Economic Fear Factor : Planet Money : The Indicator from Planet Money The global economy is being hammered this week - markets have tanked, businesses are closing down. The spreading virus is part of it, but most of the effect is coming from fear.

Economic Fear Factor

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OK, so a package has arrived. And I think I know what it is. I'm very excited, although slightly ashamed of being excited. Here we go.

So, Cardiff, you know, I do not consider myself to be a reactionary person. You know, I like to think of myself as skeptical, analytical, a rational person who makes considered decisions, does not follow the herd.


OK. I'm with you so far.

SMITH: It's a mask. It filters out pollen and dust. And it's black, and it goes around my ears. Oh, there are two of them. Oh, I thought I ordered more.

Facemasks, Cardiff. I ordered facemasks...

GARCIA: You ordered facemasks, OK. You're preparing.

SMITH: ...Which apparently don't do much of anything to protect you from coronavirus. And these masks, these were not, like, the good masks that do stuff. I could not actually find any good ones. They actually had the label fashion masks on them. They didn't say anything about a filter. I doubt they'll protect me from anything.

GARCIA: So did you buy them to give yourself a sense that you were doing something? Was that the rationale for getting them?

SMITH: Well, I bought them at 1 o'clock in the morning after reading a bunch of terrifying articles about coronavirus. And guess what I paid for two cotton masks - two cotton fashion masks.

GARCIA: Impulse buy two cotton masks, they're all going heavily. I'm going to guess you overpaid by quite a bit. I don't know what the precise price would be, but I don't know, like...

SMITH: Seventy dollars.

GARCIA: Oh, my God.

SMITH: I paid $70 (laughter).

GARCIA: You paid $70 for a pair of useless fashion accessories basically?

SMITH: Yes. Yes, I did (laughter).

GARCIA: (Laughter) OK.

SMITH: I mean, the reason I bought the masks was fear. I was scared, and there has been a lot of that going around lately. The markets have been on this wild ride all week. Stocks dropped 10%, then went back up 9%.

GARCIA: Yeah. And, I mean, it wasn't just the markets that were volatile. President Trump put in place a travel ban from most countries in Europe this week. The NCAA basketball tournament was cancelled. The NBA season itself has been suspended. Plus a lot of universities have shut down their campuses. It's just huge parts of the economy that have been shut down. It's been scary. It's been shocking. I think to a lot of people, it's been totally unexpected, but not unexpected to economist Olga Jonas, who's been studying pandemics for more than a decade.

OLGA JONAS: I think it helps to have studied it because I'm not surprised.


JONAS: No. And so that's kind of nice (laughter).

SMITH: Yeah.

JONAS: I mean, it's not nice because the whole thing is going downhill, but this is all very much as anticipated, what is happening so far.

GARCIA: Olga Jonas is a senior fellow at the Harvard Global Health Institute. And before she worked there, she worked at the World Bank for more than 30 years. She specialized in pandemics. She says yes, this is what happens to an economy during an outbreak like this.


SMITH: And I'm Stacey Vanek Smith. Today on the show, fear and the economy. We talked to Olga Jonas about the economic effects of a pandemic, what's going on right now and why Olga actually thinks we should be hopeful.

Pandemics are not typical terrain for an economist. Economists like data and models, models where you can take the data from the past and use it to predict what's going to happen in the future. But, Olga says, you can't really do that with pandemics.

JONAS: You know, you cannot model outbreaks. Every outbreak is peculiar in some way (laughter).

SMITH: Yeah.

JONAS: All right? And so it's very unpredictable.

GARCIA: Very unpredictable. That unpredictability itself is what causes one of the big economic impacts of a pandemic. The markets freak out. They do not like uncertainty.

JONAS: You know, the market plummets, overreacts, plummets again.

GARCIA: And that has started happening in a big way. Not only are people selling off their stocks, they're also selling off other things, like bonds, even gold, everything. Investors just don't know where the safe ground is right now, so they're scrambling.

SMITH: And there's the local reactions to uncertainty. It's really hard to get tested right now. There's a lot of uncertainty about how fast coronavirus is spreading, what the symptoms are, what puts you at risk, how contagious it actually is, how deadly it is, what you should avoid.

