Why inflation could be on the way back

The global economy may be shifting as it did four decades ago

Martin Wolf

      © James Ferguson


Are we about to move into a new era of unexpectedly high inflation, rather than the below-target inflation we are used to? Many dismiss this view. But the boy who cried wolf was right the last time. 

A book just out is crying wolf insistently. Notably, it states that, as a result of today’s fiscal and monetary largesse, “as in the aftermath of many wars, there will be a surge in inflation, quite likely more than 5 per cent, or even on the order of 10 per cent in 2021”. That would change everything.

The prediction comes from The Great Demographic Reversal by Charles Goodhart, a respected academic, and Manoj Pradhan, formerly at Morgan Stanley. Its prophecy of imminent inflationary doom is in fact less significant than its analytical framework. 

These authors argue that the world economy is about to shift regimes. The last time this happened was the 1980s. The big shifts four decades ago were not so much the desire to bring inflation under control, but globalisation and the entry of China into the world economy. 

That era, they argue, which was one of low inflation and high, rising indebtedness, is now ending. Its inverse will soon follow.



In the 1980s and 1990s, the economies of China, the former Soviet empire and other developing countries opened up. The Uruguay Round was agreed, which led to the birth of the World Trade Organization, to which China acceded in 2001. International economic integration advanced apace, notably through trade, but also via direct investment from high-income countries. 

The global labour supply for production of tradeable goods rose enormously. The big trading economies had falling birth rates and still youthful populations, reinforced by the entry of women into their labour forces. So the workforce grew faster than population and output per head rose ahead of that per worker.


All this together, argue Messrs Goodhart and Pradhan, caused a fall in the market power of labour in high-income countries, higher profit shares in gross domestic product, rising domestic inequality, falling global inequality, a “savings glut”, weak inflationary pressures and declining real interest rates. There was a surge in indebtedness.

Now, they argue, all this is going into reverse. Globalisation is under attack and no other economies can replicate what China did. Ageing hits the growth of the labour force and exacerbates fiscal pressures. Not least, they assert, as the number of consumers rises relative to that of producers, inflationary pressure will increase. 

Moreover, as the labour force shrinks and globalisation weakens, the market power of labour will re-emerge, exacerbating these inflationary pressures.


These shifts will, they add, create huge policy dilemmas, especially given the extended balance sheets of governments and non-financial corporates. If the relationship between unemployment and inflation were to shift as adversely as the authors suggest, would central banks tighten as much as they might need to, in order to contain inflation? 

How would the authorities handle the waves of defaults? How would governments bring their deficits back under control in a world of structurally low growth (partly due to ageing), higher interest rates and pressures to raise spending? 

If they failed to do so, would the central banks keep printing money or permit national insolvency? In brief, are we confronting a rerun of the 1970s, in worse circumstances?


The authors are correct in arguing that the world economy is undergoing big structural shifts. Ageing and a weakening of globalisation in the production of goods are well under way. Moreover, this process includes China. That combination will transform our economies.

Yet it is also vital to remember how little we know about how such shifts might play out in the real world. What if we had known in 1980 that China was going to open up its economy to the world and launch the biggest investment boom in world history, culminating in an investment rate of 50 per cent of GDP? 

How many would have predicted that the macroeconomic situation a few decades later would be one of excess savings, low real interest rates, ultra-loose monetary policies and debt overhangs? Most would surely have assumed that booming China was about to import savings massively and so raise real interest rates and export net demand, instead.


Similarly, Messrs Goodhart and Pradhan may be right that, in their brave new world, the desire to save will tend to fall faster than that to invest, the savings glut will turn into a shortage, and real interest rates will soar. But the difference between desired savings and investment is a narrow one. 

It is quite possible, instead, that, with slow economic growth and continuing declines in the relative price of capital goods, corporate retained profits will continue to exceed investment in high-income economies. 

The Chinese corporate sector might also follow suit. If so, demand might stay weak and real interest rates low for a long time, reinforced by the huge private-sector debt overhangs in all these economies.


It is not even clear that globalisation was the main historic driver of changes in labour markets. It was just one element in a set of transformations — new technologies, the shareholder-value-maximisation model of corporate governance, the rising role of finance and growing monopoly power.

Doubts about these theses are warranted. But it is also dangerous to extrapolate the present into the future. In 1965, few imagined that postwar Keynesianism would shortly die. The world of “lower for longer” may similarly vanish. Big changes are in process. We need to think rigorously about how our future may differ from our past.

What’s Ahead for the U.S. Economy?


The U.S. economy seems stuck in neutral for the near term as the numbers of new COVID-19 cases reach new highs in nearly all states, although President-elect Joe Biden’s proposals could bring relief on several fronts, according to a recent post-election press briefing held by the Penn Wharton Budget Model (PWBM) on November 12. 

