Lindsey Graham is among the president’s allies who don’t want him to quickly reopen the country. He says the president should “err on the side of human life.”
Senator Lindsey Graham called President Donald Trump this morning to confer about the massive stimulus bill nearing passage on Capitol Hill. But when Trump said that Democrats had “overplayed their hand,” Graham offered some advice.
“Don’t you do the same thing,” he told his occasional golfing buddy.
Graham worries that the president will move too hastily to try to reboot the virus-stricken economy—loosening social-isolation measures and thereby triggering more disease and death. “He has a predisposition that the cure is worse than the disease,” Graham told me. Should Trump repudiate public-health experts’ advice and take steps that cause infections to spike, he would “own” the fallout, he said. “Any increase in the mortality rate would be a huge problem for him. The biggest political risk any president takes is deviating from sound advice. The economy can recover. Once a person is dead, that’s it.”
Trump’s reflex is to salvage economic gains that, until a month ago, were the basis of his reelection argument. “I would love to have the country opened up and just raring to go by Easter,” on April 12, the president said at a Fox News town hall today. But on this front, Graham told me, he needs to show restraint—to make a “data-driven decision, but err on the side of human life.”
In the coming days, Trump is heading toward a collision—and not just with the medical community and state and local officials worried that aggressive moves to limit the virus’s spread might all be undone.
He could also antagonize some of his strongest Republican allies, such as Graham, who are already sending him warnings. “There will be no normally functioning economy if our hospitals are overwhelmed and thousands of Americans of all ages, including our doctors and nurses, lay dying because we have failed to do what’s necessary to stop the virus,” Representative Liz Cheney, a Wyoming Republican, tweeted today. She was responding to public comments made by Scott Gottlieb, Trump’s former head of the Food and Drug Administration, who had warned that the economy can’t function amid “uncontrolled” spread of COVID-19 in large cities. Senator Tom Cotton, an Arkansas Republican who is also close to Trump, cited Gottlieb’s comments too, adding that the United States has to stop the coronavirus’s spread in order “to get the economy back on its feet.”
Advice is flooding into the White House from all directions—economists and medical professionals, struggling businesspeople and governors. A debate over how the federal government should proceed is still unfolding, but Trump’s predilection seems clear: He wants people back to work. “We all realize we have to get moving again,” said a senior White House official who, like others I talked with for this story, spoke on the condition of anonymity.
Just days ago at the White House, the voice of public-health experts seemed ascendant. Anthony Fauci, the director of the National Institute of Allergy and Infectious Diseases, who has advised six different presidents, told me that Trump has never overruled a recommendation he’s made. But there’s no guarantee that Fauci’s influence endures. One person close to Trump told me the president was never entirely comfortable with the broad-based stay-at-home recommendations that touched off the economic tailspin. Trump has always solicited advice widely, and economic conservatives have delivered a contrarian message to what the president is hearing from the medical community.
Stephen Moore, a former Trump-campaign adviser whom the president last year considered for a seat on the Federal Reserve Board, told me he has spoken with White House officials about what he called the “cascading” economic costs of keeping much of the nation sequestered at home. “The public-health people, their view is that any cost is worth bearing. But even from a public-health standpoint, what about putting 35 million people out of their jobs?” Moore said. “It will cause death, more suicides, more drug overdoses, and depression and heart attacks.”
Larry Kudlow, the president’s top economic adviser, was asked about the trade-off between an economic rebound and public health in a gaggle with reporters today. “I think that public health includes economic health,” Kudlow said. “That’s the key point: It’s not either/or.”
When I asked Graham about the advice coming from economic conservatives, he said, “They don’t have to stand for elections.” His hope is that the approximately $2 trillion economic-stimulus package Congress is weighing could lessen the urgency of reopening the economy in ways that risk more illness. Emergency aid that keeps businesses afloat and stems layoffs could buy time, keeping people home and preventing the disease from spreading.
Graham, who represents South Carolina, has played a role in getting the bill passed. He told me he got a phone call this morning from Treasury Secretary Steven Mnuchin, who told him that a tweet from Trump signaling that the negotiations need to end would be helpful in prodding lawmakers to pass the package. So Graham said he phoned Trump and told him a tweet would “go a long way.” At 8:45 a.m. ET, Trump’s tweet appeared. “Congress must approve the deal, without all the nonsense, today,” he wrote.
