How bad will the economy be damaged by the coronavirus?

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The last few weeks have been a whirlwind for the financial markets and the economy, capped off by the president giving a number of speeches and conferences during which he tried to calm Americans and reassure businesses. Although the coronavirus crisis is expected to have a finite duration, similar to other outbreaks, its rippling effects may have lasting impacts on the economy and public policy. Here are some reasons why.

We simply do not know enough about the coronavirus. We do not have a preventive or a curative medical treatment for it. While the first vaccine is being tested, it might not be available for a while. This uncertainty alone instills anxiety and even panic. We do know that the coronavirus is easily transmissible, even by people who show no symptoms, and it is virulent beyond the normal seasonal flu. This situation could bring on important and adverse consequences for the economy both at home and abroad.

Workers could be incapacitated by the coronavirus, while public safety precautions could stop production. Mitigation efforts could also prevent goods shipments, including intermediate goods and materials for other production. Broken global supply chains broaden business costs across borders and around the world. The trade war between the United States and China made supply chains and production vulnerable to start with.

Hourly workers are particularly vulnerable to interruptions of production. But even salaried workers are cutting back spending on services to avoid crowds in restaurants and travel. This in turn further reduces the incomes of hourly workers and extends the disruption in the economy from goods to services. Investment was already soft, given that businesses probably bought ahead after the tax cuts took effect two years ago. The decline in consumer demand will only further soften current investment demand.

The notion that anxiety will keep potential international tourists and their money in the United States, and thereby bolster the domestic economy, ignores the fact that the same anxiety will keep foreign tourists and their money out. The same is true of the interruption of imports, which have a mirror impact in the interruption of exports, and also limits the availability of foreign parts and materials that are needed in production in the United States that are used for domestic consumption and international export.

A fall in oil prices because of weak demand would not simulate enough spending on cheaper gasoline to make the economy whole. However, the current fall in oil prices results not only from the decrease related to the coronavirus in overall demand, but further from opportunism by Russia. The United States has the ability to produce vast quantities of oil through expensive horizontal drilling, otherwise known as fracking. Russia has its own dispute with Saudi Arabia, which wants to cut global production to keep oil prices high, along with its own vast oil reserves in the ground.

The unbalanced economy in Russia needs cash now, in part to finance its wealthy and powerful, so it does not want to cut production. By flooding the world market and driving oil prices down, Russia could hurt producers in the United States more so than in other countries. Low oil prices reflect both a weak global economy and clobber a critical sector of the domestic economy, against which lower gasoline prices at home are cold comfort.

The coronavirus itself could weaken the economy. The textbook response is fiscal stimulus with spending or tax cuts. The president faces resistance to this within his own party. Republicans have held their tongues over the ballooning deficit, but they do not want to make it worse. Many lawmakers do not want to spend additional money on benefits or tax cuts for hourly workers, or they fear that paid sick leave will burden employers, and that federal support for it will further expand the deficit with limited benefit.

The Federal Reserve has now undertaken two extraordinary interest rate cuts, taking its policy rate all the way down to zero. It is unclear whether this will have any meaningful effect on the economy, with the impetus for business investment essentially absent. White House messaging in times of challenge is always difficult. Presidents need to be realistic and show empathy for those suffering, while also conveying confidence and hope.

The crisis today is worse than most. Bickering between the White House and the Federal Reserve or the leadership on Capitol Hill instills neither confidence nor a sense of community. The sprouting side effects of this public health emergency may indeed be felt long after the crisis is over.

Joseph Minarik is a senior vice president with the Committee for Economic Development of the Conference Board. He was the chief economist at the Office of Management and Budget under President Clinton and coauthor of “Sustaining Capitalism: Bipartisan Solutions to Restore Trust & Prosperity.”

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