The PWBM is a nonpartisan research organization that provides economic analysis of the fiscal impact of public policy.

The implications of the unrelenting pandemic were at the top of the agenda during the briefing. “R,” or the effective reproduction number to measure secondary infections, is currently racing as if one’s foot were “on the gas pedal,” noted John Ricco, senior analyst at PWBM.

“When your R is bigger than 1, you get explosive growth,” Ricco said. “Our analysis shows that the number of states where R is greater than 1 — in that danger zone — is almost near 50 right now. It’s a pretty dire situation.”

In addition to monthly or quarterly government data, the PWBM team developed its own “high-frequency economic trackers” including data on Google searches for unemployment claims and cell phone location data to “track how the recovery is going on in real time,” said Ricco. 

For instance, it found a plateauing of the “social contact rate,” or how frequently people come together in close physical contact, which is a desirable trend. But that trend also puts an upper limit on the recovery, and employment trends reflect that, he added. 

“We’re basically stuck in neutral right here until the virus is suppressed.”

In the near term, regarding non-pharmaceutical interventions, the stress ought to be on getting right individual behavior to contain the spread of the pandemic, Ricco said. 

“Beyond that, the recovery will depend on what happens in six months or so with the vaccine, and any fiscal response.”

Parsing the Biden Plan

In a study of the proposals by President-elect Joe Biden, PWBM found that over the 10-year budget window of 2021–2030, the Biden platform would raise $3.375 trillion in additional tax revenue and increase spending by $5.37 trillion. 

Including macroeconomic and health effects, by 2050 the Biden platform would decrease the federal debt by 6.1% and increase GDP by 0.8% relative to estimates under current law. But in the run-up to 2050, GDP decreases by 0.4% in 2030, and stays flat in 2040, the study noted.

GDP growth dips in the near term because of some distorting effects of changes to the tax system and in health care benefits, said Kent Smetters, PWBM’s faculty director, who is also Wharton professor of business economics and public policy. 

As higher tax rates hurt high-income people more under the Biden plan, they end up dampening capital investments. But “as people get greater access to health care, there’s little less pressure on them to work,” said Smetters. “That means labor becomes a scarcer as they have fewer workers, and hourly wages actually go up.”

Over a 10-year period, the largest new revenue-raisers in the Biden tax plan are the corporate tax ($1.4 trillion), payroll taxes ($992.8 billion) and individual income taxes ($944 billion). Over that same period, the two biggest areas of new net spending would be education ($1.9 trillion) and infrastructure and R&D ($1.6 trillion). Housing, social security benefits, health care and expanded paid leave are the other spending areas.

The study noted that most provisions of the Biden tax plan focus on raising taxes on corporations, capital income, and ordinary income of high-income filers. Two major provisions of the Biden proposals are (a) implement a Social Security “Donut Hole,” or a band of non-taxable wages between the current annual taxable maximum threshold of $137,700 and $400,000 for the 12.4% payroll tax that finances the Social Security Trust fund; and (b) repeal elements of the Tax Cuts and Jobs Act (TCJA) for high-income filers.

Previous PWBM studies have analyzed those and other features of the Biden plan, including raising the corporate tax rate, taxation of capital gains and dividends at ordinary rates, limiting itemized deductions, and eliminating fossil fuel subsidies.

Who Gains, Who Loses

One PWBM chart traces the impact on individuals by age group and adjusted gross income, which shows “who would prefer to live in a Biden world,” said Richard Prisinzano, PWBM’s director of policy analysis. “It’s the older rich people that don’t like Biden’s world,” he noted. “They face a lot of taxes, and they don’t get a lot of benefits from the spending program. At the other end, the lower-income folks really do like Biden’s world.”

In calculating the impact at the individual level, PWBM used a dynamic model that covers entire lifetimes, compared to conventional models that look at tax changes only in one year. It found that in a Biden regime, working-age and lower-income people benefit, whereas higher-income young workers and wealthy retirees lose. Almost 80% of the increase in taxes under the Biden tax plan would fall on the top 1% of the income distribution.

Under the Biden tax plan, households with adjusted gross income (AGI) of $400,000 per year or less would not see their taxes increase directly but would see lower investment returns and wages as a result of corporate tax increases, the PWBM study found. Those with AGIs at or below $400,000 would see an average decrease in after-tax income of 0.9%. But after-tax incomes would fall by 17.7% for those with AGIs of more than $400,000, who make up the top 1.5% of taxpayers.

In distributing the corporate income tax to households, PWBM assumed that 75% of the tax falls on capital owners and 25% falls on workers in the form of lower wages over time. These lower wages and lower investment returns are included in its calculation of the “effective tax rate.” 