Reports this morning that lawmakers are poised to strike a deal gave the markets a jolt. By the time the markets closed, the Dow Jones Industrial Average had climbed by 11 percent. Still, virtually all the gains under Trump have been erased during the month-long sell-off. And unemployment claims have soared; some analysts predict that the country could sink into a depression.
For the past three years, the strong economy was a core reason Trump said voters should reelect him. Should illness spread because he was too eager to reopen the economy, a spike in the Dow may only remind Americans of the human toll.
“If his judgment is seen as having extended the disease—and taking the foot off the throat of the disease—at a time when we’re making progress, then, yeah, it would put him in great jeopardy,” Graham told me. He suggested an alternative message for the campaign: “I’m the guy who got [the economy] humming. I’m the guy who rebuilt it out of the ashes. My goal is to defeat the virus, and I will rebuild this economy. I’ve done it once. I’ll do it again.”
The president is brazenly grabbing his only clear option to bolster his re-election hopes, portraying himself as a take-charge leader the country can’t afford to lose.
With the economy faltering and the political landscape unsettled as the coronavirus death toll climbs, a stark and unavoidable question now confronts President Trump and his advisers: Can he save his campaign for re-election when so much is suddenly going so wrong?
After three years of Republicans’ championing signs of financial prosperity that were to be Mr. Trump’s chief re-election argument, the president has never needed a new message to voters as he does now, not to mention luck. At this point, the president has one clear option for how to proceed politically, and is hoping that an array of factors will break his way.
The option, which he has brazenly pushed in recent days, is to cast himself as a “wartime president” who looks in charge of a nation under siege while his likely Democratic opponent, former Vice President Joseph R. Biden Jr., is largely out of sight hunkered down in Delaware. This gambit, however, requires a rewriting of history — Mr. Trump’s muted approach to the virus early on — and it’s far from clear if many voters will accept the idea of him as a wartime leader.
Then there are other variables that he and his allies hope will fall in their favor: that the outbreak of the virus will slow and, in the warmer months, dissipate; that the states will get it under control; that the federal government’s steps taken so far will flatten the curve; that Mr. Biden and the Democrats will look impotent and inconsequential by comparison; and that enough voters will move past his initial efforts to play down the virus’s dangers.
The great unknown, of course — and the tremendous risk to Mr. Trump’s political fate, no matter what he says or does — is that the human cost, the economic toll, and the longevity and course of the pandemic are all X factors that will most likely play out for months and could be strongly salient if not severe by the time of the November general election.
In perhaps the best-case scenario for Mr. Trump, the patina of a “wartime president” could prove to be influential with casual voters who don’t dig into the details of his belated response to the coronavirus, which included dismissing the criticism of his handling of the threat as a Democratic “hoax” and contributing to a slow start in testing for the virus.
“He is counting on people being so traumatized on a day-to-day basis that they will forget his inaction,” said Douglas Brinkley, a professor of history at Rice University. “It’s better for him to be a wartime commander in chief than someone who, when the big crisis hit, misread it completely.”
Politically, Mr. Brinkley said, the new posture made sense. “He can claim credit for the curve flattening at some point,” he said, “and hope people will be afraid to push a leader out of office if the crisis pushes into the fall.”
The president’s course correction showed some quick results that were seized on by his political advisers. An ABC News poll released last week showed that 55 percent of Americans approved of Mr. Trump’s response to the pandemic, up from 43 percent the week before.
Rarely have incumbent presidents seen their arguments for re-election evaporate so quickly. Mr. Trump and his advisers had planned to argue that the strong economy warranted a second term and that supporters and detractors alike wanted their 401(k)’s in the Trump-era stock market; that has now become an impossible sell. And as the administration negotiates an enormous bailout package with Congress for multiple industries, his strategy of caricaturing Democrats as “socialists” is not tenable either.
So Mr. Trump is trying to mount a new version of his old argument: that “I alone can fix it,” as he said at the 2016 Republican convention about the nation’s problems. He is counting on enough voters believing they have to stick by a leader in the midst of an immense global crisis.
