When prophets panic

Paul Jacob

1/4/2009 12:00:55 AM - Paul Jacob

When politicians ratchet up airy optimism, we snicker, even sneer. Remember Herbert Hoover’s “prosperity is just around the corner”? Gerald Ford’s WIN buttons? Laughable in their day, they remain so now.

But, for some reason, “Happy days are here again” rarely gets mocked by historians, even though FDR’s campaign song proved the very opposite of prophetic. The Great Depression dragged on, longer than any other economic downturn in American history.

Maybe it’s only right-wing optimism that receives sneers.

No matter. From left, right, or rear, when we hear optimistic yammerings from on high, today, we have every reason to be suspicious.

After all, we know what’s going on. Politicians realize something: Every now and then the Self-Fulfilling Prophecy works in their favor. Their notion is, if they can manage to encourage investors and consumers and others to think that things are getting better, those participants in markets might increase their investments and purchases, thereby, the theory goes, giving the economy a jump start.

Trouble is, saying cheerful things, alone, is not enough.

Behind the scenes, Herbert Hoover, the old social engineer, did his darndest to keep prices up. And that was the furthest thing from helpful.

In an economic downturn, prices need to go down, to find a new, lower level of that mysterious thing economists call “equilibrium.” By scuttling that process, Hoover and his big business cronies ensured that unemployment would increase, and last longer.

The reason for this need isn’t mysterious. The process has been described numerous times by economists. And still, politicians act as if propping up prices during a downturn makes sense. Our current set of experts has attempted similar things in the last half-year, propping up (as best they can) the prices of bundled investments, many of them mortgages.

Franklin Delano Roosevelt was far better at making people feel good than Hoover was. But he also openly engaged in a lot more interventions into the market than old Hoover did. No matter how good he was at the fireside, his actual programs were often so anti-business that many, many people with wealth prudentially withheld their capital, and the Depression worsened.

What the Lord of the Economy gave from one side of his mouth, he took away with the other, all the while sneering about evil businessmen. (Farming businesses were exempted from his critique, of course, and he strove mightily to prop up prices of foodstuffs, making the depression harder on those with the least.)

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.