That rate stays mostly unchanged between current law and the Biden plan for all but the top 0.1% of households, who will experience a bump from 30.6% to 43% if the tax changes are implemented in 2021.

Where the Money Will Be Spent

The PWBM study grouped the new public investments in the Biden plan into three categories: education, infrastructure and R&D.

The education plan, which will boost spending by $1.9 trillion over 10 years, includes provisions for universal pre-K schooling, two years of debtless college education and free public college for students from low-income families. The infrastructure and R&D plans totaling $1.6 trillion cover investments in water infrastructure, high-speed rail, clean energy R&D, 5G and artificial intelligence.

The study expected every dollar of new federal spending to stimulate an additional 62 cents from state and local governments for every dollar. PWBM has modeled each of those public investment categories as boosting the productivity of both private capital and workers, thus increasing wages, interest rates and GDP.

PWBM noted that other areas that will see new spending in the Biden plan, over 10 years, are housing ($650 billion), social security ($290.7 billion) and health care ($352 billion). In health care, the study estimated that Biden’s proposals would lower average prescription drug prices by about 60%, by allowing consumers to import those drugs from abroad and for Medicare to negotiate prices.

Biden’s plan to ease immigration policies will take time to reverse the historically low levels to which immigration had fallen in the Trump regime. The pandemic will stifle immigration, and it will return slowly to historical levels only by 2050, the PWBM study predicted.

The Immigration Booster

Biden’s immigration plans will see distinct outcomes on several fronts. Granting legal status to undocumented immigrants will reduce emigration rates as documented immigrants emigrate back to their countries less often than those that are undocumented, the study noted. 

Furthermore, “fertility increases since immigrants have more children, and this increase, in turn, has downstream demographic and economic effects such as a slightly younger population.”

With friendlier immigration policies, “the pie gets bigger … and it builds up the economy in a general sense,” said Prisinzano. He noted that such policies attract “high-ability people” who contribute to patents, boost productivity levels and GDP growth.

All said, “a lot of the economy is still based on what happens with the pandemic,” said Prisinzano. But there are no easy options for policymakers. “There are benefits in trying to keep some of the businesses that are struggling. There’s also a benefit to not doing anything that would encourage people to do unsafe things like go out in the economy and try to do things.”

Smetters noted that some of the recent surge in economic activity is because of the increase in social contact rates. “That could also lead to more shutdowns, and it could rebound and drag things in the opposite direction. It’s really hard to have a simple story behind it, because a lot of this has to do with people’s perceptions.”

Another round of economic stimulus is certainly something that policymakers are considering. The PWBM does not make policy recommendations, Smetters said as a disclaimer before noting, “If one were to do a stimulus, certainly doing it today is going to be more effective than waiting a while.” 

A stimulus focused on lower-income people who are more likely to consume that money will prove more effective than if it is targeted at others who are less likely to consume, and instead save that money, he added. 

Europe’s Ghost of Summers Past

Hungary and Poland’s most recent opposition to the EU will delay COVID-19 recovery funds.

By: Caroline D. Rose


On July 21, European Council President Charles Michel sent out a one-word tweet that left few Europeans’ eyes dry and champagne corks popping as early as 5:30 in the morning. After months of tense clashes between EU members over the size and scope of a seven-year budget and COVID-19 recovery fund, Michel’s tweet, “Deal!” informed the world that the EU had finally reached consensus over how to support the economy. 

It took locking EU ministers into a conference room for five days (said to be one of the longest negotiations in EU history), extensive concessions from the rival southern and “Frugal Four” blocs, and a race against economic meltdown to arrive at a recovery package and budget worth $1.82 trillion. 

The deal was hailed as an unprecedented show of European unity in the face of regional factionalism, just in time for summer vacation and ahead of an expected spike in unemployment, COVID-19 infections, and economic struggle across the continent. 

The EU was rescued from the brink.

Or so it seemed. One provision of the summer’s budget agreement and COVID-19 recovery package is now coming back to haunt the EU, and the timing could not be worse. 

As Europe prepares for a second wave, Hungary and Poland have blockaded the EU’s seven-year spending plan in an effort to protest the EU’s linking fund distribution with members’ rule of law – about a month before countries receive budgetary allocations and the bulk of the recovery funds. 

The Hungary-Poland partnership has created a stalemate over European democratic principles, holding the 2021-2027 budget hostage and throwing the reliability of the EU, once again, into question.

Poland and Hungary

Even when the EU’s 2021-2027 Multiannual Financial Framework and COVID-19 recovery package was in its drafting stage in July, several EU leaders figured there was a risk of delay. (Such is the nature of a bloc that needs consensus but can’t seem to agree on anything.) 

