Civil Unrest, A Rising Threat to the 2021 Economy

Jacob Hess

January 07, 2021

• Consumer Sentiment

On January 6th, 2021 during the Senate's certification of the 2020 election results on the steps of the Capitol building, protests by Trump supporters escalated into a siege. The crowd moved to the steps of the building and eventually forced their way inside. For a couple of hours, they remained there causing chaos while law enforcement moved slowly. Amidst the invasion, a female protester was shot and killed. The day will be remembered in sadness after a year of intensifying political polarization exacerbated by an even more divisive election.

With two weeks until the inauguration of Joe Biden, political uncertainty lingers as President Trump continues to refuse to concede the election. The uncertainty was likely compounded by the COVID-19 pandemic which has spurred lockdowns and more polarization along political party lines. The economy has limped alongside supported by stimulus bills and liquidity injections. An IMF report found significant evidence that major pandemics have to lead to "a significant increase in social unrest by reducing output and higher inequality" after 14 months. The data showed that civil disorder tended to rise 0.1 points higher (on a scale from 0 to 4) up to five years after the pandemic.

Does that mean if 2020 is the year of the pandemic, then 2021 is the year of civil unrest? One can't totally be sure. However, inequality in the US and across the world will likely be the number one issue facing governments this year. In 2018, the highest-earning 20% of families made more than half of all US income. Americans don't need the numerous data points to describe the inequality, 61% of them said themselves that there is too much economic inequality in a September 2019 survey. The COVID-19 pandemic contributed to the trend with billionaires like Elon Musk and Jeff Bezos adding huges amounts of wealth to their fortune as the stock market rocketed higher. The World Economic Forum points out that "the combined wealth of US billionaires increased by over $637 billion to a total of $3.6 trillion."

So if civil and political unrest is set to heighten, what does that mean for the economy? A study of the economic effects of unrest showed that "on average" mass civil protests lead to "a significant fall in output that is not recovered over the subsequent five years". Of course, the United States hasn't reached unrest to the levels of many that were analyzed in the report, but the escalation of tension on January 6th does not bode well for the future. The study points out that uncertainty around whether or not people will be out protesting creates a "negative effect on business confidence and investment." At the very least, in this specific situation, dealing with the unrest distracts the government from focusing on the economy which has been in crisis mode since COVID-19 struck. An immediate example is Congress now pushing for the impeachment of President Trump in his last two weeks of crisis while $2,000 stimulius payments fade from the foreground of political discussion.

In general, the most likely concern will be in business and consumer sentiment which will need to be strong to help the economy rebound in 2021. A tweet from Brian Sozzi during the unrest from the George Floyd protests points out that sentiment took a tumble using indexes of tweets about the economy and surveys. On top of it all, the prospect of property damage and danger of harm can create a real desire to restrict economic activity.

The siege of the Capitol on January 6th was just one chaotic event to start the year which could turn out to be an outlier. Or, it could be the first of a larger trend of civil unrest exacerbated by the stress of the COVID-19 pandemic and the rise of many social issues, most prominently the issue of income inequality. Regardless of the impetus, the prospect of civil unrest remains a material threat to the strength of the economy in 2021.