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Black Death Makes Us Think About Interest Rates: Andy Mukherjee

Economic historians quibble over the exact consequences of the Black Death, though they agree that the sudden depopulation had a dis-inflationary impact.

(Bloomberg Opinion) -- All upheavals leave their marks. Some fade away, some linger. Following the Black Death, the plague that’s believed to have killed 60% of Europe’s population in the second half of the 14th century, the realization that life is short, played a big role in shaping interest rates in late medieval Europe, stretching all the way to the Enlightenment. 

Could we witness very long-term effects from the present contagion? 

The coronavirus pathogen isn’t as deadly as bubonic plague, and our toolkit for dealing with pandemics is far better stacked than when the pestilence reached the harbor of Messina on the northeastern coast of Sicily in late 1347. But while the dislocation caused by the respiratory disease has had a catastrophic impact on commodity and asset prices, a recovery may not close the chapter. The coronavirus, too, could leave a durable imprint.

Economic historians quibble over the exact consequences of the Black Death, though they agree that the sudden depopulation had a dis-inflationary impact. Workers’ productivity shot up because previous generations were eking out little extra output from finite land. Now they were gone; the Malthusian trap, in which growth was constrained by limited food supply, had sprung open. 

Average annual global inflation between 1360 and 1460 slowed to just 0.65% compared with 1.58% between 1311 and 1359, according to historian Paul Schmelzing’s study analyzing eight centuries of interest rates, published by the Bank of England in January. Nominal wages rose in line with productivity and to lure survivors to till the land. Dis-inflation boosted real wages.

The change in behavior was more stark. “The Black Death created not just the means for wider parts of the population for excessive consumption – but the traumatizing experience of sudden decimation in the earthly life also triggered the impetus to enjoy it to the fullest, while still able to,” Schmelzing notes. 

Products that hadn’t been for mass consumption earlier — such as linen underwear and glass panes in windows — became more widely available as cheap capital rushed to satiate the growing desire to consume, according to “Freedom and Growth,” historian Stephan Epstein’s review of states and markets in Europe between 1300 and 1750. Sumptuary laws that, among other things, sought to limit the height of Venetian women’s platform shoes were the state’s way to rein in conspicuous consumption; eventually the mad spending ended and savings went to bond markets. A republican ethos was born. 

An outbreak in a pre-capitalistic society has no exact parallels with today, though it does highlight some of our current challenges. The “secular stagnation” theory has blamed a hollowing out of aggregate demand over decades for the anemic recovery from the 2008 crisis. The lackluster share of wages in output may be exerting relentless downward pressure on interest rates. By laying bare the fault lines of production that rely on people to come together on buses, trains, planes and in offices and factories, the virus could hasten the age of the robot and the algorithm. Since automatons need no pay, the demand deficiency could worsen. 

We could as easily see the opposite effect if new norms of social distancing help working families chip away at education and commuting costs as more instruction and work go permanently online. After the demise of trade unions and the rise of cheap labor in China and India, we’ve grown accustomed to thinking of wage costs as a bargain in which capitalists perennially hold the upper hand. But what if the measures taken by nation states to fight the virus with wage support, cash grants and student loan relief, stay on after the emergency has eased and tilt the balance of power again?

Tilting the balance is what the English kings attempted by issuing ordinances, repeatedly for nearly a century, to fix summer wages for masons and carpenters to their low, pre-Plague levels. This time, the pendulum may swing the other way. As Massachusetts Institute of Technology economist David Autor has pointed out, codification of repetitive work (think, bank tellers) has swelled the ranks of labor in elder-care and other hard-to-automate, non-routine tasks, preventing pay increases despite strong demand in affluent economies. A newfound societal premium on manual occupations may spur wages for those who provide the human touch. 

It’s impossible to predict if the virus will inject a welcome impatience into spending out of pay checks that are augmented by state support, or whether the global economy will get mired in deeper stagnation. A disease that’s especially harsh on older people could alter global demographics, with as-yet-unpredictable consequences for pension savings and asset demand.

The borrowing costs for large monarchies fell to 8% to 10% by the early 16th century from 20% to 30% before the Black Death, according to Epstein. Florence, Venice and Genoa as well as cities in Germany and Holland saw rates slump to 4% from 15%. Surprisingly, the drops coincided with large increases in sovereign debt to boost military preparedness. 

We, too, are faced with a ballooning of sovereign debt to wage a war on the pandemic. Developed as well as emerging economies may have no option except to provide a universal basic income in addition to boosting hospital capacity and nationalizing chunks of their collapsed financial systems and bankrupt industries. Even if 1% of infections prove to have been fatal by the time the coronavirus is contained, the disease would likely cast a lasting shadow on behavior, preferences, prices… and yes, interest rates. 

To contact the author of this story:
Andy Mukherjee at [email protected]

To contact the editor responsible for this story:
Patrick McDowell at [email protected]

© 2020 Bloomberg L.P.

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