They agreed to make budget allocation contingent on individual countries’ respect for EU rule-of-law standards, including anti-corruption measures, electoral integrity, separation of powers, media pluralism and accountable justice and law enforcement systems. At the time, the accord’s draft didn’t really specify what “respect” would entail, but the pressure to settle on a deal kept the rule-of-law accord ambiguous.

It stayed that way until Nov. 10, when the EU Council, the European Parliament and the EU presidency (Germany) modified the budget allocations and clarified the rule of law provision.

The changes respect the budget ceiling set in July but triple the budget’s health program to 5.1 billion euros ($6 billion), saving 13.5 billion euros through retaining competition law fines, and, most notably, introducing a peer review mechanism that would subject countries’ legal systems to fellow EU members’ scrutiny to receive annual budget funds. 

The purpose, of course, is to curb euroskeptic and illiberal tendencies that have obstructed EU consensus and sown seeds of distrust among members, particularly during an economic crisis. 

The architects of the Nov. 10 compromise hailed the rule of law mechanism as a way to ensure taxpayer money was spent responsibly and to encourage its members to respect democratic ideals.

But for Hungary and Poland, the measure was just another form of censorship. 

Both are common targets of EU criticism over their rule of law, but that wasn’t always the case. When they joined the EU in the early 2000s, they were considered qualified, free and fair democracies friendly to the West. 

But in the mid-2010s, the political climates changed; the migrant crisis and financial recession ushered in euroskeptic, illiberal movements that elevated now-Prime Minister Viktor Orban and his conservative Fidesz Party in Hungary and the ruling Law and Justice Party in Poland. 

They both undertook incremental turns away from constitutional democracy by eroding the independence of their judiciaries, attacking freedom of speech among journalists, and practicing repression against political opposition. 

Both were able to use their veto power to avoid EU sanctions under Article 7, but the peer review mechanism in the new budget and the decision to link budget distribution with rule of law raised the risk of European intervention into with the ability to remove voting rights and EU funds – something that could circumvent Hungary and Poland’s ability to protect each other from Article 7 sanctions through veto.

To protect themselves from this perceived intrusion, Budapest and Warsaw opposed the mechanism at all costs. After the European Commission published a 500-page Rule of Law Report and framework for the peer review process, Hungary and Poland announced joint plans for a “Rule of Law Institute,” a network of legal academics (mostly from their home countries) that would counter EU criticism and offer alternative interpretations of Hungarian and Polish rule of law, ultimately undermining the EU peer review process. 

But given the mechanism’s popularity, not to mention the pressure to pass the budget as soon as possible, that wasn’t enough; the Hungarian and Polish governments had to try to stop the mechanism altogether. 

The mechanism itself required only a qualified majority to pass – Hungary and Poland alone could not stop it – so they channeled their efforts into hijacking a measure that required total consensus, vetoing the Own Resources Decision (the prerequisite that allows EU member states to borrow from the 2021-2027 MFF) and effectively paralyzing the EU’s seven-year budget just over a month before funds are supposed to be distributed to member states.

Square One

EU lawmakers were always wary of potential delays to the seven-year budget, but Hungary and Poland’s rule of law campaign has introduced an untimely ideological debate. Historically, regional fragmentation, economic disparity and differing national allegiances have been the EU’s main impediments to continental unity, but COVID-19 and the resulting recession have aggravated the problem. 

Europe’s leaders have once again found themselves in the throes of another marathon of emergency meetings to reach a compromise, this time pressuring the union’s illiberal bloc, Hungary and Poland, to back down before the new year when funds are to be disbursed.

For now, the EU’s long-term budget is paralyzed. Hungary and Poland’s mutual defense and the European Parliament’s commitment to strict rule-of-law measures create gridlock with little room to maneuver. Hungary’s justice minister said the two countries intend to make the process as painful as possible, warning that “nothing is agreed until everything is agreed.”

Importantly, the stalemate over rule of law doesn’t just paralyze decision-making over the mechanism itself; it reintroduces the regional hostility that surfaced over pandemic-related financial assistance. 

The longer the seven-year budget is delayed, the more national economies will be forced to weather the fallout on their own – and the more likely the debate between Europe’s northern Frugal Four and its hard-hit southern economies resurfaces as members seek to exploit and modify the July provisional agreement to meet national interests. 

Similarly, the longer funds are withheld, the greater potential for mounting political resentment and frustration with the European project, particularly among economies that have been most susceptible to COVID-19’s financial shock – Italy, France, and Spain Hungary and Poland are leveraging for better terms. 

But if the EU holds its ground, successive emergency EU meetings and mounting economic damage across the continent could force Budapest and Warsaw to fold. Hungary and Poland haven’t been able to count on allies such as Austria and Romania that have supported illiberal policies in the past. Even other EU members that have criticized Brussels over recent recessions in electoral integrity, judiciary independence, and treatment of journalists and rights groups – Belgium, Bulgaria, Czechia, Estonia, and Denmark – have yet to join Hungary and Poland.

