Will the Coronavirus Tank the Economy?

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S1: Over the last few weeks, there’s been a pretty concrete way to track the global fear around covered 19, that new Corona virus that’s been spreading around the world. You can do it by just looking at the Dow Jones Industrial Average. It’s been headed in basically one direction since the middle of last month. Down.

S2: Right. Right. And this was sort of the first stage of fear over what the the novel virus, I should say, covered 19 would do to the economy.


S1: Jordan Weisman covers economics here at Slate. You said first stage yet a new stage now.

S2: Oh, yeah, we’re definitely a new stage.

S3: Yesterday, this new stage meant Wall Street’s worst plunge in more than a decade.

S4: People at first were worried that they wouldn’t be able to get their stuff from factories in China. Now people are really worried about what’s happening here in the US, what’s going to happen.

S5: For instance, the airline industry is already getting walloped. You know, you’re seeing Southwest say we’re going to lose hundreds of billions of dollars this quarter because people aren’t flying.

S6: But you can see how it spreads. It’s like first there’s fewer flights, then there’s fewer people in the airport and then like onthey and needs fewer people making pretzels. And then the person who used to make the pretzels can’t go to the movies because they don’t have the same kind of fluid cash situation. And you can just see how this thing grows.


S7: Yeah. You start to see the economy kind of grind down in multiple ways.

S5: It’s both the supply aspect and the demand aspect of the economy. OK. Can we fix it?

S7: People are trying to figure that out. But you know, it’s tricky. The last time there was a terrible pandemic that really did damage the U.S. was 1918, the Spanish flu.

S8: We were essentially working in the era before modern macroeconomics even existed. There isn’t really a playbook for what we’re worrying about right now.

S9: Today on the show, the U.S. is already struggling to respond to the Corona virus as a public health crisis. Can it stop the economic spiral, too? I’m Mary Harris. You’re listening to what next. Stick with us.


S1: Anyone who’s got a for a K or a college fund for their kids, they probably had a pretty bad feeling when they heard the news Monday morning. I know I did. Good morning.

S10: Coming on the air now. Breaking news from Wall Street in the wake of the coronavirus crisis. Stocks have stopped trading on Wall Street after a 7 percent drop in the Dow Jones and the S&P 500 in the first minutes of trading this morning.

S1: The markets tumbled so quickly that the New York Stock Exchange went into a 15 minute pause in trading part of a system known as a circuit breaker. Basically, he like putting the market in time out.


S7: Yeah. Right. When the stock market falls too far, too fast, they halt trading. It doesn’t happen very often. It happened today. And the reason it happened, I think, is we’re starting to see the panic over Corona virus or the fears over Corona virus turned into a chain reaction. It’s not just about what the virus will do to the economy directly. It’s not just about how it’s going to keep people from traveling. You know, forced people to stay home. It’s about how we’re going to see that ripple into other parts of the economy and how that could even start to create problems in the bond market and create problems in the financial markets. You know, it could kind of become a vicious cycle.


S11: I mean, the event that sort of precipitated this drop today was all about oil. I mean, if you can explain exactly what happened.

S2: So Saudi Arabia decided over the weekend to crash the price of oil to start an oil price war in order to undercut its competitors and Russia. Right. With Russia. And that might sound like a slightly insane thing to do in response to a global pandemic, but there actually was some logic to it. So I think it helps to step back here. The price of oil has basically been falling since January, when the number of chronic cases in China started to surge or the number of recorded cases started to surge. And why? Partly because China’s economy was slowing down, which, you know, that meant there was less demand for oil. And also, China uses a lot of oil. Chinese a ton of oil. And also it started to kind of create a fear factor around the world. Right. Like, well, that people projecting forward. So oil prices have been falling for a while. And initially, Saudi Arabia wanted to respond to this by cutting production. It wanted OPEC and its allies to cut back a little bit to support prices. And Russia wasn’t going along with the program. Russia didn’t. Why? You know, there are some internal political issues. They’ve been wanting to increase their home production essentially at home because their budget relies a lot on oil. They could not come to an agreement. And on Friday, things kind of officially fell apart. There was a meeting and Russia rejected Saudi Arabia’s proposal. So over the weekend, Saudi Arabia said, fine, you’re not going to coordinate. Well, we’re going to then start a price war instead. And so they cut prices on the oil they sell to their customers. And then they basically promised to up their own production to flood the market with cheap oil. But the idea is they were gonna start snatching market share from Russia. And it’s unclear if this is just really a last ditch effort to make more money on their end or if they’re trying to pressure Russia to go along with the program. Either way, prices just collapse. The media, I mean, initially they were down like 31 percent. Here’s something they’ve bounced up a little since then.