GARCIA: And that lack of information and reliable data scares people. Olga says, when people get scared, they start to act in ways to protect themselves. And that is where the economic impact of a pandemic really begins.

SMITH: People panicking and...

JONAS: Not panicking, not panicking. Avert - you know, like deciding not to travel, deciding not to go to restaurants. It's called aversion behaviors. Basically I think people don't know how much they, you know, should be protective of their health.

SMITH: Yeah.

JONAS: Then they are more conservative, so they overestimate the risk to themselves, right?

SMITH: Yeah.

JONAS: Because of the uncertainty, not because of the objective risk out there.

SMITH: Aversion behavior - Olga says this reaction from people and institutions is actually logical. When you don't have much information, you take maximum precautions. You shut down a university, or you cancel a concert. You stay home for a couple of weeks.

GARCIA: Yeah. A World Bank study of the 2003 SARS epidemic found that just about 20% of the economic impact of that pandemic came from the actual pandemic itself, from the actual virus.

JONAS: That means ill people, right? So ill people...

SMITH: Yeah, and the health care - like the health care system...

JONAS: Health care...

SMITH: ...The cost of treating people...

JONAS: Right. And...

SMITH: ...And kits and things like that, too.

JONAS: Everything. All the medical stuff. So this is like, you know, people being at home for two weeks...

SMITH: Oh. That, too?

JONAS: ...And the lost wages due to that, right?

SMITH: Around 80% of the economic impact from SARS came from aversion behavior, basically from fear. And that is today's Planet Money indicator - 80% percent of the economic impact of SARS came from people trying to avoid getting sick, not from people actually being ill.

GARCIA: Olga says that in this way, pandemics typically have more of an economic impact than a health impact. But that, says Olga, is actually good news.

JONAS: You know, people are very rational, and they don't panic.

SMITH: Well, I don't know what things are like in Cambridge. But (laughter)...

JONAS: No, they're fine.

SMITH: ...People are sometimes rational. I...

JONAS: No, but people react to the information they have.

SMITH: That's true, yes.

GARCIA: People react to the information they have.

SMITH: Olga says this is where the silver lining is. There is a cure for this craziness - information. Olga says once people have easy access to tests, once there's more reliable information about what is and isn't safe, how many people have the virus, Olga says people will take the precautions they need to take. They won't overreact. They'll make rational decisions. The markets and the economy will settle down.

JONAS: And they will do the right thing, right?

SMITH: I think so, too, yeah.

JONAS: And that's where the hope is because we are intelligent people.

GARCIA: But until there is reliable information, until we get a handle on coronavirus, until people feel like they can get tested if they're worried and they understand more about the virus and how widespread it is, they will continue to take maximum precautions. And that can cause a lot of economic damage because that is the safest, most logical thing to do in a situation where there are so many unknowns.

SMITH: Yes. They will continue to cancel trips, avoid restaurants, shut down schools and spend money on useless products at 1 o'clock in the morning.

GARCIA: You know, I have a feeling that you weren't, like, alone in that, right? Like, that's why these things are so expensive.

SMITH: Listen; I just spent, like, $70 on facemasks, which I know is ridiculous, but I just did it because I didn't know - it made me feel better in the moment.

JONAS: You know, people want to do something...

SMITH: Yeah.

JONAS: ...Just because it's so frightening.

SMITH: Yeah.

JONAS: You don't know what's coming. And, you know, I would buy chocolate myself.

SMITH: Oh, really? That's your official recommendation? Well, you are an expert, so I'm going to go...

JONAS: No (laughter).

SMITH: ...Buy some chocolate.

JONAS: Well, instead of a mask.

SMITH: An economist sent me (laughter).

JONAS: (Laughter) I would buy chocolate instead of the mask.

SMITH: Yeah, (unintelligible). I'd be so happy. It would probably make me more relaxed, help my immune system and make me less likely to contract coronavirus - probably more effective than a mask, really.

JONAS: I don't know, but chocolate is supposedly beneficial.

GARCIA: This episode was produced by Leena Sanzgiri and fact-checked by Brittany Cronin. Our editor is Paddy Hirsch, and THE INDICATOR is a production of NPR.


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