Their campaign to paralyze the 2021-2027 budget is a double-edged sword; both governments are depriving their own countries of tens of billions of euros from the 2021 EU budget when they need them most (especially Hungary, which isn’t expected to reach pre-crisis economic output levels until late 2022 or early 2023). Both may continue to oppose the rule-of-law mechanism to appease their populist, euroskeptic constituents, but they will pay a heavy economic price as financial hardships inevitably mount. 

But even if Budapest and Warsaw back down, efforts to delay budget allocation have chipped away at some of the public trust the EU won during the summer and tapped into deep regional rivalries, reflecting the European project’s never-ending internal battle to maintain unity.

Job Creation Is the New Game in Town

Even if a successful rollout of a new COVID-19 vaccine causes the current health crisis to recede by next spring, the unemployment crisis will remain. That is especially true in the United Kingdom, where fiscal stimulus is urgently needed to avert a lost decade – if not a lost generation – of growth.

Gordon Brown, Robert Skidelsky


EDINBURGH/LONDON – In the wake of the COVID-19 pandemic, both the US and European economies are gearing up for large-scale job creation. US President-elect Joe Biden has pledged to invest $700 billion in manufacturing and innovation, plus $2 trillion in a “Biden Green Deal” to combat climate change and promote clean energy. 

Meanwhile, Germany has abandoned years of thrift by backing a €750 billion ($887 billion) European Union recovery fund and, like France, will maintain its own national job retention and job creation program throughout 2021.

By contrast, the United Kingdom’s chancellor of the exchequer, Rishi Sunak, has fallen behind the curve. Back in March, many expected that Britain would experience a V-shaped recovery. As this prospect faded, it became clear that Sunak’s rescue operation needed to be matched with a viable recovery plan.

The consensus view is that both the UK and the global economy will be smaller in 2021 than they were in 2019. The International Monetary Fund predicts that the global economy will be 6.5% smaller than was forecast before the COVID-19 crisis, with a legacy of unemployment at least double the pre-pandemic norm.

These gloomier forecasts have prompted international calls for the reinstatement of active fiscal policy, with the IMF urging rich-country governments to start large public investment programs. 

In its latest Fiscal Monitor, the Fund says that increasing public investment by 1% of GDP could boost GDP by 2.7%, private investment by 10%, and employment by 1.2%.

The IMF’s call to action is particularly important, because the Fund was a champion of fiscal retrenchment during the 2008-09 global financial crisis, despite the obvious need for stimulus. Its earlier macroeconomic model, like those of most other economists and policymakers at that time, was based on the flawed theory that market economies have a natural tendency to reach full employment. 

This ignored the truth, most persuasively articulated by John Maynard Keynes, that in the absence of government stimulus, economies can remain naturally stuck in recession for a long time.

The Bank of England, too, has changed its tune. The BOE is about to inject an additional £150 billion ($198 billion) into the UK economy, in addition to the more than £200 billion it already has pumped out in 2020, and now realizes that it cannot do all the heavy lifting. 

Businesses will not invest, no matter how low the cost of capital, until they see a market. That is why the BOE has now joined the US Federal Reserve and the European Central Bank in calling for fiscal stimulus.

Before COVID-19, monetary policy seemed to be the only game in town. Now, if we are to avoid mass unemployment and the consequent loss of demand in the economy, job creation must become the overriding priority after the lockdown.

To its credit, the UK government brought forward £8 billion in infrastructure spending this past summer. But that is a mere fraction of what is needed. The government is now frontloading its £40 billion, five-year investment plan into the next two and a half years, and giving priority to big environmental projects and social housing. 

Retrofitting homes and local amenities could quickly create many jobs, with immediate multiplier effects.

Regional and local job and training schemes are essential to the longer-term task of reallocating work and skills toward the labor market of the future. The lesson of the UK’s 1998 New Deal for Young People and the 2009 Future Jobs Fund is that such programs must offer not only training and work experience but also assistance with job searches and incentives for employers to hire people on a permanent basis.

We estimate that one million young Britons under the age of 25 are neither working nor in training or education. But the government’s Kickstart job-creation scheme, which was launched belatedly earlier this month, has offered job placements to young people only for six-month periods.

The government expected that Kickstart would secure placements for 300,000 young people, but perhaps only around 100,000 will be enrolled in the scheme by the end of 2020. Ministers assumed that 5% of UK employers would take on young people, but outside of the retail and logistics sectors, thousands of firms are instead planning redundancies and will almost certainly not offer employment on anything like the hoped-for scale in the coming months.

If we are to assist the other 900,000 or so under-25s in need of help and create the estimated 1.5 million youth placements that will be required over the next year, the public sector will have to become the employer of last resort. 

