A trader works on the floor of the New York Stock Exchange shortly before the closing bell, March 17, 2020. (Lucas Jackson/Reuters)

What answers can free-market thinking offer in the face of COVID-19?

Russell Roberts is an economist and research fellow at the Hoover Institution. He hosts the popular economics podcast EconTalk. In his latest book, Gambling with Other People’s Money, Roberts argues that bank bailouts cause excessive risk-taking. He spoke with National Review‘s Daniel Tenreiro about the economic consequences of the coronavirus.


Daniel Tenreiro: What’s your initial reaction to this crisis?

Russ Roberts: We’re in uncharted territory here. There’s a real challenge in both underreacting and overreacting, because we don’t know what’s going to happen.

The best-case scenario is that we flatten the curve through social distancing and reducing gatherings through sports, schools, and so on, which we’re doing now. The rate of growth of new cases slows, the peak comes later rather than sooner, and the disruptions are small. That would be similar to South Korea. But they got to the best-case scenario through much more aggressive testing than we have been able to achieve, so it’s hard to know if that’s even feasible.

The worst-case scenario is something closer to Italy, where there is a rapid increase in cases and deaths. If that happens, there’s going to be a vivid response both from the government and the private sector. Businesses are going to furlough or lay off workers, either because they’re sick or because workers can’t be near other people.



Within that worst-case scenario, there are two scopes of harm. In the first case, a bunch of industries basically shut down — sports, travel, entertainment, restaurants. That’s going to have a horrible ripple effect on the economy. I spoke to someone who owns real estate — apartment buildings, offices — if the people who live in his apartment can’t pay their rent because they don’t have a job, he is not going to be able to pay his mortgage. We’re going to get something akin to what we had in 2008, which is a nasty downward spiral of economic activity.

What we want to avoid — if possible — is ripple effects in production of goods. A slowdown in services is going to be horrific, but it’s not as bad as warehouses not getting restocked. If it gets to the point where shelves are empty because the warehouse that stocks the toilet paper doesn’t have workers, then we’re at risk of a major economic disruption. I don’t even want to think about it. It could be really ugly.


DT: And it doesn’t help that we don’t have testing capacity.


RR: The testing is a major failure because, for one thing, we don’t know how many people have it right now. We have no idea. Secondly, we don’t have an effective way to encourage or enforce isolation for people who test positive. What we want is drive-through testing, ideally, for people who have symptoms.

DT: Is there any economic response to this that makes sense?

RR: It would be a bad thing for the banks to go broke. That would not be good for the economy. There will be tremendous pressure both private and public for bailouts — private meaning bankers will try to argue why it’s necessary. I think there’s a chance we’ll have another round of bailouts.


DT: What about on the consumer side?

RR: The Keynesians — and I’m not one — are arguing for some kind of “stimulus” — paid sick leave, payroll-tax cuts, or a check to every American. Those may be justifiable under certain situations for hardship, just to mitigate pain, but I don’t think we should be under any illusion that this is going to “stimulate” the economy through some Keynesian multiplier. If people aren’t producing things, it’s not going to help that people want to buy more. That increase in so-called aggregate demand is going to be irrelevant. It’ll flow into Netflix, it’ll flow into things that don’t create jobs.

The main thing to look at is employment, not unemployment. How many Americans are earning a paycheck? Many service providers can work from home. Many cannot. The ones who cannot, who don’t keep their job because of the worries about the virus, they’re not going to be producing anything. So the so-called stimulus is likely to flow into areas that are fairly healthy. Netflix is going to be fine. My podcast is going to keep on going. For people who can’t telecommute, all the stimulus spending in the world isn’t going to help. If we run out of toilet paper, having more money in your pocket is not going to help you get toilet paper, it’s going to bid up the price of the existing toilet paper.

DT: In light of that, is it possible that some sort of paid-leave program could effectively trigger a supply shock?

RR: Yes, that’s the problem. A person who is sick through no fault of his own should get relief. We want people to be extra careful. But if we tell people that, if they get sick, we’ll pay for it, that’s the wrong direction. And what’s the definition of “sick”? Are we going to require a test? Think about an extreme case: If you said, “Okay, the way to stop this virus is just to pay everybody to stay home.” How long do you do that for? Because every day you do it, basic goods are not produced.

DT: Let’s say we have a credit crunch for airlines, shale-oil producers, and so on. I took a cursory glance at historical bailouts, and it looks as though almost every single one, other than the 9/11 airline bailout, has addressed a problem endogenous to the firms in question. Arguably, that’s not the case here. So does your model for bailouts apply to this case?


RR: It’s a different case than usual. The usual issue you worry about with a bailout is “moral hazard,” which is a particularly bad piece of economic jargon. What economists mean by that is that if you reward people for bad behavior, you get more bad behavior. The bailouts of the banks over the last 30 to 40 years, which took place periodically, have encouraged banks to be increasingly less prudent and cautious. I argue in my book Gambling with Other People’s Money that all we do when we bail banks out is we make the next bailout worse.

In the case of banks, that remains a problem, because banks should theoretically have some kind of extra cushion for worst-case scenarios that cannot be anticipated. Even though in this case the banks didn’t lend recklessly, you could argue that every bank should have some bigger cushion than they otherwise might think is necessary to avoid this kind of ruin. So there’s a cost there. But that ship sailed long ago. No bank in America or in any developed country right now is sufficiently capitalized for a shock of this magnitude.

And then the issue is, where do you draw the line? Everybody who owes money — airlines, indebted students, restaurants — can make a similar case for assistance. Do we have enough money to avoid this downward spiral? That’s going to be a tough political and social challenge when we’re already running a very large budget deficit at the federal level. The irresponsibility of Congress and the president over the last seven or eight years means that we don’t have a lot of wiggle room.

DT: But it’s all tied to the big balance-sheet banks, right? So, theoretically, if you just very quickly capitalize the banks, then you can kill innumerable birds with one stone.

RR: No, I don’t think so. It’s not just that the airline business has debt for planes they haven’t paid off yet. They’re going to have to lay off workers. So the fact that the banks can be made whole isn’t enough to solve the problem. There are just too many pieces to this — restaurants, all the entertainment and travel businesses, Las Vegas casinos. All travel is going to dry up. I’m invited to a wedding in two weeks. Are they going to hold it? The caterers, the flowers, the band — none of those payments will get made.

DT: But you don’t want to have an economy where every business is permanently planning for a global collapse, right?

RR: Right. Some tail risks are so large that it’s not feasible for firms to be prepared. There’s no easy way to handle it. But a president who is months away from a reelection campaign is going to be very generous with other people’s money. And unfortunately, a lot of that is going to be political. The beneficiaries will be those with the largest megaphones and the most access. And up until now, we’ve always treated living beyond our means as just a can to kick down the road. But if people don’t want to buy our bonds anymore? To say there’s a lot of uncertainty here is a massive understatement.

DT: I guess we’ll be testing the deficits-don’t-matter hypothesis.


RR: Right, we’ll be testing the modern monetary-theory claim that because we can print money we don’t have to worry about going into debt. I think that’s foolish, but we’ll find out.