Today, Explained - Coronavirus hits the markets

Episode Date: March 10, 2020

The stock market’s going haywire. Major companies are telling their employees to stay home. Austin has canceled SXSW. Vox’s Matthew Yglesias says governments across the world have to act fast to save the global economy. (Transcript here.) Learn more about your ad choices. Visit podcastchoices.com/adchoices

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The market's been all over the place. Where are we now? We had really big declines over the weekend and continuing through Monday. Stocks way down, interest rates way down, all kinds of commodity prices way down, some particularly crazy stuff with oil, but really across the board, down, down, down. Tuesday, we had a partial rebound, but if you look on a week-long or month-long basis, it's still down across the board. And, you know, nothing has sort of fundamentally changed in terms of our scientific understanding since Friday.

But we're getting a really clear sort of warning sign from financial markets. And how is all that connected to the coronavirus? Well, I think if you think about it, when you look at places that have had more severe outbreaks and the measures public health officials say you need to take, it's things like having office workers stay home rather than come in. We know that Facebook, Google, LinkedIn, those are three major tech companies, they are now strongly recommending their employees work from home. Facebook is also scrapping all Bay Area events and telling workers to cancel all business travel. It's canceling large events, telling people not to go to movie theaters,

not to hold big parties, things like that. In a major move, city officials today in Austin declared a local disaster and canceled this month's popular South by Southwest festival. So think about what that means in concrete terms, right? It means fewer people getting lunch across the street from their office. It means fewer people going to hotels. It means less hours for people who work in the leisure and hospitality industries. It means less tips for those kinds of people. So that's millions and millions and millions of working class people looking at reduced incomes, reduced ability to spend. And that has a big secondary impact on demand all throughout the economy.

If people don't have any money, they can't spend. If they can't spend, nobody else can make money. Investment starts to go down. You've got a recession. Like most Americans' work is providing in-person services to other people. If we're getting the message from the government, which we seem to be, that, you know, you got to do less stuff. You have to stay home more. You have to cancel your events.

That's really bad for the economy. And that's even before talking about some of these problems in supply chains, right? If Apple can't make iPhones, they also can't sell iPhones. A lot of companies have very complicated international supplier networks and shutdowns in just a handful of cities can create big disruptions to the supply side of the economy. So where are we seeing the most disruptions so far in the U.S.? In the Seattle area, we can see sort of what is to come elsewhere, right? Which is that Amazon and Microsoft, who are the two biggest employers there, they've told people to stay home, do their jobs in their office. Those companies have also done the right thing and said that they are going to keep paying their hourly workers, you know,

people doing blue-collar tasks, that they're going to keep paying them their full salaries even though they don't need them for all the hours. Unfortunately, Microsoft and Amazon can't guarantee that for everybody in Seattle. There were quotes about, you know, people who work at coffee shops saying, well, we don't have any customers anymore. And you're seeing the slowdown of an economy where even though we think of those two companies, Microsoft and Amazon, as the sort of pillars of the Seattle economy, it's still the case that most people there, they work in stores, they work in restaurants, they clean houses, they do tasks for other people.

And you can't operate a sort of modern service economy without people leaving the house and doing things. And I imagine for blue-collar workers, this hits particularly hard. Blue-collar workers in particular don't have lots of savings cushions, right? If they don't have money coming in, there isn't going to be money going out, and that's going to hurt everybody's business ultimately, right? If you can't sell consumer packaged goods, there's not going to be advertising on like podcasts that you and I host, and that's not going to be good for our livelihoods. You know, and it goes on and on like that. I mean, people like to sort of draw distinctions and divide cutting lines, but we really are all in the same boat together economically.

And even though the pain is probably going to start with sort of blue-collar people working in hospitality industries, the pain will be felt everywhere unless we do something quickly. And it's hitting hospitality industries all over, right? I mean, South by Southwest is pretty far from Seattle. Did that just get canceled because so many people were coming from different places? Well, exactly. So the city of Austin decided to cancel the conference because they didn't want to have tens of thousands of people coming in from all over the world. They decided that wouldn't be prudent for public health. But I also know people who live in Austin who work there, and it's devastating to them. They were counting on this crowd of people, and it generates just

incredible amounts of business for bars and restaurants, for craftspeople who build the stages, who work the show. And for some people, they might miss the money, but it'll be fine. Like the Hilton Corporation will continue to exist. But for people who were counting on those tips, who were counting on those extra hours, that's now money they don't have and that they're not going to be able to spend in other local businesses, right? So it goes sort of down and down and down and down. And the risk is that, you know, it's not just one city, right? It's every city is going to be canceling these kinds of large events.

