Paul Krugman appeared on CNN's New Day to talk about the potential effects of coronavirus on the U.S. economy.
"What do you think the economic impact or how much of an economic impact do you think the coronavirus will have?" John Berman asked.
"Okay. We're still waiting to get a sense of epidemiology, just how bad is this. People have gamed out pandemic scenarios. They are ugly. They may be especially ugly right now, because I've been saying for a while I don't know what the next bump in the road is but I know the shock absorbers are shot. We have no room to cut interest rates, Europeans have no room to cut interest rates, the normal policy offset to a shock isn't there. I have to say, this is a way bigger shock than anything I saw coming down the pike," Krugman said.
Berman asked what he means by saying we don't have as many tools in the toolbox as we did in 2008.
"In 2008, we had interest rates that were on the order of 5%. That meant you could do the standard -- in a standard recession, the Fed cut interest rates by 5 percentage points," Krugman said.
"It turns out 2008 was a lot worse than the standard recession, so even that wasn't enough to stop a severe slump. Now we start with interest rates at 1.5%. We've only 30% of the room to cut we have in the face of a ordinary garden variety recession, and this could be worse than the garden variety recession. Europe has got negative interest rates which we didn't think was possible. They can't go lower than they are now. So this is -- that's the first line of defense. That's the thing you do when the economy stumbles is the central banks, Fed, ECB, cut rates. They've got no room to cut."
"What are you looking for here? When do you know, will you think, whether this is a blip or inconvenient, or something that will be a long-term lasting crisis?" Berman said.
"If we start to see -- watch the spread of cases. The problem right now is that we're heading very incomplete testing and data collection. We don't really know. A lot of what we see in the increase in cases is just better testing. We want to see if this thing is peaking. We want to see if the U.S. starts to look like South Korea, where the economy is largely in lockdown already. If that's happening, it's really bad. If it starts to fade out, then maybe it's a one or two quarter blip," Krugman said.
"But I have to say, I'm extremely nervous about the economics."
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