Coronavirus Crises: Everything to Fear from Fear Itself

The coronavirus has spawned crises on three fronts—medical, financial, and economic—and the tide in each turns at different times. The stock market has rebounded from its March 23 bottom, two weeks after Treasury bond yields began to rise from their all-time low. COVID-19 death rates passed their peak in the United States and most other countries by the beginning of May. Now the economic fallout has begun.

Beyond the human carnage inflicted by the virus, in all three cases fear has proven to be a greater enemy still. It’s what motivates investors to sell shares at exactly the worst time, and it’s the main reason for a drying-up of liquidity. The importance of fear lies in the extreme actions and beliefs that follow from its victims’ inability to think clearly. Distortions abound not only in the behavior of the general public but, as we all know, also in the decisions of government officials.

Those in charge of major areas of policy urgently seek to avert a breakdown on their own turf. And when forecasters warn of a deep and lasting economic slump, they not only express their own fear; they spread it. Those human reactions follow despite the lack of any historical evidence that pandemics lead to recessions—not even in 1918, when tens of millions died. 

The burdens of mandatory shutdowns fall mainly on service businesses where the virus can spread quickly: restaurants and bars, travel, public entertainment, and—ironically—health care. But these industries and their supply chains are only a fraction of the economy. There have been shutdowns in manufacturing as well, but the lost output can be recouped by boosting production after the infection threat passes.

Relative to biological vulnerability, which is still subject to profound uncertainties, the U.S. economy is a known quantity with a long history of resilience. Experience shows that capitalist free-market economies bounce back. Countries will succumb and recover according to diverse schedules; the slowest recoveries are to be expected in economies where markets are least free.

The public-health community is not immune to fear; its beliefs and actions can be distorted as well. Its workforce is on the front line. Worrying that the hospital system might be unable to cope, its leaders have pressed for social distancing and a general economic shutdown to “flatten the curve.” That became the policy nearly everywhere, despite the admission by epidemiologists all along that the speed of spread and virulence of this novel infection were completely unknown.

Not only is public-health science not “settled,” vigorous debate is underway. At one end of the opinion spectrum death rates are high and social distancing is the only way to go. At the other the virus spreads fast enough to be ubiquitous already; only herd immunity will end the scourge. (In this case the good news is that death rates are proportionately low.) As in other professional fields, one doctrine is in the ascendancy at any given time—in this case, it’s the pessimistic one.

Worst-case scenarios have dominated the public consciousness, opposing views receiving little attention. This helps explain why the closing down of personal and economic freedoms has until now received broad public support. New research from Oxford, Stanford, and University College London, pointing back toward herd-immunity policies, is arriving too late.

Unbalanced reporting has reinforced the impression of a single expert view that doesn’t exist. Bad news crowds out good news. It’s no secret that fearful commentary and its politicization help boost the audiences and revenues of the news media. (“If it bleeds, it leads.”) As a result, skepticism is frowned on and voices of calm are muted. With thousands of pundits voicing their own feelings and fears, it’s a picture of catastrophe.

Fear wins out in economic policy too. Exaggeration of the threat has forced both parties into giant “stimulus” actions that do nothing to lift the constraints of the shutdowns. The calculations of forecasters and public officials are essentially political: designed to be seen as “doing something,” however ineffectual.

In crisis mode they ignore the forces that drive a free-market economy to find its own full-employment equilibrium. Calls for extraordinary monetary and fiscal actions stem from Depression-era thinking, according to which economic vitality is fragile, driven by the population’s propensity to spend. Devotees teach circular reasoning: a mechanism in which the virus causes an income cut, which in turn causes a spending cut, followed by further income cuts … and so on. Accordingly, only massive government spending can transform this vicious cycle into a virtuous cycle. 

If instead it is capital that drives economic vitality, then the pivotal question in any natural disaster should be, How much capital will be destroyed? In a pandemic, no physical capital is in danger. Nor in this particular pandemic is the economy’s effective human capital vulnerable. All COVID-19 casualties are valuable human beings, but most are among population groups who are not in the labor force: the aged, the infirm, and the sick. When the economy is freed up, our capital will still be there, along with the incentive to put it to good use.

The crisis will teach many lessons. One could be an uncomfortable paradox. We have been taught to mock the “madness of crowds” while respecting the superior judgment of specialists and technocrats. But what if their fearfulness is part of the problem?