And it's not just in the United States. It's a fully global problem in an almost unprecedented way. And that's just a huge hit to spending and economic activity. I have to ask, does any of this bad news for certain industries get balanced out by all of the business that like Costco is doing? I mean, I was at Trader Joe's. They were sold out of all the canned food and bottled water. Yeah, I mean, you've had some businesses like Costco reported to investors that they've had a surge in sales. But that's in part their warning that they don't think that's sustainable, right?

It's just people stockpiling. There's funny stuff. There's like TikToks of people hoarding things, you know, pasta and canned goods, stuff like that. But ultimately, even a grocery store, right, their business is built around a certain model. They have a lot of fresh produce. They have meat. They want people coming in on a regular pace week after week. So even if you get a little extra sales bump from stockpiling, it's not really good news for any kind of business if people are going to have less money to spend.

My name is Matt Cisneros, and I am an owner of Cisco's Restaurant, Bakery, and Bar in Austin, Texas. We were established in 1950, and our partnership group purchased a restaurant in 2017. I'd say South by Southwest is kind of comparable to what Black Friday and Cyber Monday is to e-commerce. That's kind of what South by Southwest is to local businesses in Austin. During the 10 days of South by Southwest, our revenue for the month alone increases by 40 to 50%.

With South by Southwest being canceled, I'd say our bottom line was affected, definitely. But in addition to that, I'd say our staff is really affected, which is super important to us because we want to make sure that they're happy and they're compensated. And they use these 10 days every single year as a means to being able to not only pay their bills, but help support their families. They've got increased hours, but that income to them is something that could potentially pay their kids child care or pay their car payment that month. So when we found out that South by was canceled, we basically decided the only thing that we could do is to operate as normal and just hope that, you know, the local

economy would sustain by having Austinites that were really looking forward to South by Southwest, just hoping that they're going to continue to come in the door and spend money. I mean, I'm born and raised in Austin. I've been here 35 years. And so I've essentially never not seen it happen. It's a big hit. And a lot of people will lose their year over this loss. So it's just super sad and unfortunate to see. The economy is starting to show some serious cracks. Up next, what the U.S. and the rest of the world might be able to do about it. I'm Noam Hassenfeld, filling in for Sean Ramos for him while he's on vacation.

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There's a lot we could do. I mean, we need to generate more demand. That fundamentally means some combination of higher spending and lower taxes from the government. And then we can talk about, you know, what's sort of ideal, what's actually workable. But fundamentally, the government can buy more stuff, it can give money to people that they can spend, or it can collect less in taxes so that, again, people can go out and spend. So we need more people to have more money that they can spend into the economy. Yeah. And ideally, get the money into the hands of the people who have sort of financial needs, right? Because there may be wealthy people who are cutting back

just because it doesn't seem like a good time to spend. And if you give them extra money, they'll just kind of sit on it. But then you have a lot of people who live paycheck to paycheck, but those paychecks may be getting smaller. If you give them extra money, you're helping people in need,

but also they will go out and spend that money and bolster the incomes of everybody else. And that's where the sort of highest value comes in. OK, so that seems like not exactly the easiest thing to do immediately. What kind of things can the U.S. do to make that happen? So you can cut payroll taxes. This is what employers and employees pay sort of out of every paycheck, you know, biweekly or monthly. A good thing about this is it can be done really, really fast, right? If Congress says stop collecting these payroll taxes, it's just boom, next payday, it comes into place. So President Trump has been talking about doing this. It sounds like Democrats and Republicans

on the Hill do not love the idea. And when I've spoken to policy experts, a lot of them are also a little lukewarm on it. To me, the sheer speed is very appealing. Another thing you could do, you know, that's sort of smart for the long term is invest money in worthwhile projects, right? I mean, if we can make zero carbon electricity, I got a crew putting solar panel on my roof today. I mean, that's just a coincidence. But like, it's a great thing for the government to do because borrowing money is really cheap right now. Economic activity is really needed, but we'll be glad for years to come, right, if we have stuff like that. Then another thing that's easy to identify right now is that state and local governments, they're going to lose sales tax revenue. They're going to lose, you know, meal

and beverage tax revenue. And they're going to have a lot of expenses, right? They're going to lose sales tax revenue. They're going to lose, you know, meal and beverage tax revenue. And they're going to have a lot of expenses, right? They're doing all these extra treatments. They're trying to, you know, help kids who may not be able to go to school, things like that. So just give money to state and local governments and let them do kind of whatever with it, right? Congress normally doesn't like to do that. But it would be simpler and easier to just sort of put money into those state treasuries and let the governors figure it out. Because probably all they'll do is maintain their existing service levels, which is easy and simple. But if they come up with something else to do, you know, why not?

