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Epidemics and Economic Policy

A far-reaching global crisis demands a comprehensive global response. A multilateral organization such as the World Bank or the International Monetary Fund should urgently establish a task force comprising, say, 20 economists with diverse specialties, as well as experts in health and geopolitics.

NEW YORK – The number of daily new cases of the COVID-19 coronavirus is finally declining in China. But the number is increasing in the rest of the world, from South Korea to Iran to Italy. However the epidemic unfolds – even if it is soon brought under control globally – it is likely to do much more economic damage than policymakers seem to realize.

In the wake of the 2008 global financial crisis, central banks led the response. As the COVID-19 outbreak disrupts value chains and raises fears among investors, some seem to think that they can do so again. Already, the US Federal Reserve has cut interest rates by half a percentage point – its largest single cut in over a decade. But the Fed’s move, without other supporting policies, seemed only to confuse markets further; just minutes after the cut, their downward slide continued.

Such stock-market gyrations say little about the actual state of the economy – that is, the world of goods and services. Rather, they reflect beliefs: not just what you and I believe, but what you and I believe about what you and I believe. In this sense, stock-market losses often become anxiety-fueled self-fulfilling prophecies.