A Coronavirus Recession?

A Coronavirus Recession?

Stocks cratered on Monday, suffering their worst daily drop in more than nine years, as the spread of the coronavirus and a clash between Saudi Arabia and Russia over oil prices left investors again looking for safety. The S&P 500 fell 7.6%, its worst daily decline since 2008.

The market plunge triggered an automatic 15-minute halt to trading shortly after the opening bell, reportedly the first such pause in 23 years.

As investors fled to safe havens, the yields on Treasury securities continued their recent slide, with rates on 10-year Treasury notes dropping 0.4% and briefly touching a stunning all-time low of 0.318%. (“This is the market's way of begging Treasury secretary Steven Mnuchin to invest in projects that will improve America's economic health over the long term,” Axios’s Felix Salmon wrote.) The 30-year rate fell below 1%.

“The world economy essentially just got a one-two punch to the face,” The Washington Post’s Heather Long wrote.

Rising recession risk: The fear is that those dual blows could tip the economy into a recession as the virus disrupts business and forces people to hunker down at home and an oil price war threatens energy companies in the United States and elsewhere. The action in stock, bond and energy markets all signal that investors believe the recession risk is very real.

“We are going to take a hit. It might not be a full out recession, but we’re moving closer to that,” economist Claudia Sahm, an expert on recessions, told the Post. Bloomberg’s Businessweek’s Peter Coy was even more pessimistic: “Let’s just say it: The longest economic expansion in U.S. history may already be over, killed by Covid-19.”

What the Trump administration might do: President Trump last week signed an $8.3 billion bill to fund the public health response to the virus, but the White House is under intense pressure to deliver a broader plan addressing both the health and economic concerns stemming from the outbreak.

Trump and his top economic adviser, Larry Kudlow, have both downplayed the threat from the virus, and the White House still does not have an economic response plan. But The Washington Post reported that the White House National Economic Council and Treasury Department have been discussing potential actions to help limit the economic damage for 10 days. White House advisers were reportedly set to present the president with a list of policy options on Monday afternoon.

Those options reportedly include paid sick leave, deferred taxes on hard-hit industries and emergency cash assistance for small businesses. Trump has also discussed the possibility of a payroll tax cut, but top administration officials reportedly have given attention to a short-term expansion of paid sick leave “because it would cost less,” Bloomberg News reported. White House officials reportedly have also considered providing money to geographic regions of the country hurt most by the virus.

“The timing of any of the economic measures is unclear, but they would likely be rolled out on a step-by-step basis, beginning with aid to individual Americans who are infected, then expanding to companies and workers affected by lost business,” Bloomberg News reported.

Congress lays out its priorities: House Speaker Nancy Pelosi and Senate Democratic Leader Chuck Schumer on Sunday issued their own list of priorities for a coronavirus response and called for the administration to do more, with a focus on worker-friendly policies. “In light of reports that the Trump administration is considering new tax cuts for major corporations impacted by the coronavirus, we are demanding that the administration prioritize the health and safety of American workers and their families over corporate interests,” they said in a statement.

Pelosi and Schumer called for paid sick leave, enhanced unemployment insurance, expanded food assistance programs, free coronavirus testing and reimbursement for uncovered costs of treatment. House Democratic leaders reportedly plan to meet Monday evening to plan their own legislative proposals.

Rep. Rosa DeLauro (D-CT), a member of the House Appropriations Committee, “has introduced legislation mandating 14 days of paid sick leave in the case of an emergency health crisis such as coronavirus, noting that most workers -- especially low-wage workers -- have no paid sick leave and thus would face difficulty complying with medical quarantine advice,” the Post reports.

Senate Finance Committee Chairman Chuck Grassley (R-IA), meanwhile, “is exploring the possibility of targeted tax relief measures that could provide a timely and effective response to the coronavirus,” a spokesman said Monday.

Tweet of the Day

From Larry Levitt, executive vice president for health policy at the Kaiser Family Foundation:

A Return to the 1970s?

With economists and investors worried that the coronavirus outbreak could spark a global recession, Harvard’s Ken Rogoff warns that the downturn could be significantly different than the last one over a decade ago.

That recession was driven primarily by a sharp reduction in demand as homeowners and investors around the world ran for cover amid plunging housing prices. This time around, in addition to a demand-side shock, there will likely be a supply shock as China’s economy slows, Rogoff says, creating bottlenecks and eventually higher prices throughout the global supply chain. Think 1974 oil crisis, not 2008 housing bubble, with inflation returning as a potential threat.

