The Crisis In Context

Earlier this evening, my wife had the Hannity show on television as she was working on dinner, and Sean showed clips of Barack Obama talking about his mortgage plan in which he used the word “crisis” probably 20 or 30 times to describe the current economic climate. This is one of the weird aspects of today’s news: rather than trying to reassure businessmen and consumers, the Obama administration seems determined to provoke the maximum possible amount of panic, presumably because this will make it easier to rush sweeping pro-government legislation through Congress. One down-side, perhaps, is that the Dow has declined more than 2,000 points since Obama was elected President. While other factors no doubt predominate, it’s hard to escape the conclusion that some part of that drastic decline is attributable to the near-hysteria emanating from the Executive Branch.

Today the Federal Reserve revised its projections for 2008 downward. The Fed now thinks that GDP will decline this year somewhere between 0.5 and 1.3 percent. That’s not good, of course; the Associated Press notes that it would be the worst calendar-year contraction since 1982, when GDP fell by 1.9 percent–one and a half times the Fed’s worst-case projection for 2009.

The Fed also predicts that the unemployment rate will climb to somewhere between 8.5 and 8.8 percent this year. Again, not good. But the unemployment rate averaged 8.3 percent for the five-year period from 1980-1984. And at that time, it was combined with a devastating inflation that peaked at 13.6 percent in 1980, the last year of the Carter administration.

Yet I don’t recall Ronald Reagan or others in his administration trying to stoke panic when they came to power in 1981. Their attitude was one of quiet confidence, and they did everything possible to restore trust in America’s economy, even as they justified that confidence by reducing inefficient regulations and cutting wealth-destroying taxes. No doubt the success of the Reagan administration was due far more to the sound policies it followed than to any psychological impact of the confidence it inspired. Still, there is something to be said for reassurance.

To some degree, the current panic no doubt stems from the fact that for the last 26 years, the U.S. has encountered little in the way of economic trauma. A generation has grown up with the assumption that the unprecedented growth that took place between 1982 and 2008 was normal. But panic is rarely a good thing; the history of the 19th century doesn’t record “recessions,” but rather “panics.” The Obama administration is reaping short-term political gain, no doubt, by exaggerating our current difficulties. But a year or two down the road, it may regret its role in sowing panic among consumers and investors.

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