This transcript is taken from an interview conducted March 31, 2020.
How has COVID-19 hit the stock market?
The stock market reaction is remarkable and, in some respects, unprecedented. The remarkable aspect is how much the stock market fell over the first few weeks of the pandemic, starting in late February—by 30 percent or so in the United States. The unprecedented part is the extent of stock market volatility.
If you look at stock market volatility measured at the daily-return level going back to 1900, you find only two or three other episodes that are as large as or larger than what we experienced from late February to late March. One was around the Great Depression, and the other was the sharp, short-lived volatility spike around the 1987 stock market crash.
A simpler measure of volatility is to look at how many big jumps up and down we had. We had more such jumps at a daily frequency in March than in any other month in history, back to 1900. I’m defining a large jump as one in which the stock market goes up or down by at least 2.5 percent in a single day.
One more thing makes these past few weeks really unprecedented: My colleagues and I looked at the next-day newspaper accounts of every big daily stock market move back to 1900. Before February 2020, we found zero instances in which a pandemic or a policy response to a pandemic triggered a large daily stock market jump. In contrast, between February 24 and late March, we had about 18 jumps that next-day newspaper accounts attributed to either the economic fallout of the pandemic or the policy responses.
It’s hard to answer with complete confidence what role the media has played in driving these stock market gyrations; I don’t think, however, that it’s the primary reason this episode is so unique. I base that on a comparison with the Spanish flu of 1918. It’s entirely plausible that back in 1918, 1919, and 1920, information filtered out rather more slowly than it does today. You might have expected the stock market reaction to be more spread out over time. That was certainly the case.
But even when you look at a span of months during the Spanish flu pandemic, you see a much milder stock market response to the downside than we saw in February and March in the US. There are two primary reasons for the violent stock market reactions. The first is the interconnected nature of the modern economy and, in various ways, the ubiquity of long-distance travel; the role of face-to-face, personal, and business services in everyday life; and global supply chains, just-in-time inventory systems that are highly vulnerable to supply-chain disruptions. And the other is the tremendous policy response: the social distancing, the containment, the curtailment on travel. These are outside the bounds of previous experience, even during the Spanish flu.
How has COVID-19 affected businesses?
My colleagues and I did a survey earlier this month designed to elicit information on exactly that question. There’s a survey on business uncertainty that is fielded by the Federal Reserve Bank of Atlanta and cobranded with Chicago Booth and Stanford, because I’m one of the cocreators, as is Nick Bloom at Stanford. The unique characteristic of this instrument is designed to elicit forward-looking information about what businesses see.
In March, over a two-week period around the beginning of the month, we explicitly asked several hundred businesses: “What do you anticipate will be the impact of coronavirus-related developments on your sales revenue in 2020?” The activity-weighted average answer that came back was about minus 6 percent. That’s a big hit.
Perhaps even more interestingly, from the first week of the survey, the week of March 9, to the second week of the survey, the week of March 16, the answers got a lot worse. The answers in the second week were almost twice as bad as in the first week—close to a 12 percent sales hit. Businesses anticipated a hit to their sales revenue and operations in 2020, and over the course of the time the survey was in the field, those expectations deteriorated quite a bit.
The shift toward online purchases, coupled with onsite delivery, is going to be a massive change that I don’t think we’ll turn around.
Even 6 percent is a sharp recession; 12 percent is unlike anything we’ve seen in modern times in terms of a contraction for a span of less than a single year. Of course, developments are changing day by day, and we don’t yet know how long the pandemic will accelerate. We don’t know at this point just how infectious the virus is and how lethal it is, because we don’t have good information on how many people have already had the disease and recovered from it. We’re still in the dark on the medical side, and that makes it hard to assess the ultimate economic consequences.
The crisis is going to have some profound effects in the labor market, and you can already see some early waves of what that is. There’s been a huge uptick in the demand for delivery services—home-delivery services, business-delivery services. Some of that will subside in the wake of the crisis, but not all of it.
For one thing, there’s probably millions of more people who, in the past month, have figured out how to order food deliveries online. Once they’ve gotten over that hurdle, some of them will find they like it. Some of them will continue, either for the sake of convenience or because there are lingering concerns about the health effects of going to a sit-down restaurant or a crowded grocery store.
