How the pandemic has impacted the world’s most vulnerable populations in low- and middle-income economies

 Freetown, Sierra Leone
In Sierra Leone, 87% of rural households reported food insecurity, nearly double the median value.

  • Northwestern researchers asked 30,000 people on three continents how the pandemic affected them.
  • Households reported drops in income, as well as increases in food insecurity, and little support.
  • One of the most promising tactics for moving past the pandemic’s effects is mobile money transfers.
  • See more stories on Insider’s business page.

The COVID-19 crisis has been devastating for much of the global economy. Yet while the effects on established markets have been well-documented, less is known about the pandemic’s impacts on low- and middle-income countries, which account for the majority of the world’s population. This is partly because official statistics generally fail to capture the impact on informal markets, such as street-vendor sales, in which large sections of those economies participate.

So Kellogg finance professor Dean Karlan and Northwestern professor of economics Chris Udry, along with more than 20 collaborators, set out to measure the pandemic’s economic impact in low- and middle-income countries.

“These are the world’s most vulnerable people,” said Karlan, who along with Udry codirects Kellogg’s Global Poverty Research Lab. “The level of vulnerability is just fundamentally different in developing countries versus US and Europe, where even if someone is really low-income, they’re still better off than the poorest of the poor in developing countries, where the safety nets simply aren’t as strong.”

Read more: How to make sense of the COVID economic crisis, explained by a former US Treasury official

“We wanted to know the effect of the pandemic, and government policies to combat it, on individuals who rely on informal markets to sustain themselves and don’t have access to formal support mechanisms like social security or unemployment insurance,” Udry said.

Based on a phone survey of more than 30,000 people on three continents, the researchers found the pandemic’s impacts on developing regions to be deep, widespread, and negative: households across geographies and economic status reported significant drops in income and employment, as well as increases in food insecurity. And, crucially, few of these households reported receiving any kind of financial support.

As the authors write, for low- and middle-income countries, “the economic crisis precipitated by COVID-19 may become as much a public health and societal disaster as the pandemic itself.”

A global phone survey

While it’s not their normal method of data gathering, the researchers landed on a phone survey as the best method to use in a pandemic.

“It was like, ‘You want some data? This is the only way you can get it,'” Karlan said.

The method introduced a number of challenges for the researchers.

“We had to learn very quickly about how to conduct surveys by phone. You lose the trust and comfort that a face-to-face conversation engenders,” said Karlan.

To mitigate that loss, the researchers partnered with Innovations for Poverty Action to recruit local interviewers in each country, and took care to match languages, dialects, and accents between interviewers and respondents.

Another challenge: not everyone owns, or can easily borrow, a phone. “It meant we weren’t able to reach people without access to mobile phones,” Udry said. “That’s a whole set of vulnerable people we can’t get to until we’re able to go in person again.”

Due to this limitation, the study’s results likely represent a “best-case” scenario, as the interviews didn’t include those at the economic pyramid’s very bottom.

Ultimately the researchers conducted 16 surveys that were statistically representative of households in nine countries across Africa (Burkina Faso, Ghana, Kenya, Rwanda, Sierra Leone), Asia (Bangladesh, Nepal, Philippines), and Latin America (Colombia), starting in April 2020. Most of the surveys were coordinated by Innovations for Poverty Action.

In total, they surveyed 30,000 people living in both urban and rural areas, as well as in or near refugee camps. The researchers asked about changes in employment, income, food insecurity, access to markets (such as for purchasing groceries), receipt of government support, and domestic violence.

Bad news across the board

The study found that the negative impacts of the pandemic on developing regions are large and broad.

For example, income dropped for households in all settings during the pandemic. Across the 16 surveys, the median share of households that reported an income drop was a “staggering 70%,” the authors write, compared with a median of 7% reporting an income increase. The median share of households that experienced job loss was 30%.

In general, similar proportions of households across all socioeconomic levels reported drops in income and employment.

Moreover, the median share of households that reported food insecurity was 45%, with wide variability within and between countries. In Sierra Leone, for example, 87% of rural households reported food insecurity, nearly double the median value.

The crisis may have also contributed to increased domestic violence. In Kenya, for example, violence against women and children rose 4% and 13%, respectively, during the early months of the pandemic.

And, for the most part, people were on their own to weather the storm. Overall, the median share of households receiving government or NGO crisis support was only 11%.

The authors note that the scale of disruption seems to eclipse those of other global crises like the 2008 Great Recession and the 2014 Ebola outbreak. “The biggest take-home for me is the spread of the effect,” Udry said. “I expected the effects to be serious but didn’t realize it was going to reach almost everyone.”

“What we found makes clear the kind of calamity low-income households in developing countries are facing,” Karlan agreed.

To make matters worse, if other historical events are any guide, COVID’s impact will be long-reaching. For example, children in the US born soon after the 1918 influenza pandemic experienced lifelong declines in education and earnings compared with baseline expectations.

“One of the main messages of modern economics is that even relatively short-run shocks can have long-term effects,” Udry said. “Long after the pandemic is gone, there are likely consequences for the growth of kids’ knowledge and declines in the asset holdings of the poor.”

The impact, unfortunately, is likely to be felt for generations.

The best way forward

The research also points to policies that could help address the pandemic’s dire economic impacts – and mitigate the effects of future crises.

One of the most promising tactics is mobile money transfers from the government or NGOs, which are fast and require no risky face-to-face transaction. “We can reach a lot of people quickly with these innovative payment mechanisms,” Udry said.

Indeed, Karlan and Udry worked on this type of transfer with the government of Togo during the pandemic.

“We’ve helped them rapid-fire implement a targeted program of cash transfers to low-income households that were in the informal market,” Karlan said. “Now we’re helping the government use cell-phone data to refine and improve targeting methods, to help find low-income households and transfer them cash.” They’re exploring expansion of the strategy to Nigeria and Bangladesh.

Furthermore, the researchers say, governments and NGOs must build robust social support systems – with short-term components like Togo’s cash-transfer system and longer-term ones like skills training programs – to anticipate the next pandemic or economic crisis.

Granted, this wouldn’t be easy for the already cash-strapped governments of the countries studied here. But richer countries have an important role to play, partly for humanitarian reasons, but also because “disease transmission does not respect national borders,” as the authors write.

“We need some multinational players, like the World Bank, to help establish the methods, procedures, and technical knowledge for doing this,” Karlan said.

In general, the researchers agree that a more proactive, preventive approach is the right way forward.

“This crisis has been disastrous and widespread, with long-term effects,” Udry said. “We do have mechanisms that can help a lot of people, but we need to strengthen social security systems to provide greater resilience and support in the future. That’s the lesson to learn here.”

Karlan agrees. “We want our work to serve as a call to arms to groups,” Karlan said, “to do things like what Togo has done, to prepare for the next crisis.”

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Private equity firms will be back in action over the next year – here’s what investors should expect

entrepreneurs using private equity to purchase old school businesses 2x1
For PE funds looking to invest, deals may not necessarily be easy to come by – and competition for the best companies will be fierce.

  • Private equity deals have been down about a quarter over the past year, but they’re rebounding.
  • Private companies looking for funding or an exit now will have a wealth of options.
  • In addition to big competition for deals, PE firms will also face challenges gauging their quality.
  • See more stories on Insider’s business page.

Last April, as the US confronted a historic pandemic, Alex Schneider, cofounder of private-equity firm Clover Capital Partners and adjunct lecturer of innovation and entrepreneurship at the Kellogg School, watched as the private-equity industry pressed pause on deals.