OK, that all sounds like a lot of stuff that Congress might not want to do so quickly. Are there any ways to get around Congress to make sure it actually happens? People have been talking sort of policy nerds for years about, well, we should create automatic triggers, right? We should have a policy in place that says anytime there's a downturn, this, that, and the other thing will automatically happen. And I would strongly advise congressional Democrats to write something like that, right? So address the initial problem, but also put in place a system for any future recessions. Because I know I'm hearing some grumbling from Democrats that's like, look, we know Republicans wouldn't bail us out with stimulus if we had a Democrat in the White House. And I think that's probably right, or at least

it's an understandable reaction. But the world needs help now. I mean, it's not a good idea to spike the economy just to sort of stick it to Trump. But you can needs help now. I mean, it's not a good idea to spike the economy just to sort of stick it to Trump. But you can solve the bigger problem and create an automatic program so that when there's a downturn, extra money goes out. We stabilize the economy. We'll save things in the short term, but also solve future problems. Except the way Congress seems to be reacting right now, at least what I saw yesterday was being scared of coronavirus and asking for a two-week recess? Well, some people are asking for a recess. Chuck Grassley was talking about targeted tax cuts for impacted industries.

I think that's thinking too small, right? Trying to find the industries that are most directly hurt and give them a tax relief, it's a very Republican way of thinking about it. But for starters, right, if you own hotels and your business has like gone to hell because people aren't staying in hotels, a tax break doesn't help you, right? Corporate tax cuts help profitable companies be more profitable. But that's not the problem now, right? The problem is that lower income people may not have any money and certain classes of businesses may not have any customers.

And nobody needs like high-end tax breaks. We need cash in people's hands. And if we don't take action, I assume you would say that increases the likelihood of a major recession? Yeah, exactly. I mean, there's going to be an economic dislocation caused by this virus, no matter what we do. But it could be brief, right? I mean, virus, no matter what we do. But it could

be brief, right? I mean, I don't know the full epidemiology of it. But in theory, there's no reason the virus couldn't come and go, and then we all go back to work and it's fine, hopefully with minimal loss of life. But it's also possible to tip into a recession point that goes on for months and months and months, quarter after quarter after quarter. And that's purely up to whether we manage the policy on the demand side, because once people start losing their jobs, the recession becomes self-propelling, and it doesn't matter if the epidemic goes away. I just want to take a step back for a second, because this entire time we've been talking about the U.S., but the U.S. is just one piece in this huge puzzle, kind of like climate change. You know, if we do it over here, who's to say they're going to do it

over there? So, I mean, like, what would a coordinated international response even look like? You know, you need some coordination. Fortunately, it's a little easier than climate change because we don't all need to be doing the exact same things. A lot of countries have relied in the past on what's called external demand. So it's like, you know, we'll make cars and we'll sell it to foreigners. China sort of got its way through the Great Recession initially, largely by continuing to export. But every country is impacted by coronavirus. So there's no place else to go. If you had a normal situation going into it where interest rates were higher, I would just tell you, look, central banks around the world, they're going to cut interest rates. It's going to be OK, at least as long as we can get the public health

piece right. Because interest rates are already low, to stimulate demand, what we're going to need is Congress in the United States, the parliament in Germany, the parliament in Japan, whoever makes these decisions in China. Governments all around the world are going to need to do fiscal stimulus measures. They're going to need to do tax cuts. They're going to need to spend on new projects. And ideally, they would do it in a coordinated way. That's just – it's hard. Like it's easy for me to write down in an article what you should do, but it's challenging coordinated way. That's just, it's hard. Like, it's easy for me to write down in an article

what you should do, but it's challenging political task. Barack Obama and Gordon Brown really tried to rally the world to do this in 2009. They had some success, but it was limited. It wasn't good enough. And now we've got Donald Trump, and there's reason to worry that we will not pull it off, even though we could. I mean, in principle, there's no reason why this virus should cause a prolonged recession. But we would have to do something about it. This all seems to be like a real test of the Trump rhetoric of isolationism, America first. I mean, do you see the Trump administration as really being able to cooperate

with these countries across the world on a coordinated effort? I mean, this is high on the irony meter. I think anybody would have told Trump that, you know, it doesn't matter what you think or what normal people think, that pointy-headed elites are correct and there is a lot of interdependence in the world

and it matters a lot to America what happens in Wuhan, China and sometimes national leaders need to work together even when they don't agree and like we are seeing that all play out now. We are getting a live-fire demonstration of global interdependence and the value of cooperation and we have a leadership in the United States that is deeply antithetical to that idea. And it's hard, right? Even if leaders really wanted to, international cooperation is hard. But we have a president who really goes against all of his instincts to think of positive sum collaboration. And it's a real problem.