Monday, March 2, 2020

Consequences of losing credibility in a crisis

Washington Post’s Catherine Rampell exposes the consequences of Trump’s dishonesty: With coronavirus, Trump’s lies and his reassurances backfire. Here is her column (with block quotes suppressed).

It mattered when the White House press secretary, in his first day on the job, lied about President Trump’s inaugural crowd size.

It mattered when Trump said that wind turbines cause cancer.

It mattered when he claimed that a half-dozen steel mills had reopened when they hadn’t. It mattered when he promised that his health-care plan (and his infrastructure plan and his wife’s immigration records) would be released in “two weeks,” and those weeks passed without such promises materializing.

Maybe that stuff seemed minor at the time. But the smallness of the lies was actually critical. People learned that if Trump can’t be trusted about little things, he definitely can’t be trusted about big things. Such as, say, a possible pandemic. Even if, miraculously, Trump and his underlings told only the truth from here on out — an about-face that seems unlikely — their record would still endanger public health and the economy.

University of Chicago economics professor Austan Goolsbee has a rule for this phenomenon called the “pathological irony of crisis”: If you lose credibility, your statements begin to mean the opposite of what you say. In other words: Entreaties to “remain calm” instead get interpreted as reasons to panic, even when calm might be justified.

As coronavirus spreads, Americans worried about health risks now increasingly have economic concerns, too. Stock markets just achieved their fastest correction in history, with the S&P 500 dropping a whopping 4.4 percent on Thursday alone. A major outbreak in the United States could hurt economic growth if businesses shutter and workers are quarantined. Even if a lot of people don’t become sick in the United States, the epidemic could cause serious pain — through a few channels.

Some are relatively obvious, including supply-chain disruptions that would make it hard for manufacturers to get parts they need from abroad. Idled factories would reduce demand for U.S. energy. Travel restrictions would jeopardize the tourism industry. And so on.

Some potential economic harms are less intuitive. In particular: a blow to public confidence.

Companies might cancel orders or workers’ shifts to be cautious because they fear others may do so. Or government officials might prove themselves so incompetent and unreliable that everyone assumes the worst and preemptively hunkers down.

Trump clearly understands that government messaging can move markets; he blames the Centers for Disease Control and Prevention for issuing warnings that may have unnerved traders. At his news conference Wednesday, he also scolded Democrats for allegedly “trying to create a panic.” Trump seems not to realize that saying everything is fine when no one trusts you to assess the situation honestly can cause people to freak out, too.

That’s why it was profoundly unhelpful for Trump to tweet, shortly after the U.S. markets closed down more than 3 percent on Monday, that stock markets looked “very good.” (Markets fell a further 3 percent the next day.)

Or when he seemed to say that a coronavirus vaccine was “very close” — despite scientists’ estimates that a vaccine is at least 12 to 18 months away. (The White House later said that Trump was referring to a “very close” vaccine for Ebola. One of those already exists.)

Or when his economic adviser Larry Kudlow urged investors to consider “buying the dip” in the stock market, a plea that reeked of desperation. Or when Kudlow declared that there were no supply-chain disruptions despite front-page headlines that Apple, among other major companies, had already announced supply-chain disruptions.

In this context, it’s clear how Trump-delivered reassurances might backfire — and already have. While Trump spoke Wednesday from the White House, telling Americans that the government has things under control, stock futures fell. Ordering government scientists to clear comments with Vice President Pence’s office, as has been reported, threatens to dilute the value of any soothing words such experts might offer, too.

There is a corollary to the Goolsbee rule on crisis and credibility. It’s one that Goolsbee told me he learned from the late, great former Federal Reserve chair Paul Volcker during the financial crisis a decade ago, when Goolsbee was advising President Barack Obama. Volcker said that the only asset you have in a crisis is your credibility. Hence this other rule of thumb: All normal, non-crisis time should be spent establishing the credibility you’ll need when a crisis inevitably hits.

Would that the Trump administration had done so, instead of fibbing about crowd size and so much else that followed.

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