During the past year, deals were down about a quarter (though the average size of deals increased).

But now, it is safe to say that the pause is over. “There’s a lot of deal-making happening right now, and there’s a lot of money out there to do it,” Schneider said.

Sellers who would’ve gone to market in a normal year but held off are now back in. The US election is over, the markets proved resilient, and vaccines have buoyed hopes of economic recovery. Companies’ values are high, interest rates are low, and PE funds are ready to invest.

Read more: 10 key elements of a successful startup pitch deck, with real examples from founders and backed by investors

“Other than a few weeks’ uncertainty at the end of March and early April 2020, there was substantial liquidity to keep credit markets alive,” Schneider said. “Prior to the pandemic, there had been a lot of wealth created and limited places to invest.”

Which is why Schneider predicts that the next year will be a busy one for these investors.

“Dry powder” and tax planning are fueling buyouts

One reason why the industry has rebounded so quickly is that many PE firms were in strong shape heading into 2020 – and there was a pause on deploying that capital in early stages of the pandemic.

The longest bull market in the US ended in March 2020, Schneider said, leaving PE firms with large reserves to safeguard against an inevitable market downturn. In 2019, so-called “dry powder” totalled $2.5 billion and grew to $2.9 billion in 2020, Bain reported.

As a result, PE firms are now primed to spend on buyouts. And due to President Biden’s proposed changes to the capital-gains tax, there will likely be more assets to acquire. Currently, owners who sell their businesses this year should have their capital gains taxed at 20%. The current administration’s proposal would double that for households making more than $1 million annually. This provides sellers with a strong incentive to close deals in 2021 rather than waiting for later.

“There’s still demand to put capital to work through traditional PE funds,” Schneider said. “There’s going to be a bit of an urgency to deploy some of that capital here in short frame. I definitely would see multiples increasing and higher prices, which I think ultimately benefits sellers. We saw this in 2012 before the capital-gains rates changed from 15% to 20%.”

Competition is heating up

Still, for PE funds looking to invest, deals may not necessarily be easy to come by – and competition for the best companies will be fierce. Private companies looking for funding or an exit now have a range of options including corporations, sophisticated family offices, and Special Purpose Acquisition Companies (SPACS).

“Corporate M&A is starting to pick up again largely because many large companies adapted during the pandemic and restructured – cutting costs and hoarding cash. Many are in a favorable position now to attack market share and innovation through acquisitions,” Schneider said. “That’s particularly true in the food industry, where companies like Kraft, Modolez, General Mills, and Unilever performed well through the pandemic and now have funds to invest.”

Some sophisticated family offices are also staffing up, hiring their own investment professionals to source and execute deals directly, rather than investing in larger “blind-pool” funds. This allows them to reduce the amount of fees they pay for deploying capital. Multigenerational family offices also tend to have a longer investment horizon than the typical three- to five-year hold of a private-equity fund. This longer horizon is often an attractive feature to sellers as well.

SPACS, which the SEC calls “blank check companies,” go public as shell companies without commercial operations. Their only assets are investments and IPO proceeds, which they later leverage to purchase a company. The Wall Street Journal likens them to “big pools of cash listed on an exchange.”

“SPACS go public and then they look for a company to acquire,” Schneider said. “This puts them into competition with a lot of larger private-equity firms. There’s a ton of interest from institutional investors in this strategy right now, even if the market may be overheated at the moment.”

While all of these have existed for decades, they have returned to vogue as companies seek financing options that have a greater deal of liquidity than typical private-equity investments can offer.

Atypical metrics, uncertain recoveries

In addition to fierce competition for deals, PE firms will also face significant challenges gauging the quality of these deals.

With many businesses having endured a highly atypical year, firms are having to find new ways to accurately scrutinize companies’ health. Add to that the difficulty in gauging when certain sectors will fully rebound, and some deals may not be as easy to close as they were in the past.

“PE firms are analyzing year-over-2019, because 2020 was so different,” Schneider said. “The metric that they’re looking at is, how do we compare to the last year of pre-pandemic, and will that be accurate?”

One challenge for firms looking to invest: ongoing global supply-chain challenges, both in terms of materials and labor.

The pandemic has of course wreaked havoc on international supply chains for materials. Lead times have grown substantially, in particular with the global microchip shortage upending the production of machines for factory automation and automobile production. This has left plenty of otherwise promising companies with a lot of demand they cannot execute on.

Ditto for labor. “There’s a need for labor in the market right now, particularly in manufacturing, retail, and the service industry,” Schneider said. “The demand is there for workers, but companies are struggling to hire.”

There is some optimism from business owners that as legacy COVID-19 unemployment programs trail off, the available supply of labor will bounce back, but it will take some time before labor supply and demand reaches equilibrium.

The biggest question for buyers and lenders is how well a company managed risk at a time when the priority went from value creation to value preservation. Those that got through the last year unscathed are going to make attractive targets.

“For a lot of business owners, the past 12 to 18 months have been the most challenging of their career,” Schneider said. “They’ve experienced how events outside of their control could have a very meaningful impact on their business. As a result, many are more open to a sale or financial partner as a way to diversify their own risk. The second half of this year should see a wave of private-equity deals.”

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6 strategies for creating a robust, multifaceted approach to improving diversity at your organization

D&I training
Create opportunities for coworkers of all backgrounds to gather and talk openly to bring about a more inclusive culture.

  • Diversity trainings are only the tip of the iceberg for improving diversity in the workplace.
  • Organizations need to move beyond implicit bias trainings by following up on their trainings.
  • Treat diversity as a real goal, measure it, and create dedicated spaces for underrepresented groups.
  • See more stories on Insider’s business page.

The racial reckoning of spring 2020 prompted much soul-searching at organizations, as companies, nonprofits, and schools realized they could no longer ignore failures of diversity and inclusion. Many quickly rolled out programming aimed at addressing these shortcomings – in particular, diversity trainings.

But training alone can’t address long-standing organizational failings, said Ivuoma N. Onyeador, an assistant professor of management and organizations at the Kellogg School. “It’s fine to have trainings,” she said, “but trainings are only the beginning of the efforts needed to improve diversity in an organization.”

Read more: Inside YouTube VP Malik Ducard’s push to fund Black creators and amplify their voices online

On their own, trainings can’t address systemic problems: pay inequity, leadership that is mostly white and male, failure to hire underrepresented groups. Additionally, some trainings just don’t work or even backfire. For example, research has shown that implicit bias training – a popular approach that seeks to help participants recognize and overcome unconscious prejudices – does not reliably reduce bias in the long term and may reduce participants’ sense of responsibility over their own behavior. Yet some organizations have implemented implicit-bias training and figured that’s enough.

In a new policy paper, Onyeador, along with coauthors Sa-kiera T. J. Hudson of Yale University and Neil A. Lewis Jr. of Cornell University, explores how organizations can move beyond implicit-bias training. The researchers reviewed the existing literature on diversity efforts in organizations and developed a set of evidence-based recommendations for creating a robust, multifaceted approach to achieving diversity goals.

Here, Onyeador highlights six key takeaways.

Prepare for bad reactions

Diversity efforts may be poorly received. The backlash can range from eye-rolling in a training session to a sense of grievance that underrepresented groups get “special treatment” to outright hostility.

Organizations should be realistic about these challenges and have plans to address them.

“We do this in other arenas – we would never launch a product without anticipating potential snags in the process,” Onyeador said.