So, rather than passively responding to a rise in unemployment, fiscal policy should aim to replace Karl Marx’s “reserve army of the unemployed” with a buffer stock of state-supported jobs and training schemes that expands or contracts with the business cycle.

What we need above all from UK policymakers is an updated full-employment commitment in the spirit of Keynes and US President Franklin D. Roosevelt. An essential condition for this is the coordination of monetary and fiscal policy. 

The BOE should retain its anti-inflation mandate, but policymakers should not use this to cut off necessary fiscal stimulus.

Earlier this month, the BOE echoed then-ECB President Mario Draghi’s famous 2012 pledge to save the euro by stating that it “stands ready to take whatever additional action is necessary” to boost the economy. 

To boost the credibility of such forward guidance, the government could give the BOE a dual mandate to fight both inflation and unemployment, while the bank could state that it will not tighten monetary policy until unemployment falls below its pre-crisis level of 4%.

A successful rollout of Pfizer’s new COVID-19 vaccine (and possibly others) could return life to a semblance of normality by next spring. But even if the health crisis recedes, the unemployment crisis will remain. UK policymakers must act now to avert a lost decade – if not a lost generation – of growth.


Gordon Brown, former Prime Minister and Chancellor of the Exchequer of the United Kingdom, is United Nations Special Envoy for Global Education and Chair of the International Commission on Financing Global Education Opportunity. He chairs the Advisory Board of the Catalyst Foundation.

Robert Skidelsky, a member of the British House of Lords, is Professor Emeritus of Political Economy at Warwick University. The author of a three-volume biography of John Maynard Keynes, he began his political career in the Labour party, became the Conservative Party’s spokesman for Treasury affairs in the House of Lords, and was eventually forced out of the Conservative Party for his opposition to NATO’s intervention in Kosovo in 1999.

Is it the end of the line for mass transit systems?

Revenues have fallen victim to the pandemic. Now there are concerns about what happens if passengers don’t return

Gregory Meyer in New York

              © Bloomberg


Patrick Foye travels to work on the Long Island Rail Road, once known as the “Route of the Dashing Commuter.” He boards the 6:45am from leafy Port Washington, disembarks in the catacombs of New York Penn Station and then rides the subway to his office on the tip of Manhattan. 

As chief executive of the New York region’s public transport agency, Mr Foye’s vinyl seat provides a stark view of the effects of coronavirus. The parking lots at Port Washington are plains of empty asphalt. The LIRR’s rail cars are carrying a quarter of their normal daily load of more than 300,000 passengers. Office workers no longer dash — they Zoom.


A collapse in fare and tax revenue has opened a $12bn fiscal hole at his New York Metropolitan Transportation Authority. It has an annual budget of $17.2bn of which fares make up $6.5bn and taxes another third. Without more aid from Congress, Mr Foye may furlough 8,000 employees, eliminate billions of dollars of planned capital spending and gut service on New York subways, buses and railways, including the LIRR. 


Yet an even more ominous prospect looms in the longer term: after Covid-19, what happens if some passengers never come back? It’s a question echoing across cities around the world, from New York to London — where leaders just agreed a £1.8bn short-term transport rescue deal — to Singapore.


The pandemic is setting in motion structural changes in how employees do their jobs with profound implications for urban settlement, transport networks and energy use. 

Journeying to work five days a week now seems excessive in an age of video conferencing and cloud data. 

In future, 85 per cent of employees would prefer to work remotely at least two to three days a week, according to a survey by CBRE, the commercial real estate services company. 

Without more aid from Congress, the MTA’s chief executive Patrick Foye may furlough 8,000 employees © Frank Franklin II/AP


Such a scenario could seriously weaken the finances of public transit systems that underpin great cities. No other mode of transport can efficiently deliver millions of workers into dense central business districts. With fewer riders and fares, transit operators face an unpleasant choice: trimming service, which repels customers, or going cap in hand to the government for more subsidies. 

Mr Foye still hopes to stave off an immediate funding crisis with federal coronavirus aid. But he is also pondering how he would respond to lasting changes in commuting habits. 

“[We] would have to think about right-sizing service and taking steps to reduce the cost to get it commensurate with the long-term decline in revenue,” he says.


Driving revival

Passenger numbers collapsed when authorities declared lockdowns in the spring, keeping all but essential workers home. After partially reopening in the summer, New York City is placing more limits on social gatherings and restaurants to keep a lid on climbing coronavirus cases. 

Initial research suggested that transit seeded the disease, spreading it through city arteries. But later studies, some sponsored by transport agencies, found that buses and trains with proper safety measures were no more risky than offices and homes. Transit lines adopted aggressive cleaning routines, with the MTA shutting down New York subways overnight for the first time in history to allow daily disinfections. 

