaped recovery – a brief spell in the economic doldrums followed by a snap-back to business as usual.

More than a year on, however, many experts believe we are instead facing a K-shaped model, signified by a widening of the gap between rich and poor. INTHEBLACK spoke to four leading economists and thinkers about how best to prevent a K-shaped economic recovery.

A new approach to lockdowns

Daniel Wild, Director of research, Institute of Public Affairs

The main inequality division that we’ve seen throughout the lockdown period has been between the public and private sector, where there has been a significant growth in the number of jobs and wages of public sector workers, but a fairly significant decline in jobs and wages in the private sector.

In Victoria, in the second lockdown last year, private sector wages went down by about A$3.5 billion in total, whereas public sector wages increased by about A$660 million, so there’s a very significant divide.

The situation has also created a moral hazard, because public sector workers are largely responsible for the advice on how to respond to COVID-19 and its implementation, yet it’s often the private sector workforce that incurs the costs of lockdowns.

The second division is between big and small business. Again, it’s largely been smaller businesses that have disproportionately suffered the negative implications of lockdowns, whereas bigger businesses tend to be better capitalised, have a stronger cash flow and able to offer home delivery.

The point is that the pandemic is going to be with us for another couple of years, so we need to have a different strategy for managing COVID-19, in part because of the economic and humanitarian costs.

Our team has advocated an approach that’s risk-based, proportionate and targeted. Rather than having city-wide and state-wide lockdowns in response to a handful of cases per day, you dedicate your resources to ensuring the safety of those who are most vulnerable and those who are in the worst health – typically the elderly – and you have a bias towards allowing economic, social and recreational activity to continue.

At the moment, the presupposition is that everything will be stopped subject to special exemptions, whereas we think it should be the opposite approach. 

We need a trickle-up approach

Jacob Aldridge, International business adviser

A typical recession usually starts with a specific industry and slowly affects tertiary services like hospitality and tourism.

The pandemic trigger for the COVID-19 recession has meant that, for the first time in history, hospitality and tourism were impacted first, and these industries typically employ younger and lower-skilled individuals.

In response, governments in the developed world pumped billions of dollars into fiscal stimulus packages, which had the desired effect of keeping people employed, but the broad and indiscriminate nature of the stimulus pushed a lot of extra money into the hands of those who didn’t need more cash.

Furthermore, the lingering impact of inflation will benefit those who have significant assets that increase in value, moderate levels of debt, and secure income to respond to any interest rate rises.

Australia will never offer equality of outcome with regards to financial security, because some people are better at creating value, some are better at managing wealth, and others just get lucky. As a country though, we can do more to support equality of opportunity.

Just as our health system provides a safety net, we can provide a stronger income safety net as well. Reliable and stable cash flow support for our lowest earners will not make them wealthy, since they have little choice but to spend it on essentials.

However, since one person’s spending is another person’s income, the trickle-up effect of reliable income support at the bottom end of the economy means more money will flow through our businesses and be taxed along the way.

We can now say with confidence, after 40 years of testing, that trickle-down economics doesn’t work. My experience with business owners around Australia and internationally is that most appreciate tax cuts, but all are looking for more customers.

Meaningful increases to the financial safety net of our pensioners, underemployed or Australians otherwise unable to work will reverse the decline they are experiencing in the K-shaped recovery, while also providing positive financial outcomes to business owners and their staff.

Build wealth independently

Jeremy Britton, US-based financial adviser and economist

It may be an unpopular opinion to state that the so-called “economic recovery” is all smoke and mirrors, or that it favours the rich over the poor, but that is my belief system.

Since the start of the pandemic, governments and central banks have collaborated to print more cash than they did for the bailout of the 2008 global financial crisis.

Anyone with a modicum of common sense will realise that printing 30 per cent more cash than was in existence in 2019 will lead to inflation.

The cost of groceries, healthcare, insurance and most shipped products will continue to rise. Meanwhile, wage growth is largely static at the lower end, and interest rates on cash are close to zero.

Anyone who is paid or holds their savings in cash in the bank is actually going backwards. Those who rely on the benevolence of governments and central banks may face a bleak future via hyperinflation, while those who adapt to the new environment will survive and thrive.

The good news is that people don’t have to accept their fate in the K-shaped recovery. While some wealth and knowledge may be passed on from parents, inspirational stories abound of children who were born into poverty and made their own fortunes. For example, many of today’s billionaires were self-made.

In the 21st century, anyone with a smartphone can access the collective knowledge of the world, which includes learning a new language, learning about business, economics or investing.

Obviously, it is not wise to gamble with your pocket change or your life savings, and we should not rely on a “hot tip” from a friend or a random stranger on YouTube or TikTok.

Everyone has to do their own research and play the investment game not for a quick win, but for the purpose of long-term wealth creation.

Help reskill the unemployed

May Samali, Harvard scholar and leadership coach

I think social inequality related to gender and race is being exacerbated as a result of the pandemic, and it’s a conversation we’re not having frequently enough.

When you’re already part of a minority group, the social inequalities combined with the economic inequalities are even worse.

I also think it starts with being heard, and it would be wonderful if the federal government was to state that, while it’s amazing we’ve come out of this with very little life lost in Australia, let’s also talk about who has really suffered, let’s talk about the fact that incomes have not grown as much as wealth, and let’s talk about the fact that billionaires have doubled or tripled their wealth while other people’s worlds have been falling apart.

I also think we need to invest more in mental healthcare, because that is going to be crucial to ensuring the bottom spoke of the “K” doesn’t linger longitudinally.

In terms of policy, we need targeted responses that recognise that people do not start on the same footing in life, and rolling out something across the board is not going to work. With that in mind, I think there are two main financial interventions that governments can make.

The first starts with taking a global approach to ensuring big multinational companies are paying enough tax, as discussed at a recent G7 summit. We need to collect this tax revenue and use it to fund efforts to reskill our workforces.

That leads me to the second intervention idea – the FORTE model of reskilling, which was developed by an Oxford Rhodes Scholar and stands for “financing of return to employment”.

It essentially involves the government retraining people impacted by the pandemic to skill them for in-demand jobs. Investors cover the cost of training for individuals, the pie of newly employed people grows, and those who were unemployed take up the jobs of the future.

Then, because these new employees are generating income tax revenue, the government splits the surplus by repaying investors a portion of that tax income for a certain number of years.

Are you across the alphabet of economic recovery? Here are the recovery types spelt out:

K-shaped: One segment of the economy booms, while another suffers.

V-shaped: Typified by a sharp decline, but a fast recovery.

U-shaped: A longer period between decline and return to normal.

L-shaped: A pessimistic scenario, defined by prolonged and sustained downturn.

W-shaped: Also known as a double-dip recession, it features two declines.

Meet the experts

Daniel Wild
Daniel Wild is the director of research at the Institute of Public Affairs. He specialises in red tape, regulation, economic policy, the philosophy of free enterprise and criminal justice.

Jacob Aldridge
Jacob Aldridge is an entrepreneur, speaker and international business adviser who has helped hundreds of businesses implement commercial and cultural growth management systems.

Jeremy Britton
Jeremy Britton is a US-based financial adviser, economist and best-selling author. He is the CFO of BostonCoin, the world’s first diversified crypto mutual fund.

May Samali
May Samali is an Australian John Monash Scholar and the founder of Coaching by May, a professional leadership and personal development service. She holds a masters in public policy from the Harvard Kennedy School, a bachelor of law and a bachelor of economic and social sciences from University of Sydney.