Organizations can build support for diversity programs by proactively addressing employee concerns. Majority group workers may fear they’ll be passed over for promotions in the name of diversity or punished for “saying the wrong thing,” or they may simply believe that diversity isn’t important – worries that can be allayed before a new program is introduced by addressing them in ways that fit your specific organizations’ culture and context.

Facilitate intergroup contact – but also create dedicated spaces for underrepresented groups

When majority group members interact with underrepresented groups, their attitudes change. One recent study found that interracial interactions help white people perceive and combat inequality; another showed that, after hearing people of color discuss their cultural backgrounds, white people displayed more inclusive behavior toward nonwhite coworkers. By creating lots of opportunities for coworkers of all backgrounds to gather and talk openly, organizations can bring about a more inclusive culture.

But it’s essential to recognize that intergroup contact may also place a burden on underrepresented group members, who may feel exhausted, singled out, or responsible for teaching others. That’s why it’s just as important for organizations to create dedicated structures such as affinity groups that allow underrepresented groups to gather. In addition to providing camaraderie, these spaces can facilitate career networking and advancement.

“People of color, for instance, are having a very different experience in these organizations than white people, and it can be nice to have a space where you meet other people and solve problems, share resources, and find role models,” Onyeador said.

Messaging matters, but action matters more

It’s easy to sing the praises of, say, your company’s family-friendly policies in a job description. But it’s much harder to actually be accommodating when an employee needs several days off to care for a sick child.

In fact, research shows that organizations that include organizational-diversity messages in job descriptions aren’t necessarily better at recruiting a diverse pool of employees or less likely discriminate against them.

“We want to make sure that both of those pieces are in there,” Onyeador said. Including inclusive language “is important to do, because it signals to your potential pool of applicants that the organization could potentially be a supportive place for them. But then it’s really important to follow that up with action.”

Treat diversity as you would any other organizational goal

Action means creating accountability structures – which, according to one 2006 study, is the single most effective way to improve managerial diversity.

Assigning institutional responsibility “can look a number of different ways, like having a chief diversity officer with some sort of oversight role, or diversity officers within units reporting up to a leader who has the power to hold units and managers accountable,” Onyeador said.

Organizations can also create incentives for participating in inclusion efforts, like bonuses or perks for serving on a diversity council.

“People are very motivated by extra money at the end of the year,” she said. “I suspect that if bonuses were tied to diversity metrics, we would see things shift. We would find the Black engineers. They’re there.”

You can’t improve what you don’t measure

Often, organizations are reluctant to collect and analyze data on diversity programming.

But that mentality wouldn’t fly with any other important organizational objective, so it shouldn’t be acceptable for diversity efforts. If a particular program or training didn’t work, “it’s imperative that we know that,” she said, so it can be improved.

There’s a similar hesitance about studying outcomes for the overarching goals of organizational change. All too frequently, companies will set out to improve diversity – but fail to measure the variables of interest.

Onyeador summarizes the attitude this way: “Did we increase the number of women in the C-suite? It’s not clear. Is the climate different? We have no idea. Are we retaining more people? Nobody knows.” Organizations have the data to answer such questions. Deciding to pay attention to it “will go a long way.”

None of this is easy, and that’s OK

Diverse organizations are not built overnight or by accident. But just because the work is challenging doesn’t mean it’s impossible.

In fact, “as organizations, as companies, as universities, we’re used to doing hard things by putting our heads down, figuring it out, being really careful, and thinking through everything,” Onyeador said.

There’s no reason, she said, that the same level of effort can’t be applied to diversity.

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Laws requiring board diversity are becoming more common – here’s what business leaders need to know

meeting
Retaining diverse board members should be viewed not as a risk mitigation strategy but as an opportunity for growth.

  • Some states have started mandating gender, ethnic, and social diversity across company boards.
  • While certain regulations could include fines for companies that fail to comply, others are advisory.
  • For now, experts say the real pressure to increase board diversity is coming from company investors.
  • See more stories on Insider’s business page.

Companies have long been talking about how their boards need to be more diverse. But now the legal landscape is changing, with some states mandating that companies do more than talk.

In Illinois, for instance, boards of publicly owned companies are required to disclose female and minority board membership, as well as how they identify and appoint those members. California has gone even further, mandating that boards have at least one woman, as well as a certain number of directors from underrepresented racial, ethnic, or LGBTQ communities. Other states, including Washington, Colorado, and Pennsylvania, have also passed legislation to encourage diverse boards, and more are considering this step.

All of this means that, in addition to being an ethical and reputational imperative, boosting board diversity is quickly becoming a legal one as well. So what should companies keep in mind?

“Because there’s such a patchwork of inconsistent state statutes – and because many of these statutes are looking at different kinds of diversity – it’s very hard, from a compliance standpoint, to figure out a one-size-fits-all answer,” said Mark McCareins, codirector of Kellogg’s JDMBA program and a clinical professor of business law.

That said, there are certain things that companies should understand about this quickly evolving legal landscape.

Read more: We identified 10 corporate board candidates with deep experience in M&A, tech, marketing, and social impact to keep an eye on

At least for now, the real pressure is coming from investors

Not all of these new legal requirements come with teeth. While some of the new state regulations include fines for companies that fail to comply, others are merely advisory.

“Some of the new statutes say, ‘we want to know what you’re doing in this area, but we haven’t decided yet what we’re going to do if you don’t report or you report and the numbers aren’t to our liking,'” McCareins said.

There are also some inherent limits to just how strong their enforcement can be. For example, a company in one state can reincorporate in another if it feels overly burdened by the board regulations.

That’s why, at least for now, the larger incentive is reputational.

“The biggest hammer in all this is probably from a perception in the equity markets that you are not a company that plays by the rules,” McCareins said.

Investors are making their will known in other ways, too. Last year, the NASDAQ submitted a proposal to the SEC that called for instituting diversity requirements. And institutional investors such as BlackRock, Vanguard, and StateStreet have begun bringing shareholder lawsuits against firms over board composition.

“If I’m a public corporation, whether or not I’m currently under state or federal regulation, I’m probably going to be as concerned about what my investor base – and specifically my institutional investors – are thinking about this issue,” McCareins said.

As with other ESG issues such as climate change, McCareins predicts that scrutiny over board diversity from a range of stakeholders will only increase over time.

“Companies want to be ahead of the curve on this and other issues,” he said. “These statutes have brought it into the corporate mindset that there really hasn’t been sufficient progress to diversify corporate governance. So regulators and investors are going to start taking baby steps in the hopes of getting companies’ attention – and in the hopes that they end up doing the right thing.”

Consider your bylaws

All of this means that as companies anticipate new mandates, they must also consider whether their own bylaws could stand in their way.

“Let’s say our company has bylaws where a five-member board all have eight-year terms,” McCareins said. “They have just been appointed in the last year. The company would love to be more diverse, but now we’re stuck with this board for the next seven under our bylaws.”

This can put companies in a legal bind. A company that slow-rolls its compliance efforts may face legal action from shareholders. But if the company takes actions to comply with new state laws and runs afoul its own bylaws in the process, that may create other legal problems.

“You could see shareholder derivative suits against boards for not fulfilling their fiduciary duties,” McCareins said.

Ultimately the power to change the board’s bylaws resides in the hands of shareholders. After all, while boards typically make recommendations to reconfigure their own makeup, they cannot do so unilaterally.

“Let’s say shareholders vote and say, ‘no, we don’t want to change the bylaws,'” McCareins said. “That’s where the rubber hits the road and state regulatory policy runs head-on into the shareholders who own the company.”

McCareins recommends that the board’s governance committee start by gaining a comprehensive understanding of the applicable state DEI statutes.