That shift toward online purchases, coupled with onsite delivery, is going to be a massive change that I don’t think we’ll turn around. We’re doing this interview via Zoom. I can tell you my calendar has filled up with Zoom meetings, as I’m sure many others’ have. Zoom and other like-minded technologies are also experiencing a massive boom. All of us are learning how to work with this technology. There is a learning curve, and you’ve got to work out the kinks, both personally and in terms of organizations.
Once we’ve crossed that threshold, we’ll do a lot more videoconferencing going forward. That’s great for businesses such as Zoom. What it does mean, though, is that airline travel, for example, and hotel occupancy for business reasons are probably going to be soft even after we get over this crisis. Those are just some examples.
Hopefully, we’ve learned that we want to raise some of our investments in public-health infrastructure and supply chains for critical medical equipment such as masks, ventilators, and testing—both the kits and the lab capacity—not just in the near future, but over the longer run. There are going to be many shifts of this sort.
That raises an interesting point for policy. We want policy to be conducted in a way that facilitates these shifts and encourages them, rather than slowing them down and discouraging them.
Should the US bail out airlines?
How has COVID-19 affected businesses?
How policy makers have responded to COVID-19
How has COVID-19 hit the stock market?
How have policy makers responded to COVID-19?
The policy response to the COVID-19 pandemic has been multifaceted. There have been some mistakes, as well as some good things. I don’t necessarily mean this as a criticism, because it was important to respond rapidly and on a large scale, and that makes it hard to do everything right.
Income support targeted to job losers and others who are financially harmed by the spread of the virus: that makes a lot of sense. Liquidity support and credit support for businesses to make sure they remain viable and can quickly resume normal operations, or something close to it, after the pandemic passes: those both make sense.
There’s a greater need for testing, and not just testing at the ground level at hospitals, but testing of representative samples of the population in the US, both to figure out who has the virus and is infectious, and who has had the virus and has recovered. You need the second piece to figure out both how much the virus has already spread and what we can anticipate for its future course, and to assess its true mortality effect. I don’t see that happening quickly enough.
We now have tests, as I understand it, that can do both of those things, but to my knowledge, we haven’t yet conducted testing on a representative sample of the US population, which is why we’re still trying to get our hands around how infectious this virus is, how much it has already spread, how much it’s likely to spread, and what the ultimate mortality is likely to be.
I expressed my support for targeted income support, for jobless folks and for those who have otherwise suffered financial hardship due to the virus. I’m much less sympathetic to the notion of just sending checks to everyone in the mail. Why? Because not everybody is suffering financially from this pandemic. Personally, I’m not. Some of us have salaried positions that, at least at this point, aren’t in any danger. We don’t need extra liquidity support. And you might say, well, what’s the harm? There are a few.
First, we run a risk that there will be excess demand for certain critical ingredients, whether medical products such as masks or critical food supplies. We don’t want to add to that unnecessarily, because it will cause prices to skyrocket. That could create shortages, and it will lead to political demands for rationing and price controls. The last time the US went down that path, in the 1970s, it was a big economic negative, and it took us several years to get out of it.
Credit support makes a lot of sense for businesses. Bailing out shareholders makes less sense.
Another reason we don’t want a fiscal blowout for no reason is that we don’t know how long this is going to last. And while the US and many other rich countries have a great deal of fiscal capacity, it’s not unlimited. We should use our resources prudently in this regard.
Third, we’re going to have to pay for this at some point in the form of higher debt-servicing costs and higher taxes. Just because we’re in a crisis doesn’t mean fiscal stimulus is a free lunch. We ought to use it as needed, but use it wisely.
I previously talked about the importance of income-support payments to people who have lost their jobs. The stimulus bill that just passed did that in a few ways. One thing I liked a lot is that it relaxed the eligibility criteria to qualify for unemployment-insurance benefits, including some of the provisions that you must be looking for another job. Some contract workers and gig workers, as I understand it, were allowed to apply for unemployment-insurance benefits. That makes great sense. Those people have been affected quite considerably.
What makes a lot less sense is to increase the generosity of the unemployment benefits, even to the point, in some cases, that there’s not an incentive to go take a different job. Why is this important? Well, there are a lot of taxi drivers and rideshare drivers who are now without much demand for their services, but there’s an enormous uptick in demand for delivery services. We want to facilitate the shift of workers from those activities and companies that have experienced sharp downturns and demand to those where there’s a real need for additional workers. I don’t think the design of the fiscal stimulus was helpful in that regard.
