As a novel coronavirus spreads from nation to nation and through more U.S. cities, financial markets have tanked, with volatility increasing and major indices like the Dow Jones and S&P 500 dropping well over 10 percent, falling hard enough this morning to trigger a trading halt. So far, the president and the Federal Reserve—along with many financial-sector commentators—have treated this downturn as an issue of investor confidence, resulting from the virus’s psychological effect on the markets. President Donald Trump has downplayed the threat, blamed the media for inflaming the situation and touted the benefits of Americans spending their vacations in the States. For its part, the Federal Reserve cut interest rates, as though the problem is access to cheap enough capital.
They’re getting it backwards. Investors are not stupid, and investing is not as simple as “interest rates down, markets up.” When investors assess the coronavirus situation and the markets drop as a result, they aren’t irrationally panicking. And they’re not worried about a liquidity crunch in the financial markets, like we saw in 2008.
They’re worried about the human and economic costs of the virus itself. And part of the market’s analysis is its confidence, or lack thereof, in the government’s ability to manage the crisis—to step in forcefully, stay ahead of the crisis, and guide us back out. When it comes to government response, investors are looking for signs that Washington understands the threat and is taking rapid and competent steps to fight it.
Instead of demonstrating how much we’ve learned from previous outbreaks like SARS and Ebola, however, the coronavirus crisis has exposed how underprepared we and many nations across the world are for even a mild pandemic. Here at home we’ve seen a stuttering, unprepared government trying to mask the problem with empty confidence. It’s been a terrible look for our leaders, and as far as the markets are concerned, a costly one.
Meanwhile, the balance sheets of the biggest banks in the world (U.S., Japan, England, and ECB) suggest they have been injecting over $100 billion per month into the market, in addition to rate cuts. But the market’s reaction, and its evaluation of the economic impact of the virus—wiping out several trillion dollars of value in U.S. markets—suggest what is obvious to anyone outside of the investing world: that you can’t cure a virus with quantitative easing.
What does the market need to see? And what should citizens be demanding? I’ve spent half my career in law and policy, and the other half in the investing world, and this is one area where public and market interests are very much aligned.
At this point, it is hard to predict the human costs, but credible experts are suggesting we should be prepared for a very serious pandemic. For example, in a recent presentation before the American Hospital Association, Dr. James Lawler, a professor of infectious diseases, suggested that over four million Americans could be hospitalized, and over 480,000 could die.
Even a significantly milder contagion would threaten the revenue streams of a whole host of industries and companies in a way that will have global economic consequences. For example, tourism accounts for more than 10 percent of Italy’s GDP. If the virus cut that number in half it would destroy Italy’s already tepid GDP growth (of under 2 percent), and further impair its already struggling banks. At the same time, China alone accounts for roughly a third of global growth, and by all accounts it looks like major regions of China are simply shut down. Much of China’s economy consists of manufacturing things crucial to economies around the world, ours included; indeed, by recent estimates China is responsible for over a quarter of global manufacturing production.
More and more people are beginning to realize that from an economic perspective, this virus might be much worse than previous ones. Analogies to the Spanish Flu or SARS for purposes of assessing the likely economic damage are missing a very important point: the world is more dependent on extremely efficient and functioning global dynamics than ever before.
Surveying this landscape, anyone in financial markets can piece together that COVID-19 has high potential to be an enormous economic event as well as a serious health crisis. The Organization for Economic Cooperation and Development estimates the virus could cut global economic growth in half, or worse. Many are now bracing for global recession. From an economic perspective, that is a troubling prospect. For some context, in our $19 trillion economy, erasing the 2 percent growth we otherwise expected would amount to over $380 billion of losses in the United States alone—with real life, on-the-ground ramifications for jobs and economic security.
For leaders, there is a basic public policy problem at the heart of these events. If the government overreacts and panics early, it risks inciting unnecessary fear. A minor cold, blown out of proportion, could end up costing many billions of dollars. But if the government underreacts and tries to gloss it over, as China did, a local problem can fast become a global crisis, risking many thousands of lives and even trillions of dollars.
It didn’t have to be this way. At the political level, the virus demonstrates the very real risks of electing outsider presidents with little or no experience thinking through a public policy crisis like this. Trump’s strengths have been his ability to manage media and public relations, coupled with his intuitive understanding of building and using negotiating leverage. None of those strengths is relevant here. Any public relations expertise will be undermined by the morbid reality of a virus advancing through our communities and which so clearly threatens our livelihood.
But the problem is actually much deeper than any one politician. There’s been so much antagonism and partisanship that it seems that we’ve actually forgotten that the government has a role to play in combating something like a pandemic. It’s too late now, for purposes of this particular virus, to talk about the missed opportunities to prepare. But the bewildering thing is that months into this disaster, the government still appears lost and without a plan. There’s not even a semblance of an organized response at a scale appropriate to the problem.
