American Consequences - April 2020

To see this, consider that the stock market in the United States did not crater when, in September-October 1918, the news media first started covering the Spanish flu pandemic that eventually claimed 675,000 U.S. lives (and over 50 million worldwide). Instead, monthly prices in the U.S. market were on an uptrend from September 1918 to July 1919. Why didn’t the market crash? One likely explanation is that World War I, which was approaching its end after the last major battle, the Second Battle of the Marne, in July- August 1918, crowded out the influenza story, especially after the armistice in November of that year. The war story was likely more contagious than the flu story. Another reason is that epidemiology was only in its infancy then. Outbreaks were not as forecastable, and the public did not fully believe experts’ advice, with people’s adherence to social-distancing measures “sloppy.” Moreover, it was generally believed that economic crises were banking crises, and there was no banking crisis in the U.S., where the Federal Reserve System, established just a few years earlier, in 1913, was widely heralded as eliminating that risk. But perhaps the most important reason the financial narrative was muted during the 1918 influenza epidemic is that far fewer people owned stocks a century ago, and saving for retirement was not the concern it is today, in part because people didn’t live as long and more routinely depended on family if they did. This time, of course, is different. We see buyers’ panics at local grocery stores, in

Instead of a tragic world war, this time the U.S. is preoccupied with its own political polarization, and there are many angry narratives about the federal government’s mishandling of the crisis. contrast to 1918, when wartime shortages were regular occurrences. With the Great Recession just behind us, we certainly are well aware of the possibility of major drops in asset prices. Instead of a tragic world war, this time the U.S. is preoccupied with its own political polarization, and there are many angry narratives about the federal government’s mishandling of the crisis. Predicting the stock market at a time like this is hard. To do so well, we would have to predict the direct effects on the economy of the COVID-19 pandemic, as well as all the real and psychological effects of the pandemic of financial anxiety. The two are different, but inseparable. © Project Syndicate Robert J. Shiller , a 2013 Nobel laureate in economics, is Professor of Economics at Yale University and the co-creator of the Case-Shiller Index of U.S. house prices. He is the author of Irrational Exuberance, Phishing for Phools: The Economics of Manipulation and Deception (with George Akerlof), and Narrative Economics: How Stories Go Viral and Drive Major Economic Events .

American Consequences

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