David McWilliams on the future of the global economy – and return of the ‘luck penny’

ONE20: The Alltech Ideas Conference took place last week as a ‘virtual experience’ with online interviews and presentations rather than a live conference, due to Covid-19.

A key speaker who would have particularly peaked Irish interest was economist David McWilliams. A familiar face in Irish media, McWilliams spoke to Mark Lyons, president and CEO of Alltech, about how the global economy will react – and hopefully recover – from the Covid-19 pandemic.

Among the points iterated by the economist during the roughly hour-long talk was that, in a crisis like this: “What was radical before becomes mainstream, and what was mainstream becomes redundant.

Right now, what is in front of us in Europe and the US, is a sort of deflationary debt spiral, that could potentially drag us all into a depression that could go on for a long time, if the central banks and monetary authorities don’t step up to the plate, and I think they are stepping up.

One of the most significant questions that will arise in the near future, according to McWilliams, is how long economic shutdowns can be sustained in the absence of a Covid-19 vaccine.

“The question is, how long can the economy survive under these lockdown conditions, and what is the actual health risk if you can control it? These are the questions that will become crucial to politics, policy and geopolitics over the next while. The consensus that locking down is the most important thing will begin to atrophy as the economic pain amplifies, and that’s a big worry.

“It’s hard to know where to draw the line, what the trade-offs are that we have to make, and how we make them,” he stressed.

McWilliams raised concerns that the economic impact of Covid-19 could have a further human impact down the line.

The problems with recessions and depressions, I’ve always thought, is that they destroy people…unemployment destroys people psychologically and emotionally. The financial side is only one  manifestation, and long-term unemployment destroys even more.

“If you think of how many people in the US and Europe that are on fragile month-to-month pay cheques, with a hell of a lot of bills coming through, with kids and all of that sort of stuff, what we’re talking about is deep psychological trauma. It’s called economic scarring,” the economist explained.

‘Looking forward’

Throughout his conversation with Alltech CEO Mark Lyons, McWilliams used lessons from history to explain how the global economy might look after Covid-19.

One of these lessons was the fallout of World War II in the UK. The first election there after the war produced a shock result, when then Prime Minister Winston Churchill and his Conservative Party were voted out of power in favour of the Labour Party.

The British people changed after World War II. Not only did they give sacrifices in huge numbers, and lost their brothers and dads in huge numbers, but also British women worked in factories for the first time. The soldiers came back from Europe. They had seen things they had never seen before.

“They came back imbued with an idea that ‘we are going to change’ and Churchill presented them with a menu that largely said ‘we’re going back to [before the war]’. The people said: ‘No, we’re not going back to anything, we’re looking forward. After our sacrifice, we want free healthcare for our parents; we want free education for our kids; we want our kids to go to university; and we want pensions. We want a new world.’

“It’s a great example of how an event doesn’t simply happen and then the world reverts back to where it was,” McWilliams highlighted.

He added: “Sometimes when you hit the economy with a shock, people sit down and say ‘hold on a second, what do we do’. And people become incredibly innovative and creative after a shock, because it’s the mother of all invention. It’s necessary.”

‘Elevation of the old fashioned’

Both McWilliams and Lyons agreed that one possible outcome for the global economy from the Covid-19 crisis was a de-emphasis on a purely price aspect of international trade, and more of an emphasis on trust and reliability.

“That could be the longest corporate legacy for large, multinational and globally-integrated companies: The elevation of the old fashioned,” said the economist, which he explained with an agricultural anecdote.

If you watch how farmers used to do business with each other selling cattle, it was a handshake. You were good to your word, you spit in the hand and left a luck penny at the end of the deal.

“There was a network based on relationships, and your reputation was everything. Nothing else mattered. Those sort of basic, human interactions will come back to the core in a world of anxiety,” he argued.

He continued: “What happens when you get anxious? You revert back to people you know. You do business with people you know, and you usually do business with people you like, and that’s based on relationships.

“I think the Covid-19 crisis will re-energise the relationship side of things. I can really see that,” McWilliams remarked.