Addressing fearful Americans, Mr. Trump said on Sunday evening: “You have a leader that will always fight for you and I will not stop until we win. This is going to be a victory.” He added at another point, “No American is alone as long as we’re united.”
But shortly after reading his new script on Sunday night, Mr. Trump mocked Senator Mitt Romney of Utah for self-quarantining. “Romney’s in isolation? Gee, that’s too bad,” he said sarcastically at the briefing room podium.
Mr. Trump is on uncertain political ground. His poll numbers in critical swing states like Pennsylvania and Michigan have been wavering, with most surveys showing him behind Mr. Biden and Senator Bernie Sanders of Vermont.
Republican officials are banking on voters seeing him as take-charge in contrast to Mr. Biden and Mr. Sanders, who have been following the government’s guidance about staying indoors but have not yet found memorable ways to show how they would lead in this crisis.
Mr. Biden and Mr. Sanders have held news conferences from remote locations, and Mr. Biden has participated in “virtual” fund-raisers. While Mr. Biden has an all but insurmountable lead in the race for the Democratic nomination, he has no real ability to steer events because he is not officially the presumptive nominee, and therefore is not the head of the party either.
As a result, Mr. Biden finds himself with far fewer options than Mr. Trump or Democratic governors like Andrew M. Cuomo of New York, who have real authority and are holding news conferences often broadcast live.
In turn, Republican officials and Sanders allies are pushing out attacks on Mr. Biden’s low profile, asking “Where’s Joe?” in emails to supporters and the news media. (A spokesman, T.J. Ducklo, said Sunday that Mr. Biden had not been tested for the virus because he had shown no symptoms.)
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People who believed they had the coronavirus, and who met the criteria, waited in line to be pre-screened outside the Brooklyn Hospital Center on Friday.Credit…Angela Weiss/Agence France-Presse — Getty Images
But the “wartime” strategy also presents risks to Mr. Trump. In his new posture, he is trying to rewrite recent history, erasing his comments from as recently as a week ago when he told Americans that they needed to “just relax” because “it all will pass.” It is also undercut by his resistance to calls for additional federal action from governors in hard-hit states.
Mr. Trump’s temperament is also dissimilar to “wartime presidents” with whom he is seeking to compare himself. Over the course of his presidency, Mr. Trump has struggled to stick to any bipartisan message, or speak emotionally to the pain and fear of Americans during crisis points like natural disasters or mass shootings.
“That’s why it’s so hard to be a wartime president,” said Michael Beschloss, the historian and author of “Presidents of War.” “Not only are you coming up with a strategy and tactics, but at the same time you have to let Americans know that you know how hard this is for them.”
Mr. Trump, so far, has struggled to feel anyone’s pain, unlike past presidents, while continuing to play out the fights with the news media that enliven his base. Last week, he lashed out at a journalist who had prompted him to explain what his message was to the millions of Americans watching him from home, who felt scared.
The president has also continued to credit his own administration’s response. But Mr. Beschloss added that “part of being a wartime president is being willing to give people bad news,” a job Mr. Trump has mostly left to others.
At the same time, he has been timid of using wartime powers to fight what he has called an “invisible enemy.” Last week, for instance, he resisted invoking the Defense Production Act, a federal law that grants presidents extraordinary powers to force American industries to ensure the availability of critical equipment.
Mr. Trump’s allies are aware that his re-election now hangs almost entirely on how he handles the crisis. And the question is whether he will be seen as President George W. Bush was in the immediate aftermath of the attacks of Sept. 11, 2001, when he was widely viewed as bringing the nation together, or if he will be compared to Mr. Bush amid the fallout from Hurricane Katrina, when he tried to minimize a crisis that eventually became too big for him to ignore, and during which Mr. Bush praised cabinet officials even as the federal government bungled the response.
Aides said that how Mr. Trump ends up being perceived would also depend on Mr. Trump’s own disposition during the crisis. It is not clear to them whether he will be able to maintain his focus on the crisis for months, especially as the economic situation worsens. Over the weekend, some Trump advisers weren’t ready to accept the likelihood of jobless claims climbing into the millions by next month.
