It is safe to say that markets have been roiled by the global spread of the virus. The spread of the virus walloped global supply chains. The supply shocks have since given way to demand shocks. China’s economy has ground to a halt. Italy’s economy is about to do the same. The travel and tourism sectors have been hit hard, and airlines are not far behind. Oil prices have cratered in part because of Saudi-Russian bickering but mostly because of the lack of demand.
In the United States, the stock market has been … let’s say “jittery,” while the bond market has been acting like it downed an entire bottle of Valium. And for good reason. As economists Luca Fornaro and Martin Wolf recently argued: “The spread of the virus might cause a demand-driven slump, give rise to a supply-demand doom loop, and open the door to stagnation traps induced by pessimistic animal spirits.” That sounds bad.
According to the Wall Street Journal, “Businesses are bracing for a longer and steeper coronavirus-triggered downturn than the single-quarter event initially anticipated.” This all comes after the Federal Reserve cut interest rates by half a percent, which suggests, as one commentator noted, that monetary policy will be of limited use in keeping the economy chugging along.
On Monday, President Trump promised an economic plan to keep the U.S. economy chugging along, an announcement that surprised his aides. It is safe to say that they are unenthusiastic about Trump’s preferred approach of a giant payroll tax cut. His meeting with GOP senators on Tuesday failed to generate anything in the way of specifics. Some of the administration’s ideas, like bailing out shale companies hit by low oil prices, reeks of rent-seeking much more than a cogent response.
That the federal government needs to do something is unarguable. Global economic growth is going to slow down, and the wave of conference cancellations and university shutdowns will have an effect, too. A payroll-tax cut, on the other hand, seems like a misdirected response. The problem with an economic slump caused by an outbreak isn’t a lack of spending money, it’s a lack of willingness to spend money on things that increase the risk of exposure to the coronavirus. No one will use a payroll-tax cut to go to Disneyland.
There are two ways economic policymakers can ease the economic pain. First, offer short-term support for those who will be hurt by the dislocations caused by quarantines and travel cancellations. Offer a credit facility to cover airlines reimbursing passengers canceling their flights and organizations canceling their confabs as a precautionary move. Provide sick leave funding for those who need to stay home from the coronavirus. Increase spending for urgent health-care needs and more emergent health-care infrastructure.
Honestly, however, the best economic palliative is also the best public health response. Test as many people as possible. Provide accurate information about the spread. Advise localities what to do to mitigate the spread of infection. Exhort good hygiene, particularly good handwashing. Try to bend the infection curve so that the United States resembles Hong Kong more than Italy.
The best way to reassure investors and employers is to show them how it ends. Right now, the sclerotic response by the Trump administration has exacerbated economic uncertainty. That ends when public health officials can point to a slowing of the spread. Trump needs his administration to do something he is awful at: acting in a predictable manner.