“Where a change is – or will be – mandated, the governance committee then needs to formulate proposals to reflect these changes in board composition,” he said. “If the governance committee feels ill-equipped to evaluate DEI principles, an outside consultant in such matters can be brought in to assist.”

Embrace the opportunity

There is plenty of good advice out there on how to find and retain diverse board members – and set them up for success. (For instance, see here and here.)

McCareins advises companies to embrace the process – not just as a risk mitigation strategy, but as an opportunity for continued growth.

He recommends codifying the nomination criteria and diversity metrics that would comply with necessary requirements and would fit the company’s goals. In addition to boosting gender or racial diversity, this may also be an opportunity to diversify in terms of professional backgrounds or skills. Or perhaps it is an opportunity to recruit directors who can better represent the voices and experiences of diverse clients, customers, and other stakeholders.

“Every company is different and every company culture is different,” McCareins says. “It is up to the nominating committee to spend time early in the process to identify the metrics which make sense and are attainable for their business.”

Read the original article on Business Insider

3 predictions for how company operations will change post-pandemic, according to an operations expert

woman flight airplane mask
Airlines will need to retool their pricing model after a year of unpredictable travel.

  • Marty Lariviere is a professor of operations at the Kellogg School of Management at Northwestern.
  • He offered three predictions for how operational changes will stay the same or shift in the future.
  • Stores will keep minimal SKUs, supply chains will snap back to normal, and travel pricing will vary.
  • See more stories on Insider’s business page.

As growing numbers of people get vaccinated and the economy begins to pick up speed, many companies are – once again – assessing how their operations will need to adapt for the future.

As they are busy sorting through which operational changes will endure and which will fall by the wayside, Marty Lariviere, a professor of operations at the Kellogg School and coauthor of The Operations Room blog, expects fewer seismic changes going forward than many may be envisioning.

But that’s not to say it will all be business as usual.

“We’ve already had something of a return to normalcy,” he said. “But there are aspects of convenience – like click-and-collect grocery and grocery delivery – that are not going away.”

Here, Lariviere offers three predictions for the next year and beyond.

Read more: Remote work, bitcoin miners, and over-ordering have led to a PC parts shortage that’s driving up prices for everyday electronics – and likely to last into 2022

Consumer-goods companies will keep it simple

In a stable economy, product variety is a hallmark of consumer goods: businesses lure customers with choice and compete on new offerings.

But the pandemic shrunk variety across consumer goods.

Both online and brick-and-mortar stores stocked fewer SKUs, a trend that extended across product categories early in the pandemic. Grocery stores, for example, reduced their average number of items by 7.3% early in the pandemic. Producers dropped less-popular products to streamline production – a common cost-reduction strategy.

“You lose production capacity every time you change things like scent, size, or packaging,” Lariviere said.

When customers just want common items such as disinfect wipes in stock, whether they come in lavender or lemon scents matters less than availability. Maintaining a wider variety of products also makes forecasting demand and inventory management more challenging at a time when companies are striving for efficiency.

Lariviere and others predict that this streamlined trend is likely to continue, at least for the near term. Customers have become accustomed to smaller product choice, he said, while stores will be unlikely to diversify beyond what they know already sells.

“Over time, wider selections might come back. But for right now, unless you can really convince stores that it’s going to drive a lot more demand, I don’t think they would be anxious to take on the complexity of having more variety,” he said.

Supply chains will start to look a lot like they did pre-pandemic

Regional shortages and panic buying are common before storms or natural disasters. The global nature of the pandemic meant that every region shared that strain. And early in the pandemic, runs on certain products – think toilet paper and pasta – left many consumers with the impression that global supply chains are vulnerable.

But most supply chains ultimately proved resilient. In Lariviere’s view, rather than bolstering inventory to safeguard against future shocks, companies will likely return to something close to business as usual.

“We may see some tweaking around the edges, but no dramatic sea change,” he said. “It’s too expensive.”

The rise of just-in-time supply-chain management means companies have little incentive to produce excess inventory, only to store it in a warehouse until the next crisis.

“In a steady state, people like cheap stuff,” he said. “Would you be willing to pay an extra 20 cents on a package of paper towels if it meant that there was, somewhere, a big inventory or idle production capacity that would be called upon in an emergency? Unlikely.” In fact, the paper company Kimberly Clark is reporting lower toilet paper sales, with many consumers now working through their home inventories.

So Lariviere thinks there will always be some fragility in the system – and thus the potential for shortages – especially for commodities and consumer goods.

“Supermarkets and Target and firms like that are always first and foremost going to be competing on price,” Lariviere said. “They’re not going to be in a place where they can sustain carrying lots of access inventory for terribly long.”

Even items such as PPE fall under some of the same pressures, which may leave us vulnerable to the next public-health crisis, unless policymakers intervene.

“It’s hard to imagine a national stockpile without government subsidizing production and storage,” Lariviere said. “Hospitals are already under cost pressures, so they can’t afford to stock up on excess supplies. That price pressure is not going to go away.”

The travel industry will struggle with pricing

Much has been made of the pandemic’s impact on the travel industry. But according to Lariviere, one of the industry’s greatest challenges for the foreseeable future has largely fallen under the radar: how to price their services.

For decades, travel companies – especially airlines and hotels – built business around dynamic pricing and revenue management, or adjusting prices based on historical data and timing. Armed with extensive data on sales and customer habits, airlines have mastered the practice of demand forecasting. As a result, customers with neighboring plane seats often pay different prices for the same service.

“The magic is selling some seats at $300 early while making sure there are seats to sell at $2,000 later,” Lariviere said.

But the last year has upended these practices. Airlines and hotels have gone from being able to precisely pinpoint demand to having to guess. So while there may be a lot of pent-up travel demand among customers, efficient revenue management is going to be tough.

“We now have a year with no data, and the years of data before the pandemic won’t guide these companies terribly well for the next two years,” Lariviere said.

Consider the uncertainty facing airlines, which have reason to fear that business travelers, their most lucrative customers, may be slow to return at pre-pandemic levels. (The Global Business Travel Association forecasts it will take until 2025 for business travel to fully recover.) Consumer behavior in leisure travel is also highly uncertain. The CDC has issued travel guidance for fully vaccinated people, but variants continue to spread and children remain unvaccinated, so consumer preferences may take time to catch up to public safety.

All this means that the traditional model of “sell cheap early and expensive late” may still work – or it might need to be tweaked.

“Airlines and hotels are going to have to be ready to retool their pricing very quickly,” Lariviere said. “Forecasting demand at different price levels, that’s going to take a while to get straightened out.”

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A Kellogg finance professor explains why companies are adding more women to their leader boards

STOCK of people at a boardroom desk
American companies only recently tripled the rate at which they added female directors to prominent boards.

  • Professor David Matsa believes “the Big Three” investment companies influenced the recent uptick in female directorships.
  • “The more of a firm’s stock the Big Three held, the more women directors appeared on that firm’s board.”
  • The Big Three’s campaign to get more women on boards shows there are qualified women ready to serve.
  • See more stories on Insider’s business page.

The dearth of female leaders in corporate America is well established. For example, at the end of 2020, fewer than 8% of companies in the S&P 500 were woman-led.

One way to address this gender imbalance would be to increase female representation on corporate boards. Not only are board members corporate leaders in their own right, but they also hire CEOs.

While countries such as Norway have used government mandates to force companies to include women on their boards, few such rules are on the books in the US. Nonetheless, American companies recently tripled the rate at which they added female directors.

