A quick perusal of my postings tagged ‘Economics‘ over the last year or so is a worthy study in reality for anybody who is concerned about our economy. Concern is, unfortunately, well-founded now—a fact reinforced by today’s news that our economy and unemployment has spiked very quickly up to 6.7 percent. The National Bureau of Economic Research declared on Monday that the U.S. economy has been in a recession since December of last year.
But today, individuals and businesses are reacting to all this bad news with short-sighted maneuvers that are counterproductive and will accelerate, deepen, and lengthen this recession. By taking actions based on hysterics instead of reality, we are making things worse. Anybody who has studied economics with any seriousness can tell you the number one impact on the economy is the peoples’ general perception of the economy. Some might say it’s consumer spending, employment levels, government action, and so on but in the grand scheme of things all these have their roots in perception.
Consumers who perceive the economy is doing poorly will tighten their belts and spend less (out of fear that they might lose their jobs), then reduced consumer spending leads to less profit for business, then businesses lay people off and the economy really does tank. Or businesses perceive the economy is doing poorly and preemptively lay people off (out of fear that their profits will drop), which increases unemployment, which reduces consumer spending and the economy really does tank. Or the government perceives the economy is doing poorly and preemptively intervenes with much fanfare and blather, which convinces consumers and businesses that things must be really bad, which leads to both reduced consumer spending and preemptive layoffs and the economy really does tank. Or consumers, businesses, and the government all do all of these things all at once and send us into a self-induced negative spiral . . . which is what we’re seeing today.
We are in a recession; that is unavoidable. But this recession could have been short and relatively minor. Every time the government ham-handedly steps in to ‘fix’ things it is making them significantly worse. Every business that lays people off or cuts spending when it doesn’t really have to is contributing to this downturn. Every consumer that cuts back spending more than they really need to is contributing too. We cannot overreact on the basis of mindless hysteria, lest we become part of the problem instead of part of the solution. Cutting back is fine if you’re unemployed or if your business is in the red, but doing it without cause will do nothing except undermine our economy.
Some of the things we’re seeing are incredible. We have Henry Paulson, Secretary of the Treasury, lying to Congress to get himself empowered beyond his wildest dreams as the emperor of our economy, futzing around in the dark, nationalizing banks, building a culture of fear and hysteria both within and outside of the government, and watching the stock market plummet every time he or his boss, President George W. Bush (R), opens his mouth. We have the CEO’s of the long-dysfunctional U.S. auto manufacturers flying to D.C. in private jets to beg for billions of your tax dollars to build cars that people don’t want to buy and avoid a bankruptcy that is long overdue and much needed. We have businesses that are in the black, making profit and doing well, laying people off, canceling employee holiday parties, and cutting back on bonuses for no reason. We have consumers canceling vacations and scaling back on their holiday spending when they are still employed and doing just fine.
Let’s all just take a deep breath, shall we? Fear is what will turn this hiccup into a full-scale economic calamity, so stop buying into baseless fear. If you’re gainfully and stably employed, count your blessings and go about business as usual. If you are a corporate decision maker in a business in the black, don’t make any rash cutbacks or layoffs since you’ll need those people (and decent employee morale) when things inevitably bounce back. If you’re a government decision maker in elective, appointed, or career positions, don’t contribute to the hysteria by pursuing ill-advised interventionist policy.
And if you are unemployed, or your business is in the red, be patient. Things will bounce back. The only question is how soon the bounce-back will occur, and the answer depends entirely on whether our decisions are driven by rational thinking or mindless hysteria.