What should the government do? It’s already clear the current $8.3 billion aid package and its scramble to catch up on testing patients won’t be enough. But it’s not time to panic. In fact, market prices are still around or over 18 times historical earnings, certainly not a low multiple by historical standards, suggesting considerable hope that we can get this under control—and leaving a lot of room for downside if we don’t. The government should have been better prepared, but it still has time to make the right moves.
At this point we’ve seen enough reports from government and institutional analysts that we can piece together a serious menu of options, and one the White House and Congress should be looking at. There are four categories—call them the four Cs of COVID19—that deserve particular attention.
First, containment. The federal government is uniquely positioned to adopt data-driven restrictions on travel, and to discourage non-essential events where the risk of contagion is high. It is well positioned to consider the civil liberty interests at stake, and to develop a transparent rationale for all of its actions, giving its citizens and businesses predictability around which we can make plans. Restricting citizens’ freedom of movement doesn’t and shouldn’t come naturally in the U.S., so it needs to get maximum value from the actions it does decide to take.
The government should identify all transportation hubs and “hotspots”—areas where the existence of the virus is confirmed or where population density creates higher risk—and authorize a $50 billion plan that includes sanitation infrastructure in those areas. The failure of the recent $8 billion aid package to address this is visible to anyone traveling in the United States. Even now, major international airports in New York and Washington D.C. are staffed by TSA and private sector employees who see a tremendous volume of travelers, and yet are totally exposed. They touch our phones and IDs and credit cards and hand them back to us. These employees should be given masks and these hubs should be provided with ample soap and hand sanitizer, in the airports and train stations but also on the planes and trains themselves. The common spaces themselves should be disinfected more frequently. The benefits of this would be immense for everyone, and yet no private-sector actor has an incentive to clean anything more than their own storefront, thus creating precisely the kind of free rider problem that government is best suited to address.
Second, capacity. By Dr. Lawler’s estimates, and those of other expert epidemiologists, millions of Americans might need to be hospitalized. That number may be hyperbolic, but isn’t it better that we be ready? Right now there is a good chance we don’t have enough things like masks and sanitizer to protect healthcare workers as well as vulnerable populations (like those with compromised immune systems), or even enough hospital beds and healthcare workers to staff those beds.
One might think that hospitals have every incentive to build this out. The problem is twofold. First, there is real uncertainty about how much to build out and how to finance that capital expenditure, given that we just don’t know how much we need, and for how long. Second, hospitals, even non-profits, depend on high-margin (and often elective) procedures to sustain their budgets; switching to low- margin or charitable care, like treating infectious-disease patients, could be financially catastrophic. Left to private incentives, we will likely be unprepared to address major public health threat like COVID-19. If the government wants to protect its citizens, it should consider a stimulus package that would build out care capacity and compensate hospitals and other providers for taking on infectious disease care. Such a bill should also subsidize domestic manufacture of essential items like sanitizers and masks, and provide states with grants aimed at training healthcare workers. Done right, this will also be an investment for the future, building reserve capacity for the next crisis, and providing training that people can use as a stepping stone towards a career in the burgeoning healthcare sector.
Third, the cure. The $3 billion allocated by the aid package is a great start, but we need more. The vaccine and cure effort won’t work without robust participation by the private sector, and anyone with experience with pharmaceuticals knows that research and drug development can be extremely costly. To encourage the private sector to proceed, the government should announce a race for the vaccine and cure. It should incentivize entrants by subsidizing the cost of research, as well as the distribution of any such vaccine and cure, and ensure that its creators will make a reasonable profit. A sizable prize would help as well. Ambivalent messages—about whether it makes sense to invest, or whether everyone will have access to the cure—are not productive. We want to reward research in public health and make it a desirable pursuit, but in a way that ensures the public that the fruits of that research will be widely available.
And finally, coalition. The government response needs to include an international aid package that would help other countries that need it. It’s already clear that even with the best of efforts, viruses don’t respect human borders, and not every country has America’s resources to deal with it. This will be a key part of ending the crisis, and an important opportunity to build relationships that we can rely on in the future.
Given the importance of credibility, the spokesperson for this effort should be a nonpartisan expert like Dr. Tony Fauci. Politicians, by contrast, should be focused on enabling those experts and clearing bureaucratic hurdles to an effective response. This should not feel like an effort driven by a politician’s PR priorities.
With estimates suggesting COVID-19 could cost the U.S. hundreds of billions in lost GDP, to say nothing of the human suffering, the cost of these programs combined is not difficult to justify. These measures, taken together, would amount to a powerful fiscal stimulus, plugging important gaps in the government’s response to the coronavirus. They would provide a much-needed investment in the nation’s pandemic infrastructure, with an immediate—in fact imminent—opportunity to employ that infrastructure and give it experience. Doing so would limit both the human suffering and the economic losses that COVID-19 could inflict, and would show that our government can solve problems. That’s what we all want. And here, that’s what markets want too.
Sina Kian is a former vice president at the Blackstone Group, former clerk to Chief Justice John Roberts and adjunct professor at New York University School of Law.
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