Coronavirus fight sends economy into turmoil

The coronavirus.
The coronavirus.

Last updated on April 28th, 2020 at 02:32 pm

The COVID-19 pandemic is a global health care crisis, and perhaps the most important tactic to fight it is the social distancing strategy, which seeks to “flatten the curve” and slow the spread of the virus in hopes of preventing it from overwhelming the health care system.

But social distancing requirements are creating a gigantic strain on the economy as many businesses have, at least temporarily, been forced to shut down or dramatically scale back their operations.

While the coronavirus fight is first and foremost a serious public health issue, the economic damage is also significant and may be just beginning.

To gauge the economic outlook moving forward, BizTimes Milwaukee reached out to a pair of economists who have participated in our annual Economic Trends and Mid-Year Economic reports. Michael Knetter, the president and chief executive officer of the University of Wisconsin Foundation, is also an economist who served as an advisor for presidents George H.W. Bush and Bill Clinton. Avik Chakrabarti is an associate professor of economics at the University of Wisconsin-Milwaukee.

While they are not public health experts, Knetter and Chakrabarti answered a series of questions about where they see the U.S. economy going as it confronts the coronavirus. The following are portions of their responses.

BizTimes: Is the U.S. economy in a recession now? If not, are we headed into one soon?

Knetter: “I believe we will look back and say the economy tipped into recession in April. We won’t know this for sure for a few more months, and I hope I am wrong.”

Chakrabarti: “The economy has, indeed, begun to show signs of a recession as businesses struggle to cope with the pandemic. Current conditions are highly likely to hinder economic activity through subsequent quarters, sending the economy back into a recession after more than a decade.”

BizTimes: Will the U.S. economy be able to recover quickly after the virus runs its course, or will there be long-term ramifications?

Knetter: “The recovery path will depend on the path and pace of the virus itself. China, South Korea, Taiwan and Japan are either more authoritarian and/or more cohesive societies than we are in the U.S., which has helped their ability to contain spread once detected. I have so far been impressed by the rapidity of the cancellations of major sporting events and closings of educational institutions and some businesses. Nonetheless, social distancing is not natural for Americans and I worry containment efforts will be much more difficult. This is a classic free rider problem and I am not sure we will easily resolve it. That leads me to expect more of a U- than a sharp V-shaped recovery. It feels like an elongated 9/11 at this point. Again, I hope I am wrong about this.”

Chakrabarti: “The scale and scope of any damage to the economy will depend on the spread and duration of the pandemic. If the spread of the coronavirus in the U.S. is restricted before the second quarter ends, the recession will be short-lived. The economy will bounce back with consumers and investors regaining confidence and businesses restoring their supply chains. Otherwise, if the current economic disruption extends beyond the second quarter, a prolonged recession may be unavoidable. It would be remiss not to recognize that the prompt private-public partnerships forged under the leadership of President Trump, in the face of the unprecedented pandemic, is likely to resist a steep economic downturn. The U.S. economy is likely to recover promptly after the current pandemic wears out.”

BizTimes: The stock market has been extremely volatile with several huge drops. What do you think is the bottom?

Knetter: “The volatility will be with us for a while.”

Chakrabarti: “Not surprisingly, due to the uncertainty surrounding the coronavirus outbreak and its economic impact, the stock market has become increasingly volatile along a downward trend. At this time, a reasonable guesstimate is that the S&P 500 would bottom around 2,000 near the end of the pandemic.”

BizTimes: What strategy should policy-makers be using to help reduce the economic damage caused by the pandemic?

Knetter: “Showing mature bipartisan leadership is important now more than ever. Coronavirus doesn’t care who you are voting for and it is serious enough that Americans will want leaders working with the best facts and expert opinions available in choosing a shared course of action. We need public health measures with strong bipartisan support. Short-term measures that help businesses (and therefore employment) and consumers ride this storm out will also help blunt the worst impacts.”

Chakrabarti: “It is high time for policymakers to recognize that any backlash against spending during the current pandemic will be misguided. They need to rise above their political leanings and disagreements over the size of the budget deficit. A bipartisan support for the co-creation of private-public partnerships forged under the leadership of President Trump is overdue. Lessons from the last recession can be useful as well. For instance, a timely rolling out of a program similar to the Troubled Asset Relief Program (TARP) may prove to be effective in clearing out any damage to bank balance sheets and providing mechanisms for funding small businesses.”

BizTimes: Any other thoughts?

Knetter: “More broadly, I think this event will underscore the importance of education and science to society and the importance of international cooperation.  

“You asked about the economic impacts, but this is of course a humanitarian global crisis. Our thoughts should be with those who fall seriously ill and the health care providers who are on the front lines treating them. We need to have them in our thoughts and deeds.”

Chakrabarti: “The spread of coronavirus in the U.S. has apparently induced hoarding of several items, including bottled water, bread, milk, toilet paper, soap, hand sanitizers, and cleaning supplies. While a compassionate citizen is expected to refrain from indulging in such practice, retailers can better manage their inventories by imposing a ‘no return’ policy, in addition to a strict enforcement of rationing, on purchases made during the national emergency. Above all, those serving tirelessly (from the custodian to the physician) to prevent the pandemic from causing further damage will remain in everyone’s thoughts beyond the boundaries of economic reasoning.”

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Andrew Weiland
Andrew Weiland is the editor of BizTimes Milwaukee. He joined BizTimes in 2003, serving as managing editor and real estate reporter for 11 years. A University of Wisconsin-Madison graduate, Weiland is a lifelong resident of the state. He lives in Muskego with his wife, Seng, and son, Zachary. He is an avid sports fan and enjoys coaching his son’s youth baseball and basketball teams.