Other people, including [Stanford’s] John Cochrane [who is also a distinguished senior fellow at Chicago Booth], have stressed another point: the distinction between essential and inessential business commercial activities is important, but another important one is between commercial activities that involve a low risk of disease transmission and those that involve a high risk of disease transmission.
Many construction and manufacturing activities, particularly in highly automated facilities, can be conducted in a way that has low infectious-disease potential, because it’s possible to maintain social distancing. Whether the commercial activities are essential or inessential, if there’s a low risk of transmission, or if they can be rearranged in such a way that there’s a low risk, we don’t want to shut those down. And if we’ve shut them down, we want to reopen them. There hasn’t been enough thinking about how we can mitigate the transmission of the virus without needlessly strangling the economy.
What will be the long-lasting effects of the crisis?
Some of the major shifts in labor markets and business activity will persist. I hope that we have a much more vigorous evaluation of and investment in our public-health infrastructure. That’s partly a policy decision, so I’m a little less confident that that will materialize.
I hope we also see a much more vigorous and supportive policy environment for the development of new vaccines and new treatments for infectious disease, and a willingness under emergency circumstances to relax some of the protocols that make testing and the ramp-up of production such a slow process. That might make sense in normal times, but it makes no sense in a crisis such as the current one.
I have the impression that we’ve been a bit too slow to respond on those fronts, partly because we are operating under legacy rules and norms that don’t really make much sense in the current environment.
Those are the three areas in which I both foresee some change and also hope to see some change. There will certainly be others.
How will the stimulus bill affect businesses?
Credit support makes a lot of sense for businesses. Bailing out shareholders makes less sense. The airline industries, if they go bankrupt again as a consequence of this, can continue to operate. They’ve been through bankruptcy before. I don’t see a particular reason to bail out their shareholders. That’s quite distinct from a liquidation of the company and its operational capacities. A bankruptcy court is designed to maintain critical operational capacity while ownership is transferred from the old stockholders to the new stockholders.
There are some nuances in the current environment that differentiate it from normal circumstances. It’s possible to imagine that there would be such a wave of bankruptcies in the wake of this crisis that it might overwhelm the bankruptcy-court process. There might need to be some special provisions, because we don’t want the airlines to shut down, but I’m not going to shed too many tears if they go bankrupt.
News accounts indicate that there is a huge amount of pork-barrel spending buried in the stimulus bill, which, on economic grounds, is not a desirable outcome. But in terms of political expediency, that may be how you get the bill passed.
It’s too early to say whether we’ll need another stimulus bill. I’d rather see the near-term policy focused on how we can mitigate the economic harm caused by the pandemic, and related policy responses. I’d like to see considerable attention toward ramping up the production and distribution of critical medical supplies and facilities. That’s not very expensive in the grand scheme of things, relative to a $2 trillion fiscal stimulus.
There’s perhaps too much sensationalism in the newspapers and on TV of the health risks associated with the pandemic, in the sense of, we should do just about anything to address it, including contracting economic activity and supplying massive fiscal stimulus.
We certainly want a vigorous response, but just because the situation is quite grave doesn’t mean we should suspend reason and judgment about how to manage the economy in a way that sensibly mitigates the spread of the crisis and about how to provide fiscal support in a way that is the most effective use of taxpayer dollars.
We’re still drawing on taxpayer resources, and a crisis is no reason to waste those resources. It’s a reason to be judicious in the use of those resources, even when the scale of needed resources is as large as it is currently.
What research would you like to see, and what research are you conducting?
I’d like to see some focused efforts to conduct random samples of representative population groups in the US, so we can get a handle on the true dimensions of this pandemic in terms of lethality and infection rate, and how much it has already spread in the population.
For my own research, one study is on the labor-market reallocation aspect of the impact of the crisis. A second is another on the stock market. This one is focused on trying to characterize the company-level stock-price reactions to the coronavirus pandemic and the policy responses. We are going to the field with special questions about how companies see the impact of the coronavirus on their businesses—that’s a third one. We’ll have a larger set of questions this time.