Coronavirus fear has gripped economies around the world, and there is little sign that it will abate soon. I spoke with business columnist Josh Barro about the rocky path forward.
Ben: As you wrote this morning, pretty much all economic indicators are flashing red, as coronavirus anxiety hits every corner of society. The stock market plummeted so much this morning that trading had to be halted; a coronavirus-related oil-price war between Saudi Arabia and Russia has sent oil prices plummeting; the yield on a ten-year U.S. treasury bond went below 0.4 percent for the first time in history. Do you see any scenario where the financial situation calms in the near future? Or is recession — at the least, a small one — the inevitable outcome here?
Josh: A severe economic disruption is inevitable. As for a recession — that’s defined as two consecutive quarters of negative economic growth. As recently as Saturday, I was talking with Tim Duy, a macroeconomist at the University of Oregon, and he was saying we might still avoid recession. Disasters like this hit the economy hard but often the recovery out of them is fast — people just start doing what they had stopped doing and the economy goes back to normal quite quickly. My gut feeling is this crisis is going to be too widespread and prolonged for that “natural disaster” model to apply — an earthquake or hurricane does not hit the entire world for months — but I’ve been surprised that some smart people have not been telling me “100 percent odds of recession.”
I think, as always, people focus a little too much on the “recession/not recession” question. The difference between 0.1 percent growth and -0.1 percent growth can determine whether we call it a recession, but those are quite similar economic situations. And what’s happening here is definitely slowing down economic growth significantly, especially with the impacts on the travel, transportation, and energy sectors.
Ben: But as you said, the underlying (American) economy was doing pretty well before this exogenous event, which separates it from something like the 2008 financial crisis and previous downturns. Does that also mean that the traditional economic measures we use to fight this kind of thing are unlikely to work in the same way they did then?
Josh: I’ve been saying the best thing the government can do to protect the economy is to effectively fight the spread of the virus. The markets are falling because of a very real problem in the real world. Mitigate the problem and stocks will go back up. I do think this situation is not very amenable to the traditional macroeconomic tools you use to boost the economy. Cutting interest rates won’t reopen supply chains, and it won’t do much to encourage consumers to go to concerts or take cruises. The same goes for fiscal stimulus measures, like rebate checks. I do think there is a case that fiscal and monetary stimulus will play a useful role in helping the economy recover once the epidemic abates, especially if it has gone on for a long time. If people have missed work, or if they have incurred expenses related to the virus, they may come out of the crisis in a weak cash position. Fiscal stimulus (like rebate checks or a payroll tax cut) or monetary stimulus (low interest rates) may encourage consumers to spend more and businesses to invest more after this is over. And I don’t think it’s important to get the timing right — send out the checks now and people will be in a better cash position after this is over and more inclined to spend. But we shouldn’t expect the effects to show up until later, and it’s secondary to measures to limit the number of people who get sick, ensure people who need care have access to get it, keep hospitals from getting overwhelmed, etc.
One more note on the response: I see a lot of people talking about the importance of targeting a fiscal stimulus — noting that gig workers are especially hurt, specific industries, etc. And I think it is possible to get too clever here. Those broad inferences make sense, but it is really hard to figure out in advance where to target your fiscal stimulus. And if you focus too much on targeting, you’re likely to end up with something that’s too small. Better to send checks to too many people than too few. I’d go for big, simple measures over fine-tuning.
Ben: The Trump administration response has been about as incompetent and baffling as you might expect. Though it’s hard to say how much the president and his anti-science policies hampered the CDC’s testing rollout, there’s no question that Trump himself has been the opposite of helpful, with his denial about the severity of the outbreak, as well as his usual conspiracy-mongering and lying. It’s hard to imagine even a well-oiled-machine type of administration getting things exactly right, but how much do you think the simple fact of him being in office during a crisis he’s clearly unequipped to handle is playing into the economic fears around this thing?
Josh: I don’t know. Equity markets are falling similarly sharply all over the world. That doesn’t mean it’s not Trump’s fault — if Trump screws up, that can hurt German and Japanese stocks, and in an ideal situation, positive American leadership would be helping calm the whole world. But some of the key screwups — like the CDC sending out test kits that didn’t work — strike me as matters that didn’t likely have anything to do with Trump. I tend to agree with our colleague Max Read, who tweeted this morning that our tendency to ascribe government errors to Trump personally may be causing us to miss ways our government was broadly unprepared for an epidemic of this nature.
I tend to assume the epidemiological outlook that this crisis would be at least somewhat better with a more normal president, and therefore stocks wouldn’t have fallen as sharply and the economic outlook wouldn’t have been hurt as much. But I’m very unsure how large the effect is.
Ben: If international markets continue to tank in tandem as they have the last week, is there any hope of some kind of worldwide economic coordination to stem panic? Or are we more likely to see the opposite scenario play out as things become more tense, as we are with today’s oil-price war?
Josh: So first of all, I think people are overrating the importance of the oil-price war. Obviously it’s bad for oil companies. The effect on the broad U.S. economy should be close to a wash, since we produce about as much oil as we consume. Consumers and firms that use petroleum products will benefit from falling prices. And the price war is itself a symptom of the coronavirus crisis. Russia and Saudi Arabia have their reasons for not being able to cooperate here, but I don’t think it tells us much about the ability of the U.S. to cooperate with China or with European governments, etc.
Worldwide, it would be ideal to see cooperation on fiscal and monetary stimulus measures. Europe is likely to be recalcitrant here — it’s an extension of fiscal and monetary policies that have been dysfunctional in Europe since before the financial crisis. But again, this is not my key focus. I’m mostly concerned that governments around the world do well with containing the outbreak itself.
Ben: And presumably, what you’ve seen thus far does not inspire confidence that things will be back to normal anytime soon.
Josh: No. Personally I’m concerned with how little consensus I’m seeing about the likely death rate from COVID-19, and about the outlook for mitigation. I don’t think people have a clear idea how bad this is going to be. And I think that uncertainty is part of what’s weighing on financial markets — people have good reason to think this is going to be very bad, but there are wide error bars around “very bad” in both directions.