Maybe It's Time for the Next Crisis

The received wisdom on the New Deal -- the wisdom as I've received it, anyway -- is that Roosevelt's efforts helped some people a lot, but what really yanked the U.S. economy out of the Great Depression was the advent of World War II. So maybe that's the kind of solution we need now, or maybe that's what will ultimately end the current economic crisis. If that's possible, then it might make sense to try to select the crisis that will pull us out of the current economic funk. Another global war is a possibility, but is there something comparably extreme -- something that people can and would die for -- that might be capable of stimulating extraordinary commitments by large masses of individuals? No comparable candidates spring to mind. People might somehow become united or energetic in the face of a global epidemic, but it is hard to see how the prospect of a few billion people being killed by disease would call for superhuman efforts by the remainder. Moreover, wars are competitive; are people apt to exert themselves to the maximum, without regard for their own ease and comfort, only when they are competing against others? A different sort of constructive scenario might emerge if World War II were instead construed as an excuse and opportunity for large numers of people to work together to build something remarkable out of great deprivation. In that way of looking at it, a period of tremendous growth could result if, say, the social, political, and economic map of the U.S. were suddenly scrambled, such that people were no longer locked into what may be outmoded forms and structures. If, hypothetically speaking, people were free to take off westward in covered wagons, to found new settlements in remote regions, they might well display the same industry and determination now as did those white settlers who went westward in the 1800s. But what, precisely, is the modern equivalent?

Fools and Their Money

In the late 1980s, we had a savings & loan (S&L) crisis. It seems to have been caused by President Reagan's decision to reduce regulations on S&Ls. Hundreds of banks wound up more or less bankrupt. I worked in the Resolution Trust Corporation, a government agency created to clean up the mess. Sometime in the late 1990s, I saw an estimate that the S&L crisis cost the nation at least $160 billion. I did a calculation. That appeared to be about the same amount as the total of all federally insured student loans through 1995. In other words, the S&L crisis cost this nation as much as if we had just given out grants, instead of loans, to every student who got a federally insured loan in the 30-year (or so) period ending in 1995. When I made that calculation, I thought it was just a convenient way of conceptualizing what it meant to waste $160 billion. But now I'm thinking about how much we're spending on Iraq and tax cuts and all kinds of things we can't afford, and it occurs to me: this is the classic situation. This is a fool and his money. When your money burns a hole in your pocket, it then falls out onto the ground and troubles you no more. But if you aren't carrying around that money in your pocket, then this scenario does not apply. If you have already invested the money someplace where it was badly needed, then you don't really have the option of throwing it away. What I mean is that I am beginning to think the government really should have spent that $160 billion on giving grants to college students. Or if not on that, then on something else comparably productive. And if the government had kept on doing that -- had kept on giving grants to students, say -- then, when it came time to march off to war, President Bush would have had to explain to parents why they would now be paying the vast sums needed to prop up the universities. And then middle-class Americans would have had a strikingly more informed concept of what overthrowing Saddam Hussein might entail.

Recession: Acceleration at the Top

On the subject of recession, envision two models of shifting views. In the first model, belief that a recession may occur grows linearly. Last week, 40% of economists (or whoever) believed that we would have a recession. This week, it's 50%. Next week, it will be 60%. That, I think, is an unlikely model. The alternative, I suggest, is a logarithmic or accelerating model. The acceleration occurs because recession means fear and pain. One might expect a similar acceleration in predictions about any undesirable but increasingly probable development. In this acceleration model, people initially resist believing in the negative outcome. The positive was good for them, and they want it to continue. So instead of ratcheting up by 10% per week, as perhaps it should, the opinions of economists (or whoever) initially increase by only 5%. Last week, 40% of economists publicly admitted that we were approaching a recession; this week, 45% of economists did so (even though the facts were such as to support that finding by a full 50%). It is like a rollercoaster. You do not just go directly into a 45-degree drop. First, once everyone is on the train, you roll out of the station. You screw around for a while -- up, down, up, down. Nothing major. Finally, you come to the big drop-off. But it does not happen all at once. There is a gradually steepening curve. You know what comes next. It is really scary, and there is no way on Earth to stop it. But you are not yet prepared to embrace it; and for a few seconds, the rollercoaster does not actually force you to embrace it. You are going down -- soon, but not for another fraction of a second. There is still time to hope, and to fear. That's Part I. Next, you do go over the cliff. You are indeed plunging downwards at a 45-degree angle. But it feels like 75 degrees. You're moving like a bat out of hell. You feel like you are going straight down. So now the economists are fully focused. We are into a recession: it will be a bad one, we don't know when it will end, etc. Now, instead of an increase from 50% of economists this week to a tally of 60% next week, the pace picks up. Now everybody is a believer. You go from 50% in one week to 75% in the next week. This is what panics are all about. People sell when they actually might not need to sell. The bottom might come soon. Or it might not; we really have no idea. The point here is simply that opinions change at an accelerating pace, not a linear one.