The White House press secretary, Stephanie Grisham, defended Mr. Trump’s response as apolitical. “While it seems many in the media continue to use every opportunity to destroy this president, the fact remains that he has risen to fight this crisis by taking aggressive historic action to protect the health, wealth and well-being of the American people,” Ms. Grisham said in an email.
Some Democrats, meanwhile, said the mistakes made at the beginning of the response had already colored how Mr. Trump would be remembered both in the history books and at the ballot box in November. “At the end of the day, this will be Katrina with the waters at a much higher level, and lasting a longer time,” said Geoff Garin, a Democratic pollster.
But there is an emerging split in Democratic circles about whether to attack Mr. Trump’s response to the virus in real time, or whether the gravity of the moment calls for a pause in negative political advertising and attacks.
Some of Mr. Trump’s highest-profile political adversaries leading states that have become epicenters of the virus have been striking conciliatory notes as they seek federal assistance. Mr. Cuomo said the president was “fully engaged” on the crisis. Gov. Gavin Newsom, Democrat of California, described a recent phone conversation with Mr. Trump as “a privilege.”
Other antagonists have continued to criticize him. Mayor Bill de Blasio of New York tapped into one of Mr. Trump’s greatest fears when he referred to him on CNN as the “Herbert Hoover of his generation,” comparing him to a president who failed to recognize or take bold actions to stave off the stock market crash of 1929 and the subsequent Great Depression.
The debate about whether to embrace or attack Mr. Trump in a national emergency played out most succinctly on Twitter between David Axelrod and David Plouffe, the two men who led Barack Obama’s presidential campaigns.
Mr. Axelrod said that voters would have plenty of time to judge Mr. Trump’s handling of the coronavirus crisis, “but now doesn’t seem the moment for negative ads.” Mr. Plouffe responded that time was of the essence, and that Democrats couldn’t afford to “disarm” and let Mr. Trump create his own reality.
Mr. Trump at Saturday’s coronavirus news briefing. Last week, asked by a journalist about his message for scared Americans, he said that “you’re a terrible reporter.”Credit…Al Drago for The New York Times
Veterans of John Kerry’s 2004 campaign said Mr. Biden was in a stronger position against Mr. Trump than they were when they faced an election against Mr. Bush. Back then, Mr. Bush still basked in good will from his performance in the aftermath of the Sept. 11 attacks.
Some Democratic Party officials said a comparison between Mr. Biden and Mr. Trump at a moment of crisis only helped Mr. Biden.
“You can see the contrast between the steady, assured, informed and strong leadership that Vice President Biden has shown and the bungling, chaotic and dishonest start-stop approach that Mr. Trump has shown us since the beginning of this crisis,” said Gilberto Hinojosa, chairman of the Texas Democratic Party.
Though the Federal Reserve moved over the weekend to slash rates and buy treasuries, markets around the world fell on Monday anyway. The coronavirus threatens to set off financial contagion in a world economy with very different vulnerabilities than on the eve of the global financial crisis, 12 years ago.
In key ways the world is now as or more deeply in debt as it was when the last big crisis hit. But the largest and most risky pools of debt have shifted — from households and banks in the United States, which were restrained by regulators after the crisis, to corporations all over the world.
As businesses deal with the prospect of a sudden stop in their cash flows, the most exposed are a relatively new generation of companies that already struggle to pay their loans. This class includes the “zombies”— companies that earn too little even to make interest payments on their debt, and survive only by issuing new debt.
The dystopian reality of deserted airports, empty trains and thinly occupied restaurants is already badly hurting economic activity. The longer the pandemic lasts, the greater the risk that the sharp downturn morphs into a financial crisis with zombie companies starting a chain of defaults just like subprime mortgages did in 2008.
Over the last century, recessions have almost always been started by a sustained period of higher interest rates. Never a virus: The damage such contagions inflicted on the world economy typically lasted no more than three months. Now this once-in-a-century pandemic is hitting a world economy saddled with record levels of debt.
Central banks around the world are waking up to the prospect that the cash crunch can beget a financial crisis, as in 2008. That’s why the Federal Reserve took aggressive easing measures on Sunday that were straight out of the 2008 crisis playbook. While it is unclear whether the actions of the Fed will be enough to prevent the markets from panicking further, it’s worth asking: Why does the financial system feel so vulnerable again?
