The Coronavirus Recession Will Be Unusually Difficult to Fight
Consequences will linger even after the virus dissipates.
Global markets are volatile. Supply-chain disruptions are piling up. Economists are slashing forecasts. Investors are fleeing to the safety of bonds. The coronavirus epidemic is a public-health crisis, and it is morphing into an economic crisis, too.
The Organization for Economic Cooperation and Development forecast this month that in a best-case scenario, COVID-19, the disease caused by the coronavirus, and its fallout would slash global growth by half a percentage point. In a more likely scenario, given how governments are dithering on emergency financial measures and bungling their public-health responses, it might slash global growth in half, meaning that many countries would fall into outright recession. The world economy faces the “greatest threat” since the Great Recession, the group concluded.
But confronting that great threat will not be easy. A downturn stemming from an epidemic is an unusual one. And it might prove unusually difficult for policy makers to fight, in the United States and abroad.
For one, the coronavirus epidemic has come with extraordinary, intense uncertainty. Officials are not sure how many cases there are and how deadly the virus is. Businesses and households are uncertain of how long the danger will last and what measures governments might take to counter it. People are afraid, as the market panic demonstrates, and it may take months for that fear to abate.
Second is the way that the coronavirus is stifling growth. Many recessions, including the Great Recession and the 2001 downturn, intensify when demand evaporates from the economy. Struggling businesses lay off workers. Cash-strapped consumers stop buying houses and cars. Spooked investors stop pumping money into the risky, growing ventures that vitalize the economy in the long term. To stanch the damage and turn the business cycle around, central banks lower interest rates and soak up safe assets, encouraging investors to take on more risk; congresses and parliaments cut taxes and disburse money to towns, states, and households, also spending on things like bridges, schools, and environmental projects.
But the coronavirus is not just sapping demand from the economy. It is also affecting supply. The epidemic has already led to shortages of drugs, industrial chemicals, medical equipment, and consumer goods like smartphones, as factories in mainland China shutter and those closures disrupt complicated trade networks. Human labor is in short supply too, with workers forced to stay home. The virus is “no longer mainly a supply-chain issue,” a team of Standard & Poor’s analysts wrote in an alarmed note. “Both supply and demand effects are in play, and both are being amplified by tightening financial conditions.”
Washington and other governments around the world have two main levers to help their economies from tipping into free fall: fiscal policy and monetary policy. The problem is that both of those levers work primarily on the demand side of the economy, and cannot readily fix the bottlenecks the virus is causing. The Federal Reserve has already announced one surprise rate cut. But how is a somewhat-lower interest rate going to help an American assembly business that cannot get parts out of China? “The benefits of lower interest rates at this stage are questionable with a substantial part of the economic shock due to supply-chain disruptions and official restrictions on economic activity,” argues Brian Coulton, the chief economist at Fitch Ratings. Moreover, the Fed and other central banks have already pushed interest rates to historic lows; they are running out of their strongest ammunition.
That leaves fiscal policy, meaning additional spending by Congress and other legislative bodies around the world. President Donald Trump and his advisers are pushing a temporary payroll-tax cut that would shunt more money into workers’ pockets. But that kind of measure would do nothing to help families missing paychecks, unable to keep the lights on and the house stocked with groceries because their workplaces are shut down. It would do nothing to stop businesses from going bankrupt due to manufacturing disruptions. It would do nothing to aid households struggling because a breadwinner falls sick, or needs to help a sick relative.
“We need a detailed, pandemic-induced financial crisis plan, that forestalls bankruptcies and insolvencies where possible, without causing downstream crises,” writes John Cochrane, an economist at the University of Chicago. “Yes, you heard it here, judiciously targeted bailouts are really the only way I can think of to keep businesses and people from going bankrupt given the absence of pandemic insurance.” He adds that he does not know of any such plan.
That does not mean it is impossible to come up with one: Harvard’s Jason Furman has suggested that Congress send every adult American $1,000 and every child $500, immediately. Claudia Sahm of the Washington Center for Equitable Growth has proposed a series of policies to aid strained families as well. But the Trump administration has never shown much interest in policy leadership. It has failed to attract practiced technocrats—senior Treasury leadership has virtually no experience managing a financial crisis—and spurred the resignation of thousands of experienced nonpartisan civil servants. The country is trying to fight economic and medical contagion without institutional knowledge or technocratic prowess.
Polarization and political stagnation are a problem, too. The country has far too few automatic stabilizers that kick in to help; it takes legislative action to get policy action. But Congress is divided: Democrats control the House and Republicans, the Senate. Getting politicians to agree on quick, powerful, creative stimulus measures during an election year, even as the White House argues that the coronavirus is “contained” and not much of a problem, does not seem easy.
The risk that the epidemic intensifies abroad, making the United States’ policy job that much harder, is prevalent, too. Congress can pump demand into the American economy, but cannot do much, if anything, overseas. “The coronavirus has been a body blow to the Chinese economy, which now threatens to take out the entire global economy,” argues Mark Zandi of Moody’s Analytics. “The economy was already fragile before the outbreak and vulnerable to anything that did not stick to script. COVID-19 is way off script. COVID-19 came out of nowhere. It may be what economists call a black swan—a rare and inherently unforeseeable event with severe consequences.”
Those consequences have already proved severe, and are becoming more severe around the world. And they will linger even after the virus dissipates.