Were US firms unusually enlightened? Or were they responding to pressure from another source?

Kellogg finance professor David Matsa suspected the latter. In recent research, he and coauthors noticed that the conspicuous uptick in female directorships coincided with a cascade of gender-diversity influence campaigns mounted by a trio of powerful institutional investors: Vanguard, BlackRock, and State Street. Known as “the Big Three,” these firms manage over $15 trillion, accounting for three-quarters of indexed mutual fund assets. That means that these companies hold shares in almost every large firm in the US – in fact, they’re the dominant shareholder in 88% of firms on the S&P 500.

Given this outsized influence, Matsa and his collaborators – Todd Gormley of Washington University in St. Louis, and Vishal Gupta, Sandra Mortal, and Lukai Yang of the University of Alabama – wanted to know if the Big Three really were moving the needle on boardroom-diversity efforts. And if they were, how did those efforts compare to government-enforced quotas in other countries?

The researchers found evidence that the Big Three were indeed driving boardroom gender diversity – and that these efforts led to women in more powerful board positions than those spurred by government quotas. Furthermore, by analyzing how firms responded to the Big Three’s demands, the researchers shed light on why companies may be slow to appoint female board members in the first place.

“The Big Three changed the conversation around gender in corporate boardrooms,” Matsa said. “When your largest shareholders create a ruckus, you listen. And in important ways, their advocacy can be more effective than legislative mandates.”

The Big Three’s campaign

State Street led the Big Three’s charge for gender diversity with its March 2017 “Fearless Girl” campaign, named for an eponymous statue the company placed in front of the “Charging Bull” sculpture on Wall Street. By early 2018, Vanguard and BlackRock had launched similar campaigns.

Each member of the Big Three also backed up its campaign with a threat: it would vote against directors at any firms who failed to appoint more women to their boards. Directors on a corporate board are elected by the firm’s shareholders. And since Big Three investors tend to be a firm’s dominant shareholders, their voting threats are not idle.

“Being a director is a highly sought-after job: it’s prestigious and well-compensated. Directors don’t want to lose it,” Matsa explained. “Even though these elections typically aren’t contested, it doesn’t look good to have a lot of votes against you.”

To determine whether companies were responding to the Big Three’s diversity demands in 2017 and 2018, the researchers gathered two types of information about companies in the investors’ portfolios. First, they measured how much of a stake each Big Three investor held in each of the firms, with the idea being that the bigger the stake, the bigger their campaign’s influence would likely be.

Second, the researchers gathered information about the composition of each firm’s board of directors – whether members were male or female, when they’d been hired, whether they’d previously served as board members at this or other firms, and which board committees they served on.

They then analyzed the data across two spans of time: Three years before the Big Three’s gender-diversity campaigns (2014-16) and three years after (2017-2019). Together, this provided a before-and-after picture of how firms under the Big Three’s influence behaved.

“The firms with a larger share of their stock held by State Street, BlackRock, and Vanguard – to what extent did they change their boards of directors relative to other firms during this period?” Matsa said. “That’s the variation that we studied.”

More stake, more women – with more power

The results were undeniable: the more of a firm’s stock the Big Three held, the more women directors appeared on that firm’s board after 2017.

Indeed, for every additional 8% owned by Vanguard, BlackRock, or State Street, the number of new female board members rose by 76%. Before 2017, only one in twelve firms added a woman to its board each year. By 2019, one in four did.

The Big Three’s campaigns each had a slightly different focus. For example, State Street targeted firms without any female directors. BlackRock, meanwhile, said it expected at least two women directors on every board. So the researchers were able to track whether firms responded differently depending on the relative ownership stake of each of the Big Three institutions.

Sure enough, the researchers found that companies with larger State Street ownership exhibited the largest increases in diversity among those firms with all-male boards. Similarly, firms held more by BlackRock – and with fewer than two female directors prior to 2018 – made larger board-diversity changes compared with firms where Blackrock was less invested.

“The way a company changed their board corresponds to who holds large ownership stakes in them, and what those specific asset managers were pushing for,” Matsa said. “This finding gives us more confidence that these changes in the board-member composition are indeed a reaction to the pressure from these institutions.”

But to Matsa, the most interesting finding was the quality of the Big Three’s effect on board diversity.

He explains that previous research has shown that government quota systems – like California’s 2019 requirement that every public company have at least one woman on its board – can result in tokenism as boards “check the box” of adding female directors. But, the previous research shows, the companies often fail to put these women on committees where power is actually exercised.

“A lot of a board’s work is done in these committees,” Matsa explained. “For example, the audit committee oversees the company’s financial reporting and disclosure.”

The companies that responded to the Big Three’s diversity demands, however, did appoint more women to influential audit- and nominating-committee positions than firms complying with a mandatory quota did. This implies that institutional investors may be more effective than lawmakers at creating what Matsa calls a “ripple effect” in female corporate leadership.

“When women are involved in the nominating committee, it might begin a cycle of the boards being more open to female membership in the future, even when they aren’t subject to the shareholder campaign,” Matsa said.

Why aren’t boards hiring women already?

For Matsa, these results beg a larger question: Why aren’t companies doing this on their own? “This paper is also about understanding what impediments keep firms from appointing more women, outside of these influence campaigns,” he said.

The most commonly cited reason for failing to recruit qualified female board members, Matsa said, is that there simply aren’t enough of them. But that reasoning depends on certain biases.

For one, board nominating committees often use previous CEO experience as a proxy for “qualified” – even though, in practice, boards often include other senior business leaders and nonexecutive experts like lawyers, bankers, scientists, or academics. Since most CEOs are still men, this bias curtails the number of female board candidates. Moreover, nominating committees often rely on personal connections to filter potential candidates – so when those committees are male-dominated, their networks tend to be, too.

To satisfy the Big Three’s diversity demands, Matsa found that firms simply did the obvious: they didn’t prioritize previous CEO experience, and they ventured beyond their personal networks.

But did this result in a flood of unqualified female board members? Hardly. The Big Three believed that there were plenty of qualified women out there ready to serve on boards if only existing board members broadened their searches. And, indeed, the women who were nominated were “overwhelmingly” voted for by shareholders, Matsa said – and not just by the Big Three, who may have had a motive to see their diversity campaigns succeed.

“That fact is not consistent with there being widespread opposition to adding these women,” he explained. In other words, it’s often the old boys’ network – not a lack of real qualification – that’s keeping women out of boardrooms.

To Matsa, these findings are less about assigning blame than about illuminating what works.

“My sense is that few board members believe that they were selecting a man because he was a man,” Matsa said. “They would think of it as looking for someone experienced, who they can trust. It’s difficult to move outside of that frame. It takes someone influential, like your largest shareholder, to tell you that you should approach this differently.”

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Why highly regarded leaders don’t always do the best work – and why they should be critiqued like everybody else

Businessman work
High performance on one project does not guarantee high performance on the next.

  • A leader’s high status among peers doesn’t guarantee a positive outcome for the projects they lead.
  • High-status people are prone to high highs and low lows, while moderate statuses have higher averages.
  • Executives must remember to critique their stars, too, and not let ego overshadow the actual work.
  • See more stories on Insider’s business page.

When it comes to leading a successful project, sometimes having too much status can be a bad thing.

Take, for example, video-game producer George Brussard, who in 1997 announced plans for a new game, “Duke Nukem Forever.” Expectations were high: Brussard’s previous title, “Duke Nukem 3D,” was one of the top-selling video games of all time, beloved by critics and players alike.

