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.
A budding pandemic is likely to be different. For starters, it creates demand problems that can’t necessarily be solved by putting money in people’s pockets; families aren’t going to spend a tax cut on a trip to Disney World if they’re afraid to go out in public. At the same time, as The Economist’s Ryan Avent pointed out earlier this week, coronavirus is also threatening to create a “supply shock,” by simply cutting off access to goods and services. Slashing interest rates won’t help a factory that suddenly can’t get supplies from China, or whose workers are stuck at home. And families also can’t spend their tax cut on that Disney vacation if the park is closed to prevent the virus from spreading.
Join the conversation as a VIP Member