The Economic Threat of COVID-19

This is a good summary of why a COVID-19 pandemic could have a highly negative impact on the world economy:

The financial markets plunged into a state of abject panic this week, thanks to the novel coronavirus. As the rising number of COVID-19 cases fanned fears that a recession could be on the way, stocks fell at record speed. Investors also piled into government bonds, sending yields to new lows, a sign that the world’s money guys are desperate for safe bets as the possibility of a true pandemic becomes real.

Why is the coronavirus such a menacing economic threat?

The first, most obvious answer is that the disease could disrupt life and commerce as the world knows it. Global supply chains are already getting scrambled, as much of China, the world’s factory, has been put on lockdown. Chinese consumers have stopped shopping, hurting sales of everything from cars to iPhones. Tourists are staying home. And if coronavirus truly washes across the U.S.—as public health officials seem to expect—it could prevent Americans from going to the office, their favorite restaurants, or the movies. As people’s daily routines grind to a halt, so too could the economy.

That brings us to the second, less obvious concern that’s contributing to the climate of fear: If the coronavirus does cause a severe economic slump, the normal playbook for fighting recession might not work very well.

Here’s why: Most downturns are the result of what economists call “demand shocks.” Some financial calamity befalls the country—gas prices spike, a stock bubble bursts, or housing prices go into freefall—or the Fed hikes interest rates too aggressively, and as a result, businesses and households cut back spending. When this happens, the government has plenty of ways to respond. Central bankers can cut interest rates, to encourage more borrowing and investment. Lawmakers can increase government spending or lower taxes, in order to get businesses humming and put money in people’s pockets.

As I’ve said before, this reality gives Donald Trump very strong incentives to deal with the crisis effectively, which given his incompetence and his belief that he can propagandize away even this is moot.