But instead of another smash hit, “Duke Nukem Forever became a legendary boondoggle, released more than a decade late to lackluster reviews and fan response. What went wrong?

It may seem shocking when an iconic leader like Brussard swings and misses, but it’s not uncommon, according to research from Brayden King, a professor of management and organizations at the Kellogg School. In a new study of the video-game industry, King and his coauthors – Balazs Szatmari of the University of Amsterdam, and Dirk Deichmann and Jan van den Ende of Erasmus University – found that a leader’s high status among their peers doesn’t guarantee a positive outcome for the projects they lead. Indeed, it can often be a liability.

Leaders with high status, the research revealed, are prone to extremes – big successes or big flops – while moderate status is associated with the highest average level of project performance.

Why? With status comes everything a leader needs for a project to succeed: resources, support, the faith of executives, and team members. But there is peril, too: high-status project leaders are often overburdened. And precisely because of their status, the people around them may not offer honest feedback.

“We tend to be too deferential to people who we consider to be higher status. And where we give deference, what we should be doing is increasing our scrutiny – or at least, scrutinize them as much as we do people of lower status,” King said. “There is greater potential for them to let their egos take control and produce something that sounds good to them but that is in reality a terrible idea.”

Read more: I’m a first-time founder who raised $2.5 million despite the pandemic upending the fundraising process. I know why we were successful.

Game on: testing status and performance

The researchers focused their study on the video-game industry – a useful test-bed because of the large quantity of games released each year to an audience of vocal, engaged fans. But, King said, “I don’t think these findings are just characteristic or a dynamic specific to the video-game industry.” Any field where leaders can attain status is subject to the same set of forces.

To begin, the researchers assembled a database of 745 games produced by leading companies between 2008 and 2012, for which full information about the development team was publicly available. They winnowed that list down to games with a single producer who was not a first-time producer, leading to a final sample of 349 titles. Data on performance came from the popular MobyGames database, which aggregates critic and user reviews.

To assess producers’ status, the researchers used their “network positions” – a statistical measure based on patterns of who has collaborated with whom within an organization. The idea, Szatmari said, is that people who are well-connected tend to be the best-regarded.

“If you enter in a room and you see someone surrounded by many people, you think, ‘Oh, that person must know something.’ There’s a reason why people are around them,” he said. “If many people want to work with you or seek your advice, that’s a sign of competence.”

Then, the researchers analyzed the relationship between producer status and game performance – controlling for a variety of factors that might affect success, such as year of release, team size, and whether the game broke technological or conceptual ground and involved greater risk.

When too much status can be a bad thing

What they discovered was an inverted U-shaped relationship between producer status and average game performance. In other words, having status helped – until it didn’t. Middle-status producers had the best average performance, while high-status and low-status producers fared about the same.

However, while high-status and low-status producers had similar average performance scores, in the case of high-status producers, that stemmed from extreme variation in performance. Some had wild successes and others abject failures, resulting in an average comparable to low-status producers.

These patterns were reflected in observations from industry insiders, whose comments offered a qualitative complement to the researchers’ statistical analysis – and Szatmari said, “helped shed light on some of the causal explanations for what was going on.”

For instance, the researchers suspected that high-status producers’ tendency to flounder stemmed from being overwhelmed because, given their reputation, everyone wanted some of their time.

One producer put it this way: “I can certainly notice that as my status grows, my productivity goes down. When people are not absolutely clear, I start to miss the signals … until somebody says something like, ‘I need help!’ In the past, I had more time for processing the information, but now, if somebody doesn’t scream then I don’t see the problem.”

Another insider confirmed that executives’ faith in high-status producers can lead them to ignore serious problems in a project. Once, the insider said, a legendary producer sold company owners on a game that many employees questioned. It quickly spiraled out of control, but the owners didn’t see it, despite employees’ repeated attempts to raise concerns.

As for the high success rate of intermediate-status producers, King believes it’s partly attributable to career phase. People with moderate status are likely to be mid-career, a time when they are trusted but still hungry. They’ve attained “enough status and recognition that now people are willing to put resources behind them, but they’re also still striving to reach the top” – and aren’t yet surrounded by yes-men. This combination of ingredients, he believes, accounts for their success.

Why companies should scrutinize their stars

It’s easy for companies to assume their most well-regarded leaders have things under control – after all, they got that positive reputation for a reason. But King said it’s essential for executives to pay extra attention to stars when they are leading important projects.

When people are put in charge, there’s “a double whammy,” King said: our egos can swell at the same time as those around us stop telling us the truth, “so they’re constantly giving us feedback that we’re always right.”

So he has a word of advice for anyone taking charge of a project: “Be aware of this potential in yourself.” Learning to accept negative feedback isn’t easy, but it can save you from a disaster.

“People only give us the feedback they perceive we’re comfortable taking,” King said. “And if we’re not open to being told ‘no,’ when we’re in a high-status position, people probably won’t tell us ‘no’ enough.”

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A Kellogg marketing professor explains how to use AI and analytics to grow your business

data worker
Many companies can improve how they analyze their industry’s market data.

  • Leaders should develop a working knowledge of data science to help their businesses grow.
  • It’s important to build on the success of teams that are already solving specific problems using AI.
  • Data and analytics can also show business leaders what consumers are likely to want to purchase.
  • See more stories on Insider’s business page.

If you pushed a shopping cart down a grocery aisle in the summer of 2013, you might’ve noticed a curious new snack: Watermelon Oreos. Perhaps you even reached for a package.

The limited-release flavor, alas, was not long for this world. But the data that was collected on who did and didn’t purchase it has led to some lasting insights. Namely, a team of researchers led by Kellogg marketing professor Eric Anderson discovered a segment of customers with highly unusual – and highly unpopular – tastes. If these customers purchase your new product, the researchers found, it is likely to fail.

This insight is as useful as it is unexpected. “The failure rate of new products is incredibly high. It’s hard to know, is a product going to succeed or is it going to fail?” said Anderson. Knowing that some purchases, which normally signal success, actually signal the opposite could be helpful for firms as they develop market-research strategies, or decide when to discontinue a product.

But insights like these require thinking broadly about your entire business, rather than focusing on a narrow silo. They then require collecting and analyzing a lot of data. And today, most companies simply are not up to these tasks.

“One of the big challenges for companies today is that you have processes for nearly everything. You have a process for … financial reporting, for managing a supply chain, for dealing with marketing. But if you go back and ask yourself, ‘Do we have a well-established process for doing AI and analytics in the company?,’ the answer most places is no,” said Anderson.

Instead, many companies develop an ad hoc approach to using artificial intelligence and analytics to solve individual problems – which limits the impact, making it unlikely that these tools will ever transform the company’s culture, or be used to drive its most critical decisions.

During a recent The Insightful Leader Live event, Anderson, who is also director of the new MBAi program, offered advice for leaders who want to develop an analytics and AI process robust enough to make a real difference in their business.

Develop a working knowledge of data science

The first step to success, he said, falls to leaders, who must develop a working knowledge of data science.

“This does not mean that you are a data scientist,” he clarified. While leaders don’t need to build their own algorithms, they do need to sufficiently familiarize themselves with analytics and AI to be able to gauge whether the data is being collected and interpreted correctly, and to understand the business problems that these tools are best equipped to address.

“You would never be caught dead saying I don’t know anything about finance, but I’ve got this really smart CFO that knows everything about finance,” said Anderson. The same should also be true of data science. “You can’t make the right investment decisions until you know a little more about the science.”

Data-savvy leaders also need to know enough to, well, actually lead their data science teams, and elicit the information they need from those teams to make smart decisions.