“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,” Rogoff writes.

In whatever form the recession arrives, governments will need to “engage in massive deficit spending,” Rogoff says, in order to prop up both health care systems and broader economies. And that’s why the Trump administration’s failure to get control of the federal budget in a growing economy – and instead pushing the annual federal deficit over $1 trillion a year with tax cuts for the rich and big increases in spending – is such a big problem.

“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,” Rogoff writes.

Yes, but: Critics were quick to point out a serious flaw in Rogoff’s thesis: The bond market is telling us that inflation is nowhere on the horizon, and historically low interest rates mean that even massive fiscal stimulus will come at very low cost. “Has Ken Rogoff bothered to even look at where long-term Treasury yields are?,” asked Skanda Amarnath, director of research at Employ America, a liberal-leaning group that pushes the Fed to be less vigilant about inflation and more concerned about jobs.

Indeed, with Treasury rates hitting record lows and oil prices plummeting, the markets are signaling that deflation is the greatest worry right now. “Traders are learning that the prospect of collapsing prices can be just as painful as inflation,” Bloomberg’s Brian Chappatta said Monday in his review of the day’s record moves in the bond market.

Still, while Rogoff admits that inflation doesn’t look like a problem right now — “Admittedly, the initial conditions for containing generalized inflation today are extraordinarily favorable,” he says — he argues the coronavirus could end up marking the end of a four-decade process of globalization that produced lower prices for all kinds of goods around the world, and the beginning of a new era of trade conflict, increasing prices and rising interest rates.

So how's your week going so far? Send your tips and feedback to yrosenberg@thefiscaltimes.com. Follow us on Twitter: @yuvalrosenberg, @mdrainey and @TheFiscalTimes. And please tell your friends they can sign up here for their own copy of this newsletter.

News

• Coronavirus: Why Central Bankers Say It Is Time for Fiscal Stimulus – Financial Times
• Health Agencies’ Funding Cuts Challenge Coronavirus Response – Washington Post
• Anxiety Over Coronavirus Grows on Capitol Hill – The Hill
• Coronavirus Hits Capitol Hill as 2 GOP Lawmakers ‘Self-Quarantine’ – Politico
• Surging Health Care Worker Quarantines Raise Concerns as Coronavirus Spreads – Kaiser Health News
• Mnuchin, Kudlow to Meet With Senate GOP as Coronavirus's Economic Impact Grows – The Hill
• With Global Economy in Balance, the White House and Fed Are at Odds Over How to Help – Washington Post
• U.S. Treasury 30-Year Yield’s 59-Basis-Point Drop Set a Record – Bloomberg
• Bonds Hit Historic Lows, Prompting Fed to Ponder: What More Can We Do? – New York Times
• White House Invites Top Wall Street Executives to Meet Amid Economic Fallout From Coronavirus – Washington Post
• Pence Plans to Discuss Coronavirus With U.S. Health Insurers – Bloomberg
• The Strongest Evidence Yet That America Is Botching Coronavirus Testing – The Atlantic
• Where That $8.3 Billion In U.S. Coronavirus Funding Will and Won't Go – NPR
• Inside a Coronavirus Drug Delay – Axios
• The Times America Went Big and Flooded Economy With Federal Cash – Bloomberg
• Wharton’s Jeremy Siegel Calls for Fiscal Stimulus and Fed Cut, Says ‘We Need Leadership at the Top’ – CNBC

Views and Analysis

• What Record-Low Interest Rates Mean – Felix Salmon, Axios
• Trump Goes Into Attack Mode as Coronavirus Panic Hits Stock Market – Tory Newmyer, Washington Post
• The U.S. May Already Be in a Recession – Peter Coy, Bloomberg Businessweek
• The Dangers of Medicare for All – Scott W. Atlas, New York Times
• With Coronavirus, ‘Health Care for Some’ Is a Recipe for Disaster – New York Times Editorial Board
• Why the Coronavirus Could Threaten the U.S. Economy Even More Than China’s – Austan Goolsbee, New York Times
• The US Federal Reserve’s Debt Purchases Are a Warning – David Ahn and Robert H. Dugger, Project Syndicate
• Why Taxing Bad Things Isn't Always Good Policy – Noah Smith, Bloomberg
• Plagued by Trumpism – Joseph E. Stiglitz, Project Syndicate
• Trump Sails Into the Perfect Political Storm – Former Sen. Judd Gregg, The Hill
• Health Care Is a Right Only if Doctors Surrender Theirs – Frank Miele, RealClearPolitics