S12: But it was the initial drop is the most since the first Gulf War. I mean, it was just this tremendous just, you know, market shaking move when the price of oil started nosediving.

S13: Market watchers like Jordan started to think about the bigger picture, about whether oil companies, including companies in the U.S., could afford to keep drilling when their profits were plummeting.

S8: And so it’s very possible that, you know, a lot of these companies could be going bust soon. They’ve already been troubled. A lot of them could go bankrupt.

S7: And that that could have problems that could create problems for the U.S. economy, because traditionally we think of falling oil prices as kind of a good thing for the U.S. because it means lower gas prices. And that’s good for drivers. It puts money in people’s pockets.


S11: I mean, Trump basically tweeted that this afternoon.

S7: He did he say lower gas prices, great silver lining. And that’s still true to a degree. The problem is that the oil industry has gotten so big that it drives a disproportionate investment growth in this country. When when drillers are out there trying to get a crude, they’re spending a lot of money on things like, well, you know, building new rigs and trucks and transport and certain, you know, oilfield services. And that actually is it’s it’s a meaningful driver of investment growth. It’s its own little ecosystem. Yeah, it is. And when that dries up, it’s a problem, obviously, for people work directly in the oil industry. It’s also a problem for factories that, you know, supply those big, heavy pieces of machinery that they use.


S11: I mean, it sounds like a little bit what you’re saying is that the oil industry, it’s like this leading indicator.


S7: It’s a little bit of a leading indicator or it’s an engine for part of the economy. So when the engine slows down, we’ll leave that part of the economy slows down.

S1: But the ripple effect here, it gets bigger. If the oil industry’s production is limited, it doesn’t just impact the supply side. It also impacts parts of the economy that finance the oil industry in the first place.

S4: All of these oil companies, these these shale drillers have borrowed an enormous amount of money in the last few years.


S11: So if they can’t repay those loans.

S7: Yep. Yep, yep, yep. Yep. That’s the issue. So those loans stop me if this sounds familiar. A lot of them have been chopped up and securitized and sold to other investors and nobody really knows who has those on their books. It’s no one really knows who owns all those securities. And what I’m saying, it sounds a little familiar. They’ve been securitized a lot of the way sort of the way mortgages were leading to the financial crisis.

S11: So it’s the housing crisis only. It’s the oil crisis.

S7: Yeah. And I should I should caveat this, which is it’s a much smaller market. It’s much, much, much smaller. No one thinks that this is housing. This is the housing bust 2.0. It’s not a big enough amount of debt to create that. But people are worried about what it’s going to do to this part of the bond market and the debt markets. And it could cause, you know, turbulence there.

S11: And, well, you’re you’re getting to this bigger issue, which is that we saw this plummeting in stocks today, the sort of market uneasiness. But it means you’ve been on this show before talking about how the current boom times are kind of built on this shaky infrastructure. Is that what’s really being revealed right now?


S7: It is to some extent. What we’re seeing is the coronavirus is really revealing what weaknesses were there. Right. Or it could reveal them. And we’re starting to see it reveal them through these kinds of chain reactions, people than worrying about all the borrowing that these energy companies have done for a while. Right. But you can look up, you know, high yield bonds or high yield debt or collateralized loan obligations on Google. And you’ll find a bunch of articles by people saying, is this stuff going to blow up? And what happens if it blows up and hasn’t up until now, because it hasn’t really been a precipitating event. And so, yeah, it’s Carone is sort of becoming it’s you know, there’s this this old phrase like when the tide goes out, you see who isn’t wearing any swimsuit or who’s not, you know, her ground is like kind of causing the tide to go out.