Around 1980, the world’s debts started rising fast as interest rates began falling and financial deregulation made it easier to lend. Debt tripled to a historic peak of more than three times the size of the global economy on the eve of 2008 crisis. Debt fell that year, but record low interest rates soon fueled a new run of borrowing.
The easy money policies pursued by the Federal Reserve, and matched by central banks around the world, were designed to keep economies growing and to stimulate recovery from the crisis. Instead, much of that money went into the financial economy, including stocks, bonds and cheap credit to unprofitable companies.
As the economic expansion continued, year after year, lenders grew increasingly lax, extending cheap loans to companies with questionable finances. Today the global debt burden is again at an all-time high.
The level of debt in America’s corporate sector amounts to 75 percent of the country’s gross domestic product, breaking the previous record set in 2008. Among large American companies, debt burdens are precariously high in the auto, hospitality and transportation sectors — industries taking a direct hit from the coronavirus.
Hidden within the $16 trillion corporate debt market are many potential troublemakers, including the zombies. They are the natural spawn of a long period of record low interest rates, which has sent investors on a restless hunt for debt products that offer higher reward, with higher risk. Zombies now account for 16 percent of all the publicly traded companies in the United States, and more than 10 percent in Europe, according to the Bank for International Settlements, the bank for central banks. A look at the data reveals that zombies are especially prevalent in commodity industries like mining, coal and oil, which may spell upheavals to come for the shale oil industry, now a critical driver of the American economy.
Zombies are not the only potential source of trouble. To avoid regulations imposed on public companies since 2008, many have gone private in deals that typically saddle the company with huge debts. The average American company owned by a private equity firm has debts equal to six times its annual earnings, a level twice what ratings agencies consider “junk.”
Signs of debt stress are now multiplying in industries impacted by the coronavirus, including transportation and leisure, auto and, perhaps worst of all, oil. Slammed on one side by fear that the coronavirus will collapse demand, and on the other by fears of a supply glut, oil prices have fallen to below $35 a barrel — far too low for many oil companies to meet their debt and interest payments.
Though investors always demand higher returns to buy bonds issued by financially shaky companies, the premium they demand on U.S. junk debt has nearly doubled since mid-February. By last week the premium they demand on the junk debt of oil companies was nearing levels seen in a recession.
Though the world has yet to see a virus-induced recession, this is now a rare pandemic. The direct effect on economic activity will be magnified not only by its impact on balky debtors, but also by the impact of failing companies on the bloated financial markets.
When markets fall, millions of investors feel less wealthy and cut back on spending. The economy slows. The bigger markets get, relative to the economy, the larger this negative “wealth effect.” And thanks again to seemingly endless promises of easy money, markets have never been bigger. Since 1980 the global financial markets (mainly stocks and bonds) have quadrupled to four times the size of the global economy, above the previous record highs set in 2008.
On Wall Street, bulls still hold out hope that the worst can pass quickly and point to the encouraging developments in China. The first cases were reported there on Dec. 31, and the rate of growth in new cases peaked on Feb. 13, just seven weeks later. After early losses, China’s stock market bounced back and the economy seemed to do the same.But the latest data, released today on retail sales and fixed investment, suggest the Chinese economy is set to contract this quarter.
While China is no longer center stage, as the virus spreads worldwide there are renewed fears that the crisis could circle back to its shores by hurting demand for exports. Over the last decade China’s corporate debt swelled fourfold to over $20 trillion — the biggest binge in the world. The International Monetary Fund estimates that one-tenth of this debt is in zombie firms, which rely on government-directed lending to stay alive.
In other parts of the world, including the United States, calls are growing for policymakers to offer similar state support to the fragile corporate sector. No matter what the policymakers do, the outcome is now up to the coronavirus, and how soon its spread starts to slow.
The longer the coronavirus continues to spread at its current pace, the more likely it is that zombies begin to die, further depressing the markets — and increasing the risk of wider financial contagion.
Ruchir Sharma is the chief global strategist at Morgan Stanley Investment Management, author of the forthcoming book, “The Ten Rules of Successful Nations,” and a contributing opinion writer. This essay reflects his opinions alone.
