A 14-day Quarantine Isn’t A Matter Of If, It’s A Matter Of When
Can you afford it?
The service sector makes the whole economic system convenient and smooth. Yet have the economic efficiencies provided by the service economy come at a hidden cost?
If millions of people are forced into 14-day quarantines, who’s going to pay the bill? Can you afford it?
I’m convinced the service sector is now too big to fail. If low-wage earner jobs are cut and masses of unemployed and underemployed are thrown into the economy during a serious financial downturn or recession, the results will be devastating.
In this article
- Local service industries are being devastated — worldwide
- Can economies absorb service industry layoffs?
- Oil prices collapse — creating a perfect storm
- What’s next?
Service sector jobs are being devastated — worldwide
Companies have ordered their people to work from home. This is a good thing. It will save many lives by slowing the progress of COVID-19. However, the service industry is now between a rock and a hard place — a completely gutted tourist industry and the regular office-worker customers they count on, working from home.
It looks like many airlines, hotels, and car companies will go broke if this economic downturn continues for long. Many of these companies will likely be bailed out by governments. In fact, South Korea and the United States are already looking for ways to help out airlines financially.
However, governments around the world are struggling with who (if anyone) should help bail out small businesses, restaurants, food services companies, contract workers, and gig economy workers. I have yet to hear any solid, realistic solutions for people working in the gig economy, and laid-off service industry people.
It is these unheralded, unappreciated jobs and services that have allowed the multi-nationals to outsource work and maximize profits. However, what will happen to those same multi-national businesses if service sector businesses are allowed to fail and their employees are tossed into a world economy entering a recession?
Cities, states, and now even countries have to consider large-scale quarantines. Many businesses will not survive.
Can economies absorb service industry layoffs?
I’m hearing anecdotal evidence here in Osaka that banks are offering loans near 0% to businesses to keep them afloat during this economic downturn. Will Europe and North America try a similar strategy to keep service sector jobs alive?
If not, where will all of these people go in an economy likely to slip into recession for the next couple of quarters (and longer if COVID-19 survives the summer and comes back this fall)? In 2018, the service industry was 15.5 trillion of the economy, representing about two-thirds of all economic activity in the US. Even in the US where unemployment is historically low, it seems unlikely large numbers of service industry employees will be easily absorbed back into the economy. Other countries with worse employment numbers will obviously struggle even more.
Around the world, many part-time, self-employed, and temporary workers do not have any or have insufficient, unemployment insurance. If swaths of people are laid off without a way to easily replace monthly salary, it is easy to imagine how the economic damage might spread.
A surprisingly large percentage of North Americans don’t have $400 of emergency savings. Even one month of joblessness (with no financial support) will start bankrupting the poorest of us. With people afraid of losing jobs, cars, and even homes, and with more quarantines likely in the near future, restaurants and small businesses of all kinds will find themselves under compounding financial stress.
It is hard to imagine a situation where large numbers of service industry employers start becoming insolvent without greatly affecting the entire economy. Inevitably, there will be a domino effect, hurting business profitability throughout all sectors of the economy. It is absolutely critical financial contagion is not allowed to spread throughout the entire economy.
Oil prices collapse — creating a perfect storm
Over the weekend, Russia and OPEC were not able to come to an agreement over production cuts. Russia walked away from the negotiating table and in response, Saudi Arabia announced they will flood the market by increasing production. At one point, oil dropped below $30 per barrel.
This trade war is likely to last. Neither Russia nor Saudi Arabia look interested in further negotiation at this point. The fracking industry in the United States will not survive oil prices this low. To make matters worse, the US oil industry is heavily in debt. I expect many smaller oil producers to go bankrupt, adding to even more credit problems, unemployment, and economic disruption.
What’s next?
Regardless of whether cities or countries follow Italy’s lead and shut down their entire economies for weeks or months, or follow Japan’s example of wide-spread social distancing and strategic quarantines, the economic pain will be significant.
The service economy is simply too big to fail. Without significant strategic financial intervention, large portions of the service industry — an industry that supports the smooth functioning of the entire economy — will be forced into bankruptcy. If governments don’t step up with financial solutions that insulate service economy workers from the worst of this economic downturn, keeping economies out of a deep, protracted recession seems highly unlikely at this point.
Even more alarmingly, if allowed to fail, the service industry might ultimately drag some cities, states, or even countries into insolvency. God help us all if large economies start defaulting on debt.
