Of course, what Congress did mattered as well. We all remember the Smoot-Hawley tariff, and know why it hindered recovery. (And those who don’t know this, well, at least they’ve watched Ferris Buehler’s Day Off and know that there was such a tariff, and boring teachers say boring things about it.)
And, yes, what the Fed did also mattered — greatly — both leading up to as well as during the more-than-a-decade-long event.
Just so, today, Congress and the Fed have done some pretty stupid things both leading up to, and after, the first big hints of a downturn. The thing that interests me most about the behavior of our experts is how inexpert it all looks. And, the more one studies it, the more inexpert it proves.
Which is itself, well, predictable . . . in precisely the form of prediction one can make in economics.
Economists are actually pretty bad prophets. What they can predict are larger patterns, if that. Precise predictions of distinct events and future prices and levels and all that are beyond their ken. Why? Because each prediction can affect the outcome, and the outcomes of other predictions . . . which in turn breeds new and different predictions. The possibility of both self-fulfilling and self-defeating prophecy should lead us to a sense of humility at processes as complex as these.
This latter point was a major theme of philosopher and economist F. A. Hayek. We all quote him these days: “unintended consequences”; “order as a result of human action but not human design”; “rationalism that does not know its own limits.” But his warnings against messing about in “the economy,” especially in a micro-managerial way, get depressingly little play now.
Why? We are in the early stages of a downturn. The fear of it turning worse turns most heads away from the kind of wisdom that says that some things done can be far, far worse than doing nothing.
Funny thing is, the fear of not “doing something” was precisely the attitude expressed by both (yes, both) Herbert Hoover and FDR. And look where that got us.
This being said, FDR was obviously right on one count: We have nothing to fear but fear itself. It’s fear that prevents us from thinking clearly. It’s fear that prevents us from rejecting the policies that FDR foisted upon us, and which subsequently proved to be worse than useless.
And since fear remains the order of the year, I expect a lot of bad news for 2009, economically. That news will lead to a lot of bad policy. Which will exacerbate the economic picture. Which will reinforce the bad policy.
It’s a well-known social process: Runaway panic. And it has something to do with the self-fulfilling prophecy. “Things are getting worse, therefore we need more government.” Add more government, and then . . . “See, things are worse . . . therefore, pile on more government!” Do you see what’s missing? Common sense, I say.
Indeed, the current debacle may be an instance of the very opposite of sense. There’s reason to believe that the credit crunch itself may have been over-hyped by our current president, making his initial scare the prophecy then fulfilled in subsequent panic. Would it shock you to learn that our leaders have caused the very crisis they have attempted to avert?
Do you expect any real change from the next administration?
For my part, my most earnest wish is that this prophecy of continued bad news is of the self-defeating kind. Better to be judged a bad prophet in good times than a good prophet in bad.