Policymakers and too many economic commentators fail to grasp how the next global recession may be unlike the last two. In contrast to recessions driven mainly by a demand shortfall, the challenge posed by a supply-side-driven downturn is that it can result in sharp drops in production, generalized shortages, and rapidly rising prices.
CAMBRIDGE – It is too soon to predict the long-run arc of the coronavirus outbreak. But it is not too soon to recognize that the next global recession could be around the corner – and that it may look a lot different from those that began in 2001 and 2008.
For starters, the next recession is likely to emanate from China, and indeed may already be underway. China is a highly leveraged economy, it cannot afford a sustained pause today anymore than fast-growing 1980s Japan could. People, businesses, and municipalities need funds to pay back their out-size debts. Sharply adverse demographics, narrowing scope for technological catch-up, and a huge glut of housing from recurrent stimulus programs – not to mention an increasingly centralized decision-making process – already presage significantly slower growth for China in the next decade.
Moreover, unlike the two previous global recessions this century, the new coronavirus, COVID-19, implies a supply shock as well as a demand shock. Indeed, one has to go back to the oil-supply shocks of the mid-1970s to find one as large. Yes, fear of contagion will hit demand for airlines and global tourism, and precautionary savings will rise. But when tens of millions of people can’t go to work (either because of a lockdown or out of fear), global value chains break down, borders are blocked, and world trade shrinks because countries distrust of one another’s health statistics, the supply side suffers at least as much.
Affected countries will, and should, engage in massive deficit spending to shore up their health systems and prop up their economies. The point of saving for a rainy day is to spend when it rains, and preparing for pandemics, wars, climate crises, and other out-of-the-box events is precisely why open-ended deficit spending during booms is dangerous.
But policymakers and altogether too many economic commentators fail to grasp how the supply component may make the next global recession unlike the last two. In contrast to recessions driven mainly by a demand shortfall, the challenge posed by a supply-side-driven downturn is that it can result in sharp declines in production and widespread bottlenecks. In that case, generalized shortages – something that some countries have not seen since the gas lines of 1970s – could ultimately push inflation up, not down.
Admittedly, the initial conditions for containing generalized inflation today are extraordinarily favorable. But, given that four decades of globalization has almost certainly been the main factor underlying low inflation, a sustained retreat behind national borders, owing to a COVID-19 pandemic (or even lasting fear of pandemic), on top of rising trade frictions, is a recipe for the return of upward price pressures. In this scenario, rising inflation could prop up interest rates and challenge both monetary and fiscal policymakers.
It is also noteworthy that the COVID-19 crisis is hitting the world economy when growth is already soft and many countries are wildly overleveraged.Global growth in 2019 was only 2.9%, not so far from the 2.5% level that has historically constituted a global recession. Italy’s economy was barely starting to recover before the virus hit. Japan’s was already tipping into recession after an ill-timed hike in the value-added tax, and Germany’s has been teetering amidst political disarray. The United States is in the best shape, but what once seemed like a 15% chance of a recession starting before the presidential and congressional elections in November now seems much higher.
It might seem strange that the new coronavirus could cause so much economic damage even to countries that seemingly have the resources and technology to fight back. A key reason is that earlier generations were much poorer than today, so many more people had to risk going to work. Unlike today, radical economic pullbacks in response to epidemics that did not kill most people were not an option.
What has happened in Wuhan, China, the current outbreak’s epicenter, is extreme but illustrative. The Chinese government has essentially locked down Hubei province, putting its 58 million people under martial law, with ordinary citizens unable to leave their houses except under very specific circumstances. At the same time, the government apparently has been able to deliver food and water to Hubei’s citizens for roughly six weeks now, something a poor country could not imagine doing.
Elsewhere in China, a great many people in major cities such as Shanghai and Beijing have remained indoors most of the time in order to reduce their exposure. Governments in countries such as South Korea and Italy may not be taking the extreme measures that China has, but many people are staying home, implying a significant adverse impact on economic activity.
The odds of a global recession have risen dramatically, much more than conventional forecasts by investors and international institutions care to acknowledge. Policymakers need to recognize that, besides interest rate cuts and fiscal stimulus, the huge shock to global supply chains also needs to be addressed. The most immediate relief could come from the US sharply scaling back its trade-war tariffs, thereby calming markets, exhibiting statesmanship with China, and putting money in the pockets of US consumers. A global recession is a time for cooperation, not isolation.