S14: And so you see it like that’s that’s sort of what’s happening when markets get wobbly. The federal government has got a few tools to try to steady the situation.

S15: The Fed can cut interest rates, which it did last week. Looking at that market sell off today, it’s clear more needs to happen. What are other options?

S6: Because that has historically been the go to option. You know, slash interest rates, get people to keep investing. Let’s keep this thing motoring along.

S7: Yeah. So traditionally cutting interest rates is as a go to move for stabilizing the economy. Another classic, you know, tactic is to do some stimulus spending. Right. Let’s let’s go go build a bridge. Go fix a road. The challenge here is that a lot of the traditional tools that the government uses to steady the economy in the event of a recession or downturn or when things just look shaky, might not work the way they typically do, might not work as well as usual here. What do you mean by that? So and this is one of the things that’s been a kind of underpinning a lot of people’s fears about the pandemic is that, you know, you can try to lower interest rates and try to get companies to borrow and invest more. You can do some public works, hire a bunch of workers to fix a road, build a bridge, rehab some schools. None of that really fixes the core problem, which is or the core problems. I should say, which is you have a virus that is keeping people at home because they are afraid to get sick. Right. They have to stay quarantined. It’s not like they you know, that a lot of people are not going to spend, not because they don’t have money, but because they can’t they can’t go out. They can’t live their normal lives. Things have to be canceled. Disneyland has to has to shut its doors. They can’t go on vacation where they ordinarily would. Because the you know, the vacation destination isn’t open. And so, you know, again, there are. It just it means that some of the tools that would be. Very effective when people are reeling from a housing bust are not necessarily going to be as effective when you’re trying to deal with a pandemic. That doesn’t mean you can’t help the situation by putting money in people’s pockets, but you’re maybe treading water. It’s not. It’s just that in the end, there’s you know, you can’t necessarily get at the core problem. You just you can’t stimulate your way out of the core problem. It’s not a purely economic issue. In the end, it is a public health issue.

S1: The government’s response to this pandemic, it’s been messy with testing for the virus delayed. Congress did move to free up billions of dollars for a medical response last week, but an economic response seems to be coming together only now.

S7: Initially, the White House seemed like it just wanted to rely on the Fed that it was it just wanted the Fed to cut interest rates, and that was the extent of what it was interested in. Some people on the Hill are talking about tax relief, which seems a little bit unless you’re actually putting money directly into people’s pockets like cash immediately. Tax relief does not seem like the best way to go about it, especially since some people are just not going to be earning money. Part of the problem here is that Republicans have traditionally been skeptical about the effect of direct fiscal stimulus. Right. Dating back to that Obama administration, even though they’re willing to run deficits and they have been during the Trump administration. They they still seem to just like don’t trust the idea of of government stimulus because it suggests that big government might work. And so I think that’s that that’s part of the big question mark here is how is a Republican administration and a half Republican Congress going to go about trying to right the economy when it’s on the verge of being. Or keep the economy upright when it’s on the verge of being toppled?

S1: At a press conference last night, the president talked about the kind of stimulus he wants to invest in, a payroll tax cut for businesses. Support for the airline and cruise industry. And money for paid sick leave for workers who get the virus something. Then Trump talked about what a good job his administration has done so far.


S16: This was something that we were thrown into and we’re going to handle it and we have been handling it very well. The big decision was early when we shut down our borders were the first ones ever to do that. We’ve never done that in our country before.

S11: Looking at the president’s response to the market crash today. The main response seems to be to just try to calm people down, like one of his tweets was so 37000 Americans died from the common flu, which is obviously way more than we we know have died from this Corona virus. And he ends with think about that. I mean, one of our colleagues looked at these tweets and said in slack, I don’t think the president understands that from the market’s perspective, he is the problem. Do you agree with that?

