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The Economic Impact: It’s matter of riding it out, but big question is how long?

Dr. Greg Wright
Dr. Greg Wright

Dr. Greg Wright, an assistant professor in UC Merced’s Economics program, who earned both a Master’s degree and a Ph.D in Economics from UC Davis, shared with the Times his perspective on the coronavirus’ impact on the economy.

“The goal with the coronavirus is to handle it like South Korea has,” he told the Times. “South Korea tested tens of thousands of people and when they found coronavirus, they tested whoever they were in contact with.

“The United States was not set up to do that. For the United States, testing is too late. Over the next eight or nine months, 40 percent to 70 percent of the population could get the virus and the economy is in a standstill for that time, and that’s bad.

“The government is shutting down non-essential businesses and ordering people to shelter in place to give people incentives not to expose others. It’s more about thinking of others.

“How serious is this virus? The answer will tell us how deep the recession will be.

“The threat is how big is the recession going to be. At this point, all economists feel we’re in a recession right now or we’re going to be in a recession. In the next quarter, we’ll probably see a 5 percent to 10 percent decrease in the GDP.

“The stock market is trying to price in the decline in profits of a lot of these big companies — airlines, restaurants, the entertainment industry. That’s a really big part of the economy, and it’s going to take a big hit. In the short run, nothing can be done.

“It’s kind of a unique recession because it’s a demand side recession. This isn’t about something going on with global trade or business sentiment; it’s purely that people are staying home, and there’s nothing we can do about it.

“If it is serious, people will get laid off, and businesses will go out of business. That will create a cyclical downturn because the economy, whether good or bad, is a cycle with consumer demand and companies meeting the demand. It can cycle good or bad.

“When it cycles bad, wages start falling, people are out of work, leading to declining demand, then companies, like businesses that supply vacations, are hurting, and they put people out of jobs.

“That is the rationale for the stimulus right now — we can’t let people be out of work, not consuming, and not having any income.

“The stimulus is going to have a component of sending direct payments to Americans immediately, and what they’re trying to do is keep demand up so companies can hang on, not lay off workers, and not go out of business.

“The details are coming out, as we’re speaking. There also might be some bail outs. The airline and the cruise industries are going bankrupt in about a month if we don’t do something.

“For investors, most of the gains in the last four years have been wiped out in the last few days, but if the market feels that they’re getting the scale of the response they need from the government, it probably will recover.

“It’s a matter of riding it out, but the question is how long are we going to be riding it out.

“How many people are being put out of work and how many have died are two of the big questions.

“The worst case scenario is people lose their jobs, small businesses go out of business, and we end up with an economy that’s in bad shape.

“The situation is up in the air. Everyone is looking for signs that this isn’t that bad, but it seems like it might be bad.

“How many people over 65 are in the workforce? 20 percent of people 65 and over are in the workforce. These are people who are supposed to be self quarantining. A lot of them are teachers, and about 10 percent were in retail.

“The rest are professionals, like lawyers and scientists and accountants. Those people can probably stay at home. But a big chunk of the older folks are working with people in a public-facing job, and that’s a problem for the workforce.

“The stock market investors are thinking, ‘What is the government going to do to ease that shock?’

“As we speak, it looks like there’s going to be a large stimulus. We sell bonds, and the national debt increases.  But the idea is that that’s cheap because it saves trillions on the other side.

“Part of the package is extended unemployment benefits and the initial application period is waived, and there’s some additional unemployment benefits.

“U. S. debt to GDP is the way people measure how indebted a country is.  We’re at around100%.  It was 75 percent and then we had the tax cut bill passed a couple years ago with a trillion dollars in tax breaks, and that brought us up to 100 percent.

“My guess is there is gong to be other stimulus relief after this. The Federal Reserve is intervening.  Interest rates are now 0. That’s good for firms.

“They’re purchasing commercial paper, which is short run debt that big companies sell just to finance short term investments or get them through short periods of time. Those markets are the first to go when people stop buying, so the Fed is purchasing some of that debt itself to keep that market liquid and keep big firms operating.

“We’ve been due for a correction for awhile. I don’t know if this is it. It’s definitely a temporary correction. It usually bounces back up because people look at the situation as an opportunity to buy stocks cheap.

“If you ask the average person why the stock market is falling, most people will have a different idea. It has to do with how liquid the markets are, how people feel about the coronavirus and how they feel about the government’s response.

“This will probably be a lesson to everybody about being careful to diversify. The market has been going up, up, up, so no matter what you’ve been doing for the last 10 years it has worked out well.  This gives people a feeling that they’re able to succeed on their own in the stock market.

“Put your Mutual Fund money in the Index funds because the fees are really low and because they track the stock market. The idea is that you and I are not going to do a good job of picking stocks, so just find something that tracks the overall market like an Index fund.”

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