Keeping up on current events right now means understanding the language of business. It’s likely you’ll see or hear the following terms, used regularly during the COVID-19 crisis, in the days and weeks ahead. Can you use them all in a coherent sentence? Dazzle us in the comment section of this article, and we’ll pick a winner!
Bailout. When people, economies and companies are in financial trouble, they need to be bailed out. The current coronavirus bailout involves all three. Congress is working out a bailout plan that would potentially send money to help struggling Americans, many of whom can’t work due to business closures. And when they can’t work and earn money, they can’t spend money either, which impacts the economy. This is especially important in the U.S., which is a consumer-driven economy. The bailout is meant to help strengthen an ever-weakening economy as the crisis persists. And then there are the businesses, most of which can’t operate. The hotel industry alone has requested a $150 million bailout — and that’s just one of many. During the financial crisis of 2008-2009, the U.S. government passed a bailout plan to rescue the U.S. automobile industry with $14 billion in emergency loans to General Motors and Chrysler. Wharton management professor John Paul MacDuffie said that bailout decision made sense to, in part, avoid a much deeper crisis. The question now? Which industries will receive bailout money as this latest and most unique crisis endures?
Black Swan. High-profile Silicon Valley venture capital firm Sequoia Capital released a memo on March 5 declaring that “Coronavirus is the black swan of 2020.” A black swan is an unpredictable event that is extremely rare and potentially has a very severe impact. In financial terms, a black swan can result in drastic moves in the stock market. Nassim Taleb, a hedge fund manager who wrote the book The Black Swan: The Impact of the Highly Improbable and is credited for coming up with the theory of black swan events, told Wharton finance professor Richard Herring (who taught Taleb while he was an MBA student at Wharton), the following: “Most people think that they can predict the black swan, that with quantitative sophistication they can get answers. They don’t get the idea that because we can’t predict black swans, then we need to restructure institutions and rethink strategies to be more robust in the face of uncertainty.”
Circuit Breaker. Just like a traditional circuit breaker stops the flow of a current in an electric circuit to avoid a dangerous situation, like fire, stock markets have circuit breakers, too. These are temporary fixes that halt trading as a way to curb panic-selling on the U.S. stock markets. In recent weeks, the markets have been in complete turmoil. Circuit breakers were triggered at the New York Stock Exchange on March 9 and March 16, as the Dow Jones Industrial Average fell more than 7% at the open of trading. In large part, the markets are collapsing because investors hate uncertainty, and the coronavirus pandemic has brought us so much of that. Eric K. Clemons, a Wharton professor of operations, information and decisions, recently wrote in an opinion piece for Knowledge@Wharton that markets are reacting to uncertainty rather than to expectations. “I believe that the markets have over-reacted and that they will recover,” he suggests. “If you are light in equities now or have available cash, it might be a reasonable time to invest. But you need to be patient, since recovery will not be immediate. Do not invest money you will need soon.” Adds Wharton management professor Mauro Guillen: “For most of us what really matters is the long-term performance of the stock market. It’s not these short-term gyrations.”
Economic Stimulus. The economy is in desperate need of encouragement right now. At the writing of this article, the Dow Jones Industrial Average was soaring by more than 1,700 points on hopes that U.S. lawmakers would pass a $2 trillion economic stimulus bill. Directly related to the bailout discussion, this bill would reportedly include $350 billion for small businesses (think about all those restaurants, retail stores and others that are struggling because they are seeing little-to-no action right now) and $240 billion in relief for health care. Unemployment insurance benefits included in the bill would give recipients 100% of their salary. The Penn Wharton Budget Model, which provides accurate and balanced economic analysis of the fiscal and economic impact of public policy, has been looking at the stimulus proposals. Diane Lim, senior advisor to the Penn Wharton Budget Model, said this week on the Wharton Business Daily show on SiriusXM: “This is really different than how we’ve had to think about stimulating the economy in the past, like in the Great Recession. This is not a normal recession, this is a health-crisis-driven recession rather than a lack-of-demand recession…A lot of economists are reminding people that the economy is not the first priority right now. We are very likely going to go into a recession, but it’s a recession that’s driven by the health crisis, not by a lack of demand or high unemployment. It’s this kind of perverse situation where we actually need to have an economic recession and impose an economic stop to get past the health crisis, so we can get back along with our economic lives. It’s this really weird thing we’ve never had to go through before. I’m hopeful that the recession we inevitably have to go through will be short-lived and very deep. And I’m hopeful that whatever policies that Congress and the administration come up with, they allow people to socially distance, but allow as much of our economy to keep functioning despite that.”