Suburban railways lost the most trade as white-collar workers and students worked remotely. Buses have regained about half the passengers they had before the first outbreaks, reflecting demand from those with fewer options. 

The “transit-dependent” tend to have lower incomes, are more often people of colour and include some of the essential workers keeping hospitals, kitchens and warehouses open during the pandemic. 

As more affluent office workers desert transit, they may be less willing to see taxes support it. “If and when we resume a semblance of normalcy, will the affinity to public transportation still remain? 

That’s a bigger question that nobody has the answers to. So far it doesn’t seem like that,” says PS Sriraj, director of the Urban Transportation Center at the University of Illinois at Chicago. 

The US Centers for Disease Control and Prevention gave cars a boost when it recommended that employers subsidise workers to drive alone. Although car traffic disappeared in the spring, reducing urban pollution, it is now back to about 80 per cent of pre-pandemic volumes in metropolitan areas including Boston, Chicago, Los Angeles and New York, according to GPS data compiled by Inrix, a transport information company. 


The return to cars was visible on Manhattan’s west side during a recent afternoon rush hour. Traffic crept for blocks towards the jammed mouth of the Lincoln Tunnel to New Jersey. A few blocks away, train announcements echoed across a nearly empty Penn Station, where new touchscreen vending machines sell masks and hand sanitiser.

Green transport advocates warn that the driving revival will lead to “carmageddon” on crowded streets. Globally, oil demand could increase by 600,000 barrels a day — about 0.6 per cent of pre-pandemic consumption — over the next couple of years as people abandon mass transit for private cars, the International Energy Agency has forecast. 

Although it also calculates that fuel saved by remote working could eventually offset about 250,000 b/d of that extra demand. 

Commuters wait for a subway train on the Pennsylvania Station platform in New York in June © Sarah Blesener/Bloomberg


US president-elect Joe Biden has featured “high-quality, zero-emissions public transportation options” as part of his plan to address climate change.

“It’s important to preserve or reinforce the priority of public transport if we want to avoid complete gridlock in cities,” says Mohamed Mezghani, secretary-general of the Brussels-based International Association of Public Transport. He adds: “We need to make sure that people will not go back to their cars.”

Rotating workers

Public transport experts hotly debate the extent to which remote working habits will stick. At a recent online forum, transit professionals were among the hundreds who heard James Hughes from Rutgers university suggest that a revolution is under way. 

“This is now a watershed moment in the world of work. The coronavirus shock may have exposed an outmoded white-collar workplace structure,” he declared. “Work is now being recognised as much more of an activity, rather than as a place.” 

Prof Hughes, a veteran urban planning pundit who witnessed New Jersey’s rise as a sprawling corporate hub, envisaged a new, decentralised office geography where workers gathered together only when they needed to. 

Kevin Corbett, NJ Transit chief executive: ‘I believe transit will come back very strong’ © Bryan Anselm/New York Times /eyevine


“I think it was probably a major market failure that work as a place remained so dominant for so long,” Prof Hughes said. Endangered, he added, was “the ritual of commuting five days per week to large centralised headquarters . . . simply to be crammed cheek by jowl in a sea of office workstations”. 

The forum’s co-sponsor was New Jersey Transit, the third largest transit network in the US by passenger numbers with services feeding New York and Philadelphia. The agency’s trains are running at 20 per cent of pre-pandemic volumes, while bus passenger numbers are down by half. 

Kevin Corbett, NJ Transit chief executive, sounded a defiant tone at the forum. “I believe transit will come back very strong,” he told the virtual audience. 

Later, in an interview with the Financial Times, Mr Corbett spoke about the years after the September 11 2001 terror attacks, when he helped manage lower Manhattan’s economic recovery. People at the time questioned the future of the skyscraper. Now super tall condominiums tower above the city, he says. Until February, New Jersey Transit was operating standing-room-only trains, delivering many of the 2m people entering Manhattan every day. 

Recent reports of local road congestion give him a perverse comfort. “When I hear now that [delays into] the Lincoln and Holland tunnels are 20 minutes or a half-hour, or there’s an accident and it’s 45 minutes, sort of like the old days, that’s a big factor in driving people back to us,” he says.


Remote working, however convenient, will not predominate, he believes. “If there’s a down cycle in the economy, people may feel a little bit more comfortable if they’re in the office [being seen] than if they’re working remotely,” he says. 

Unsurprisingly, landlords share his optimism. When Douglas Durst was named chairman of the Real Estate Board of New York in September, he said his family’s company had lasted more than 105 years, “and this is not even our first pandemic — we survived the influenza pandemic of 1918”. 