“Do you have the resources to succeed here? Tell me more about how this is going to lead to an impact in my organization. Tell me how this AI and analytics you’re proposing is deeply connected to my strategic priorities and is going to deliver on those priorities,” said Anderson. “You have to have the confidence to ask those probing questions.”

Support communication between business leaders and data scientists

Along these lines, Anderson explained that it is critical for business leaders and data scientists to learn to talk to one another.

Data scientists are often trained using clean, simplified data, or by working on proof-of-concept projects. But real-world projects are far more complex, involving lots of people, processes, and of course meetings and discussions.

“So data scientists need to become much better at communication with non-technical experts to overcome some of these hurdles,” said Anderson.

For their part, business leaders need to make sure that these discussions with their data scientists occur using a common language and framework so that everyone is clear about goals and expectations.

Don’t mess up what’s working

“In almost every big company we work with, there are pockets” of analytics success, said Anderson. “Don’t mess up what’s working.”

Instead, he suggested building on that success, and allowing that team to stretch itself to solve specific problems in other parts of the organization. Then, expand the team with those specific problems in mind. If you care about, say, predicting how a product will fare based on who purchases it, you’ll want to bring in a computer scientist who is an expert in predictive analytics. If you care about influencing customers’ behavior, on the other hand, you might bring in a social scientist who is trained in running A/B tests.

“If you start with problems, you can identify what your needs are and hire against them,” said Anderson.

Even smaller companies can follow a similar playbook. Thanks to the proliferation of online AI and analytics training, getting existing employees up to speed on these skills is a real possibility.

“If you want to get skilled up, it’s not impossible to do,” he said.

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The pandemic could accelerate job automation – here’s how the change would impact cities, the labor force, and inequality

automation
According to the World Economic Forum, nearly 40% of US jobs are at risk for automation.

  • Hyejin Youn is an assistant professor of management and organizations at Northwestern University.
  • She says the pandemic may speed up job automation and widen gaps in wages, skills, and social capital.
  • This could lead to the downfall of many US cities, but Youn hopes it will instead spur innovation.
  • See more stories on Insider’s business page.

For more than a year now, many of us have worked from home, pets on laps, children babbling just offscreen. The experience has been a revealing one. Some of us have learned to embrace the flexible hours, the five-step commute, and the relative dearth of pointless meetings; others have felt disengaged and burned out by the challenges of collaborating on Zoom.

But the pandemic has also exposed a more significant split in the labor market, one that has experts worried as they speculate on the long-term impacts of the crisis.

“What we now see very clearly is that some jobs can be done from home, and others simply cannot,” said Hyejin Youn, an assistant professor of management and organizations at the Kellogg School. “Distinguishing between these types of work can help us track inequities in the labor market across cities.”

So far, the trends are worrisome. Those who can log on from home have been largely unaffected, whereas those whose jobs require a physical presence have either been laid off or faced with the choice of protecting their health or guaranteeing their next paycheck. And as companies look to cut costs, more and more jobs are now under threat of automation, which Youn fears may widen the gap between cities that flourished pre-pandemic and those that were already struggling.

“There’s always the hope that a crisis like this will spur innovation,” Youn said, “and nobody knows precisely what the long-term outcomes will be. But the concern is that rather than shaking things up, the pandemic might simply reinforce the system we already have.”

From “optimization” to automation

One consequence of remote work is that companies might accelerate the pace of automation, in part because they’ve had a chance to monitor more workers online and assess which tasks – or entire jobs – a machine might do more quickly.

With nearly 40% of US jobs at risk of automation, according to the World Economic Forum, the performance data from 2020 might have significant implications. When an employee’s every click, step, or delivery stop is recorded in digital form, a company can learn to optimize that work – and perhaps codify human routines into processes that are better suited to machines.

Using digital information, companies can identify and optimize certain task routines by finding better ways of arranging the tasks within the routine, micromanaging human workers, and developing machines to take on the tasks.

“This is the uncomfortable truth,” Youn said. “Recording an employee’s work is preparing for the day when you replace them with a machine. And this will lead to further gaps in wages, skills, and social capital.”

And while there will still be some tasks that are not codifiable – especially ones that require tacit knowledge or empathy and hospitality – certain jobs are sure to be streamlined and passed on to less-skilled laborers or organized into routines that can be handled by machines.

“Technology has always increased inequity,” Youn said. “Now we just have the means to make it happen even faster.”

The impact on cities

If these trends do accelerate, the effect on America’s urban landscape could be devastating. Youn has previously studied the ways in which automation affects US cities unequally, and she worries that this disparity will only worsen as businesses adapt to post-pandemic life.

“Cities might segregate further,” she said. It’s likely that wealthy, productive hubs like Silicon Valley will return to something resembling business-as-usual, given how valuable in-person collaboration can be for the kinds of breakthroughs on which tech thrives. On the other hand, the outlook for a small or medium city might be even more bleak than in 2019.

The impact of this geographic rift is hard to measure, Youn said, but it likely doesn’t bode well for the effort to solve the nation’s social and political polarization.

“It might make the echo-chamber problem worse, with certain kinds of high-skilled workers hermetically sealed from everyone else,” she said. Mountain View might come to seem even further away from Baltimore. And the prospect of remote-work patterns extending beyond 2020 is threatening to exacerbate the winner-take-all economy.

“It’s a well-known phenomenon in economics that social mobility increases after certain kinds of crisis, like war,” Youn said. “But this crisis appears to be different. It’s pushing us in the opposite direction.”

Reactive innovation

One source of hope is that the pandemic might spur new innovation. It’s certainly been a time when people and businesses have had occasion to reconsider their purpose and goals.

But Youn said we should distinguish between two kinds of innovation. The first is endogenous innovation, or change that evolves from within a business, society, or ecosystem. The second is reactive – change in response to external events.

“The pandemic is clearly a major event that will force some kind of innovation,” she said. “But this doesn’t mean we will innovate in the direction we aspire to as a nation or society. It’s less endogenous, more reactive.”

And some of this reactive innovation – including the many creative ways companies learn to digitize jobs – might have negative long-term effects. In fact, the focus on maximizing efficiency may actually limit endogenous innovation: in particular, optimizing technologies to execute processes leaves little room to come up with the kinds of breakthrough ideas that reshape industries.

For companies that have the luxury of focusing past their immediate survival on long-term innovation, Youn advised bringing employees back to the office whenever feasible. Because in her view, the early work of endogenous innovation cannot be done remotely, at least not very well.

“When it comes to arriving at ideas that are not well defined, thinking far into the future, that’s tough over Zoom.”

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How to make sense of the COVID economic crisis, explained by a former US Treasury official

GettyImages economy covid
22 million job losses were reported in March and April 2020.

  • Jan Eberly is a finance professor at the Kellogg School and a former chief economist at the Treasury.
  • The current economic crisis is unique since the primary underlying issue is the pandemic, she says.
  • Eberly says it will take time to strengthen small businesses and the labor force after the public health crisis recedes.
  • See more stories on Insider’s business page.

What should one make of the COVID economy?

The unemployment rate is falling, but nearly 10 million Americans who lost their jobs to the pandemic remain unemployed. A speedy vaccine rollout promises to reopen many sectors of the economy, but the national debt is on the rise. School and daycare closures have hit mothers, especially Black and Latinx ones, hard – but a new child tax credit promises to lift millions of families out of poverty.

As yet another stimulus package leaves the Oval Office with a signature – and the IRS sends an unprecedented third stimulus check to many Americans – one could be forgiven for wondering what to make of it all.

