How Soon We Forget

Today, unemployment has increased from 5% to 5.5%–still very close to full employment–but that is not the way it is usually characterized. It is important to recognize that our economy is subject to a natural cycle. At times it expands and at other times it contracts, as natural as breathing in and out. The purpose of fiscal and monetary policy is to flatten the cycle as much as possible, limiting expansion to head off inflation and reducing contraction to avoid a recession. Psychology also plays an important role, especially as it affects consumers, who are the principal driving force in the economy!

FDR understood this when he uttered his famous line, “We have nothing to fear but fear itself.” Encouraging words to hear in the midst of the Great Depression. President Eisenhower, when faced with a downturn in the economy also came on the air urging consumers not to curtail spending. Consumers responded and the economy rebounded.

A recent event illustrates, I believe, how psychology can play an important role in consumer behavior and its effect on the economy. The Wall Street Journal recently reported that an important senator leaked negative information about a major bank. The result was a run on the bank by depositors forcing a government takeover, which it is estimated will cost the taxpayers between $4 billion and $8 billion. The Office of Thrift Supervision credited the “run” on the bank with its collapse. Upsetting consumers or depositors with overkill is dangerous business and responsible parties should know better.

Ruben Navarrette, columnist and editorial board member for the San Diego Union-Tribune, in a July 16 column defends Phil Gramm’s remarks as a message we need to heed. He agrees that much of our economic gloom is “self-inflicted” and that we are not in a recession as some allege. I am not as convinced that the gloom is self-inflicted as I am that it is deliberately inflicted by people pursuing a political agenda in pursuit of power.

Nothing that I have written in the foregoing should suggest that while the nation may not be in recession, individuals may indeed be experiencing recession or even depression. To people who have lost their job or are facing foreclosure on their home, depression is real. What they need is help–not more bad-mouthing that only exacerbates the gloom and makes it harder to recover.

Individual problems are important but should not be viewed in the same context as of those of a nation. Or as Joe Louis put it after losing most of the money he made as a boxing great, “I went bust in the boom.”