Yet video conferencing was science fiction then. Kelly Steckelberg, chief financial officer of web conferencing company Zoom Video Communications, told an online investment forum that only 4 per cent of her employees wanted to go back to the office every day, “and when I've talked to peers with other companies, that's really consistent with what they're saying”. Zoom’s share price has sextupled to more than $400 this year. 

    A cleaning crew disinfects a New York City subway train in May © Stephanie Keith/Getty


Employers are already making decisions that will have lasting impacts on commuting trips. JPMorgan Chase’s headquarters rises just north of Manhattan’s Grand Central Terminal. The financial giant’s corporate and investment bank will now be rotating its more than 60,000 employees in and out of offices across the world. 

“We are going to start implementing the model that I believe will be more or less permanent, which is this rotational model,” Daniel Pinto, the bank’s chief operating officer, told CNBC. “Depending on the type of business, you may be working one week a month from home, or two days a week from home, or two weeks a month.” 

Some companies are exiting the city completely. After the geothermal heating and cooling company Dandelion Energy was spun out of Google’s advanced research lab, chief executive Michael Sachse rented offices a block west of Grand Central station. To get to work, “everybody was taking public transit. It didn’t make any sense to drive to Midtown,” he says. 

    Traffic on Madison Avenue on June 9, a day after the city began reopening © Jeenah Moon/Bloomberg


He closed the office when coronavirus hit, leaving two equipment warehouses outside the city as the company’s only physical locations.

Kevin Krumm’s tech recruitment company Objective Paradigm recently signed a 10-year office lease adjacent to a section of the Loop, the elevated train tracks of Chicago’s central business district. But now some of his clients are seeking new recruits who can be based anywhere. “You don’t have to be within a commutable proximity. 

I feel like that’s a big shift,” says Mr Krumm. “I feel like this whole talent, geography, labour-cost arbitrage is under way.”

$25bn bailout

It is an arbitrage with dire implications for transit agencies rooted in their regions. The Chicago Transit Authority’s bus and rail services are running at more than 60 per cent below normal. 

The Metra rail system, which operates 242 stations on 11 rail lines that run in spokes to Chicago suburbs such as Winnetka and Naperville, has slashed its schedule in the face of a 90 per cent collapse in passengers. 

Car traffic on the Chicago-area roadways is now just 10 per cent below levels in February, according to the Chicago Metropolitan Agency for Planning. The Regional Transportation Authority, which allocates funds to local transit agencies, examined six Covid-19 recovery scenarios and found that commuting by transit decreased in each one. 

At stake are $30bn in capital investment needs over the next decade, such as new buses and fixing bridges. “Aspects of telework are here to stay,” says Leanne Redden, RTA’s executive director. “They were here pre-Covid, and it’s become much more obvious during Covid.”

US transit agencies are public bodies funded by a mix of fares and subsidies from taxes, highway tolls and other sources. Falling passenger numbers and the pandemic economy have dealt blows to both sources of revenue. The decline in fare, toll, tax and other subsidy revenue is estimated at $6.9bn this year for New York’s MTA, according to a study by New York university.

Such transport operations have been kept afloat thanks to $25bn from the federal Cares Act coronavirus bailout, but the money will run out for most agencies next year. Democrats in the House of Representatives included another $32bn in transit funding in their proposed stimulus bill, but the legislation has stalled in a stand-off with Republicans who oppose aid to state and local governments, including public transit bodies. 

“New York risks losing its place as a pre-eminent global city” without adequate transit funding as service and maintenance cuts trigger a “continuous cycle of decline”, the Regional Plan Association warned in a report published in October on the city’s future. But the public policy group, with a board made up of corporate, legal and property executives, rebutted a narrative that New York is spiralling downhill. 

Transit agencies were already contending with threats from ride-hailing services before the pandemic. Now, experts are talking about reinventions for a work-from-home world, such as ticket prices that reward less frequent travel and better service outside of traditional rush hours, even if peak service is cut.

“The transit system is going to have to adapt to the modern workforce,” says Mitchell Moss, director of the Rudin Center for Transportation at New York university.

Sadiq Khan, London mayor, travelling on the underground. Transport for London has received £1.8bn in short-term funding to deal with the fall in revenue due to the pandemic © Jack Taylor/Getty Images


The more urgent focus is surviving until a mass vaccination programme gets the go-ahead. Last week, Boston's transport authority proposed sweeping service cuts, saying that nearly empty trains, buses and ferries were a waste of money.

Prof Moss co-authored a study that warned that 450,000 jobs could be lost in the New York region if Congress fails to give the MTA another $12bn in aid.

Mr Foye, who commutes from Long Island in a blue surgical mask, says, “I’m bullish on the city and state in the intermediate and the longer term. Cities like New York and London and Rome and Bombay have over a period of centuries endured pandemics and survived.”

But he says of commuters: “I don’t think they are all going to come back.”