So we asked Jan Eberly, a professor of finance at Kellogg and senior associate dean of strategy and academics, for her take. The last time the US was pulling itself out of a recession – the Great Recession – Eberly was assistant secretary and chief economist at the Treasury. The experience gave her a clear view of the power and challenges of using public policy to restore jobs, incomes, and the broader economy.

Eberly explained that there is plenty that policymakers are doing to encourage a quick recovery. But it is important to understand just how different this crisis is from other economic crises.

“We can address what is happening in the economy,” she said. “But the underlying issue is the pandemic. Fundamentally, this is a public health shock and that must be first and foremost in the recovery.”

Here, Eberly offers her take on this strange, new pandemic economy.

Job losses have been stark but uneven

Prior to March 2020, the US economy was humming nicely, and weekly unemployment claims numbered just a few hundred thousand. Then, the coronavirus hit, and seven million jobs were lost seemingly overnight. Over March and April, losses climbed to 22 million.

New unemployment claims have since come down. “But there are still nearly 10 million people who have not returned to their jobs nor found a new job in the pandemic economy,” said Eberly, “which is more people than were unemployed at the height of the Great Recession.”

Moreover, she explained, job losses were not spread evenly over the economy. Unlike in previous downturns, where people pressed “pause” on purchasing durable goods like cars or furniture, two-thirds of the decline in consumer spending this time was on services. In particular, it’s the in-person services – restaurants, hotels, airlines, barbers – that have been absolutely clobbered. And because of the low wages associated with most in-person services work – as well as the overrepresentation of Black, Latinx, and women workers in these industries – the pandemic has been absolutely devastating for those already struggling economically. Women were also disproportionately impacted by school closures and the loss of childcare.

Given that the pandemic’s effect on the economy has not been equally shared, policymakers needed to focus not so much on “stimulus” as on “insurance,” said Eberly. After all, the map of the pandemic economy is so unusual that using traditional stimulus can even be counterproductive if it channels support to parts of the economy that are already spared or even thriving in a remote environment.

Instead, “it’s more like FEMA and emergency relief: effectively, a hurricane hit the economy, and you try to target policy on the people and parts of the economy that are most affected,” said Eberly. “But targeting is hard to do at the scale of the US, especially when the ways in which the pandemic hit are different than in the past. So policymakers have had to innovate or try to use existing programs in novel ways.”

The relief provided has been targeted

How have policymakers been targeting their efforts – and to what effect?

Most prominently, there was expanded unemployment insurance, which was of course targeted to precisely those individuals who had lost their jobs. The expansion boosted the size of the unemployment checks, how long they could be collected, and – for the first time – even who was eligible in the first place.

The pandemic was a “wake up to reaching the gig economy!” Eberly said. “The expanded unemployment insurance was also available to people who didn’t have formal employment. It was really a transformation in availability of unemployment insurance.”

Another targeted policy: the foreclosure and eviction moratoria, which protect homeowners and renters who have been directly affected by the pandemic. During the Great Recession, the housing market was at the epicenter of the financial crisis; during the pandemic economy, fueled by low interest rates and different living needs, housing has proven to be a relative strength. Still, that is cold comfort for the many individuals who have lost their jobs and might otherwise lose their homes.

In Eberly’s view, there is reason for cautious optimism that the moratoria are doing exactly what they are intended to do.

“The early research on this says that we’re not seeing people losing their homes – that they own or that they rent – as we did during the financial crisis,” she said. However, as the moratoria end, there is a lingering question of whether and how the accumulated arrears will be paid, and how renters, borrowers, and also smaller landlords will fare as the bills come due.

In addition, each of the three rounds of the stimulus relief checks have had income restrictions, which target them to individuals who earned less than either $100,000 or $80,000 (depending on the round) but provide broad support.

There have also been multiple rounds of funding to the Paycheck Protection Program (PPP), which was intended to support smaller businesses than those that usually benefit from broad credit relief. In Eberly’s view, this is a case where a potentially innovative program was hampered by the lack of existing connections to quickly target funds to those most in need.

With this latest round of stimulus relief, state and local funding is finally getting a boost. Earlier relief packages danced around the issue, assisting badly battered states and cities by providing funds for schools, vaccines, testing, and food assistance. But this time, money is going straight to state and city coffers. “Three hundred fifty billion for state and local governments that have been hit hard by the pandemic is what states and cities were asking for,” Eberly said. The funds “give them more flexibility to buttress programs and needs that arose during the pandemic, especially after the exhaustion of their rainy-day funds.”

Finally, and perhaps most surprisingly, the latest round of stimulus also provides targeted relief to families with children in the form of an enhanced child tax credit. For all but the highest earning families, the credit will be increased to $3,600 for kids under six, and $3,000 for kids under 18 – and critically, it will be refundable and paid out throughout the year, meaning that families who don’t ordinarily earn enough to benefit will still receive periodic checks for the full amount. Some estimates suggest that the benefit could lift 40% of children out of poverty.

“The group in the US most exposed to poverty is children,” Eberly said. “The credit is helping families with children who were especially vulnerable during the pandemic because they were vulnerable already.”

This could be transformational. If this credit is extended to subsequent years, she said, “it could reduce childhood poverty and distress for those who need it most – and where the benefits could change lives.”

What will be the long-term impact?

It is too soon to know whether economic changes, like work-from-home, and policy changes, like targeted fiscal support, will last. But the pandemic has forced action and innovation. The first CARES Act was passed in record time and provided crucial initial support. When the pandemic outlasted that first effort, policymakers came back with targeted support plus some broad measures intended to bridge the economy through a tough winter and on to post-COVID.

Eberly is optimistic that these measures will act as that bridge. Some sectors of the economy have already bounced back or are poised for a quick recovery. After all, many individuals who have remained employed throughout the pandemic have extra money in their pockets and will want to spend it. Savings are at record highs and some spending categories are already strong.

“As the underlying public health crisis recedes, some parts of the economy will come back energetically. People will be able to get out and travel and live their lives with more confidence,” Eberly said.

Still, she worries that other parts of the economy will be far slower to recover, and that many workers who have been the hardest hit will continue to struggle. One particular concern as the pandemic drags on is that, once individuals have been out of the labor force for a long time, it gets harder and harder to return. “When people talk about the ‘scarring’ of the economy, it’s usually around long-term unemployment,” Eberly said. This is especially true for groups that had higher unemployment rates to begin with and were just getting more economic traction pre-pandemic.

Small businesses, long shuttered, could run into similar problems as they try to reopen. And while new businesses will eventually step in to fill the gap, that all takes time. “We will see some good headlines, I hope. I’m optimistic about that,” she said. “But it won’t lift everyone simultaneously.”

What is Eberly not particularly concerned about at this time? The accumulated debt, which is paying for all of this relief. There is near unanimous consensus among economists that the national debt is large, and quickly growing larger. And there is concern that it may constrain our ability to act so aggressively in the future. But “the best thing we can do for future fiscal stimulus is to get the economy back on its feet,” she said. “Right now, there is a necessary focus on recovery. And with interest rates low, there is some breathing room to invest in a stronger, more resilient economy.”

Above all, Eberly hopes that the extraordinary moment will convince Americans that thoughtful, competently executed, and well-targeted government policies can go a long way toward building an economy that works for everyone. Amid the missed opportunities and unimaginable losses, there also came innovation and a deep commitment to help provide relief.

“If what people and policymakers learn is that governments can help – to intervene effectively to provide relief from a once-in-a-generation pandemic – that would be a success of policy,” she said.

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