S7: I mean, that’s that’s certainly part of it. In a way, this is a throwback to 2008 when Lehman collapsed. Right. You know, the president was kind of coming out to make his his announcement about it or like about what the plan was. I was an intern at The Washington Post, and we we all kind of gathered around the TV. And this one reporter, whenever it’s like the Bloomberg terminal that we had to watch how the market would react. And literally, as George Bush opened his mouth, the market just started falling. All right. Like it was just Slyke. It was like, oh, yeah, this is our president, you know? Oh, God. It was just there was like, what are we going to do here? We’re back to that site. There is the man in the Oval Office is not in charge. And his occasional attempts to downplay the severity of this are almost certainly going to make things worse rather than better.


S11: Huh? Is that a Trump problem or something else? I mean, you said it happened with George W. Bush. So do you want to, like, tease it out a little bit?

S7: You know, it’s a problem when you have a guy in the Oval Office who people don’t think is competent. Right. Like, that’s the bottom line is like when a crisis hits, you want someone in charge. You people believe he’s competent. It’s like in 2008, it ended up that the response to the financial crisis was conducted almost entirely by Hank Paulson, the treasury secretary. Ben Bernanke, you know, that chair of the Federal Reserve, Tim Geithner, was involved. He was at the New York Fed. Then it was up to them to save the world. It’s a little bit like we’re back in that situation now. Whereas instead of George W. Bush, who is at least trying to say the right things where he could, we have Donald Trump, who is just not even remotely attempting to do what people expect of him. And instead, it’s it’s the responsibility is not just devolved down to the vice president and the rest of administration. They’re actually fighting. You know, they’re they they’re actually at odds with the guy at the top. It’s not it’s not a good leadership setup.

S17: Literally, when Donald Trump says nothing to worry about, the head of the city says, as it is, there’s something to worry about. Donald Trump says, oh, you’ve got all if you if you want a test, you can have a test. And Mike Pence has to go in front of cameras and say, well, actually, we don’t anticipate we’re gonna have enough tests initially. You know, it’s it’s really just stark.


S18: Is there a way to right the ship? I mean, yeah.

S7: I mean, maybe maybe Donald Trump’s openness to just spending money to fix a problem will will help. You know, he doesn’t really care much about deficits. I don’t think he has some ideological attachment to how you stimulate the economy. You just want the economy fixed. So maybe that’ll actually aid things a bit since he doesn’t have firm ideas about, you know, big government or whatnot. Maybe this maybe Mike Pence will pull a rabbit out of his hat and somehow manage to start a, you know, containing this this outbreak. I don’t have a lot of faith in that, but maybe it will happen. There are possibilities. You know, I again, I’m not I’m not confident, but something could go right.

S11: If it was a Jordan Weissman plan, what would it be?

S7: I mean, okay. Purely on the economic end, want one idea I have kicked around and this isn’t a really firm one, but would be just to allow people to claim unemployment insurance, for instance, for time that their business was shut down or that they couldn’t go to work because they were in quarantine, even if they. Even if they weren’t technically fired. I mean, another thing would just be to guarantee paid sick leave. But, you know, you would also need to support businesses a little bit there, too, I think. Well, I will say, though, as you know, we have automatic stabilizers. We have we have programs like food stamps and unemployment that are meant to kick in when the economy gets worse.

S17: And that’s sort of a version of just putting money in people’s pockets. Right. That’s that’s what you’re effectively doing. And so one one response here might be to just kind of double down on those programs. So, yeah, I think I guess I would kind of lean on automatic stabilizers.


S19: I would try to figure out a way to to get money automatically directly into people’s hands.

S20: Jordan Weisman, thank you so much for joining me. Thank you. Jordan Weissmann is Slate’s senior business and economics correspondent.

S21: And that’s the show. What next is produced by Maura Silvers, Daniel Hewitt, Mary Wilson and Jason De Leon. And before we go, if you like me, are tempted to check on your kids college fund after the stock plunge yesterday. I’m going to let Jordan give you a little advice on that.

S22: No, don’t do that. Don’t do that. Absolutely. Do not check your kid’s college fund. That’s just it’s not worth it. Yeah, I checked anyway. You don’t have to do this, Mary. I’m Mary Harris. I will catch you back here tomorrow.