Why are markets so pessimistic?
At the moment, the primary problem is obviously the coronavirus epidemic, and its expected impact on business. Another problem is monetary policy, more particularly falling NGDP expectations for the medium to longer-term, when the immediate crisis is over.
The lack of leadership in Washington has not been the major problem, but there are signs that it is becoming increasingly important:
On Wednesday night the global pandemic met US nationalism. It will not take long to see which comes off best. As Donald Trump was speaking, the Dow futures market nosedived.
President Trump’s proposals are widely viewed as ineffective:
He suspended all travel from Europe for 30 days. For the first time since the second world war, direct US travel to the European continent will be closed off. He excluded the UK and Ireland from the ban despite the fact that Britain has almost half the number of US infections with less than a fifth of its population. Moreover, his action contradicted expert guidelines.
The WHO clearly advises against international travel bans because they stifle the flow of medicines and aid, and “may divert resources from other interventions”.
The problem is not the travel ban itself, which might or might not be justified; rather it is the sense of drift in Washington, where policymakers do not seem to be on top of the situation:
His most glaring omission was any plan to increase America’s capacity to test for infections. Epidemiologists say accurate testing is the single most effective method to counter the disease’s spread. It allows the authorities to isolate clusters, trace the movement of the virus and make critical decisions on where the biggest risks lie. That is what places such as Taiwan, Singapore and South Korea have done so effectively without resorting to the draconian measures taken in China.
One solution is to rely more on imports:
The shortage of US kits stems from federal bureaucratic delays. One simple fix would be to import them from Germany, which are WHO-approved.
I presume the shortage of test kits will eventually be addressed. But valuable time has been lost, as Trump issued one misleading statement after another:
1. Trump claimed the stock crash was caused by fear of Bernie Sanders.
2. Trump claimed the Democrats were overhyping the threat from the coronavirus.
3. Trump claimed the virus was contained, and that the problem was likely to go away in April.
4. Trump suggested that it was a good time to buy stocks, right before they crashed.
5. Trump suggested that we did far better than Europe because we were the first to have a travel ban with China, even though Italy adopted a travel ban on the very same day, and has done far worse than other European countries that delayed their travel bans.
6. Trump compared the virus to the seasonal flu in a misleading fashion.
Trump told his aides to try to hold down the number of reported cases. He appointed unqualified people to top positions in the medical establishment. He dismissed claims that a crisis was imminent and that the US needed a crash program to prepare. He appointed top aides who shielded him from health officials wishing to warn him about the dangers from the coronavirus. He doesn’t like to hear bad news:
“The boss has made it clear, he likes to see his people fight, and he wants the news to be good,” said one adviser to a senior health official involved in the coronavirus response. “This is the world he’s made.”
President swayed by flattery, personal appeals
Trump’s unpredictable demands and attention to public statements — and his own susceptibility to flattery — have created an administration where top officials feel constantly at siege, worried that the next presidential tweet will decide their professional future, and panicked that they need to regularly impress him.
And yet, all of these missteps had only a marginal impact on outcomes. Presidents simply are not that influential, and even if we had a different president we’d likely be facing a severe crisis today. The real problem is that the federal government has been exposed as “the emperor with no clothes.” They had no plan for dealing with a pandemic. You need the plan in place before the pandemic reaches our shores. You need the plan before the pandemic hits Wuhan. You need the plan in place even before Trump was elected. The countries in East Asia that were hit by SARS did have a plan in place, and thus far have done a better job of preventing the virus from “going exponential”. (Of course that’s no guarantee of future success.)
In the past, Trump supporters argued that the weaknesses in his leadership style didn’t matter as long as he appointed conservatives to the Supreme Court and cut taxes. Even if I am right that presidential leadership has only a marginal impact on outcomes, Trump’s various statements may come back to haunt him with voters, especially if the crisis gets far worse.