Emotional Contagion. Maybe you’ve heard about “Purell panic.” Nationwide, stores from Target to Costco to Kroger have seen shelves stripped bare of hand sanitizer, cleaning supplies, rubber gloves, toilet paper and anything else that shoppers think will help them prepare for possible quarantines against the coronavirus. Wharton management professor Sigal Barsade believes the widespread panic is a form of emotional contagion. Simply defined, emotional contagion is the transfer of moods and feelings from one person to another. It happens all the time on a micro-level and is usually harmless, like a baby smiling back at a smiling adult, or a yawn that ripples from one person in the room to another. But at the macro-level, emotional contagion can be dangerous because it can interfere with making sound, logical decisions. “I would argue that emotional contagion, unless we get a hold on it, is going to greatly amplify the damage caused by COVID-19,” said Barsade on an episode of the Wharton Business Daily show on SiriusXM. “Negative emotions, particularly fear and anxiety, cause us to become very rigid in our decision-making. We’re not creative. We’re not as analytical, so we actually make worse decisions.”
Global Market. The market in which goods and services of one country are traded – purchased or sold – to people of other countries is called the global market. Shifts in production and consumer behavior, new technological innovations and policy changes all affect the global market. And as we’ve seen, so too does a widespread pandemic. Wharton management professor Mauro Guillen, who studies international trade and globalization, underscores this week in Knowledge@Wharton that the coronavirus crisis is a true lesson in how much countries rely upon each other. He says, “We need to rethink the implications of this interconnectivity that we have in the world and see whether we have made our economy prone to disaster just because we have been emphasizing efficiency too much.”
Price Gouging. As shortages of certain items that we’re used to seeing on store shelves worsen (think hand sanitizer), prices of these products are going up for consumers. When demand is higher, prices go up, referred to as surge pricing or price gouging, which happens when a seller increases the prices of goods or services to a level much higher than is considered fair. Accusations of price gouging are common these days as some retailers look to profit from the coronavirus misfortune. Amazon reportedly kicked 3,900 sellers off its platform this week for unfair pricing of products like protective masks, noting in its company blog that, “We are constantly monitoring our stores for unfair prices and listings that make false claims in regards to COVID-19. We have dynamic, automated systems in place that locate and remove unfairly priced items. In addition, we have deployed a dedicated team that’s working continuously to identify and investigate unfairly priced products that are now in high demand, such as protective masks and hand sanitizer.” Visit our sister publication Knowledge@Wharton for an interesting look at price gouging in the pharmaceutical market for EpiPens.
Purchasing Managers’ Index. The business world looks to many indicators to understand how to make decisions, like foreign direct investment or industrial output. As business activity plunges around the world, so too has the all-important PMI or Purchasing Managers’ Index for several countries, including the U.S., the Eurozone, China and the U.K. The Purchasing Managers’ Index is an index or statistical measure of change that shows the direction of economic trends in the manufacturing and service sectors. It reflects information about current and future business conditions to help investors and company CEOs and other managers make key decisions. The index is falling due to the coronavirus crisis, with some of the worst readings ever on record. Decision-makers are taking note of this unsettling statistic as the threat of a recession looms. This Knowledge@Wharton story provides information into how economists use important indexes as measures of economic activity.
Supply Chain. The supply chain, as Wharton’s Barbara Kahn explains in our video glossary, is the network of entities that serves the same consumer or customer. Smartphones, for example, can make several stops on the supply chain (often crossing country borders) before they are fully assembled and end up in our favorite cell phone case. The global economy is what’s called “highly integrated,” with businesses in one country depending on vendors in others to get the raw materials and parts to produce and sell. The impact of the coronavirus pandemic on global supply chains is “a major disruption, along the lines of having an earthquake or a tsunami,” says Morris Cohen, Wharton professor of operations, information and decisions. “This is an unprecedented type of disruption. I don’t think we’ve ever seen anything quite like this.” The coronavirus pandemic has created what Wharton management professor Mauro Guillen calls a supply shock. “The global economy works on a just-in-time basis,” he adds. “So, if one company shuts down, that means that several other companies cannot operate because they need something that the other company is doing. This is happening on a planetary scale.” Right now, for many, the chain is broken.
- Penn Wharton Budget Model
- Podcast of Diane Lim on Wharton Business Daily
- More News about the PMI
- Coronavirus Updates on Wharton Business Daily on SiriusXM
- K@W: Pandemic Panic: Can Governments Protect Jobs and Markets?
What is the Penn Wharton Budget Model and why is it important right now? In addition to the article, use the related links in the side toolbar for help.
Did you see our challenge in the intro to this article? If not, go back and read the italicized intro and then write us your best sentence…we’ll be watching!
Have you experienced emotional contagion? Describe why you think you have and how it affected your behavior.