CAMBRIDGE – It is too soon to predict the long-run arc of the coronavirus outbreak. But it is not too soon to recognize that the next global recession could be around the corner – and that it may look a lot different from those that began in 2001 and 2008.
For starters, the next recession is likely to emanate from China, and indeed may already be underway. China is a highly leveraged economy, it cannot afford a sustained pause today anymore than fast-growing 1980s Japan could. People, businesses, and municipalities need funds to pay back their out-size debts. Sharply adverse demographics, narrowing scope for technological catch-up, and a huge glut of housing from recurrent stimulus programs – not to mention an increasingly centralized decision-making process – already presage significantly slower growth for China in the next decade.
Moreover, unlike the two previous global recessions this century, the new coronavirus, COVID-19, implies a supply shock as well as a demand shock. Indeed, one has to go back to the oil-supply shocks of the mid-1970s to find one as large. Yes, fear of contagion will hit demand for airlines and global tourism, and precautionary savings will rise. But when tens of millions of people can’t go to work (either because of a lockdown or out of fear), global value chains break down, borders are blocked, and world trade shrinks because countries distrust of one another’s health statistics, the supply side suffers at least as much.
Affected countries will, and should, engage in massive deficit spending to shore up their health systems and prop up their economies. The point of saving for a rainy day is to spend when it rains, and preparing for pandemics, wars, climate crises, and other out-of-the-box events is precisely why open-ended deficit spending during booms is dangerous.
But policymakers and altogether too many economic commentators fail to grasp how the supply component may make the next global recession unlike the last two. In contrast to recessions driven mainly by a demand shortfall, the challenge posed by a supply-side-driven downturn is that it can result in sharp declines in production and widespread bottlenecks. In that case, generalized shortages – something that some countries have not seen since the gas lines of 1970s – could ultimately push inflation up, not down.
Admittedly, the initial conditions for containing generalized inflation today are extraordinarily favorable. But, given that four decades of globalization has almost certainly been the main factor underlying low inflation, a sustained retreat behind national borders, owing to a COVID-19 pandemic (or even lasting fear of pandemic), on top of rising trade frictions, is a recipe for the return of upward price pressures. In this scenario, rising inflation could prop up interest rates and challenge both monetary and fiscal policymakers.
It is also noteworthy that the COVID-19 crisis is hitting the world economy when growth is already soft and many countries are wildly overleveraged. Global growth in 2019 was only 2.9%, not so far from the 2.5% level that has historically constituted a global recession. Italy’s economy was barely starting to recover before the virus hit. Japan’s was already tipping into recession after an ill-timed hike in the value-added tax, and Germany’s has been teetering amidst political disarray. The United States is in the best shape, but what once seemed like a 15% chance of a recession starting before the presidential and congressional elections in November now seems much higher.
It might seem strange that the new coronavirus could cause so much economic damage even to countries that seemingly have the resources and technology to fight back. A key reason is that earlier generations were much poorer than today, so many more people had to risk going to work. Unlike today, radical economic pullbacks in response to epidemics that did not kill most people were not an option.
What has happened in Wuhan, China, the current outbreak’s epicenter, is extreme but illustrative. The Chinese government has essentially locked down Hubei province, putting its 58 million people under martial law, with ordinary citizens unable to leave their houses except under very specific circumstances. At the same time, the government apparently has been able to deliver food and water to Hubei’s citizens for roughly six weeks now, something a poor country could not imagine doing.
Elsewhere in China, a great many people in major cities such as Shanghai and Beijing have remained indoors most of the time in order to reduce their exposure. Governments in countries such as South Korea and Italy may not be taking the extreme measures that China has, but many people are staying home, implying a significant adverse impact on economic activity.
The odds of a global recession have risen dramatically, much more than conventional forecasts by investors and international institutions care to acknowledge. Policymakers need to recognize that, besides interest rate cuts and fiscal stimulus, the huge shock to global supply chains also needs to be addressed. The most immediate relief could come from the US sharply scaling back its trade-war tariffs, thereby calming markets, exhibiting statesmanship with China, and putting money in the pockets of US consumers. A global recession is a time for cooperation, not isolation.