It's no time to panic
Economic crisis is leading some to abandon time-honored wisdom.
December 16, 2008
» Discuss Article We are in what might be called the Great Freakout of 2008.
The Federal Reserve is a hair's breadth from pushing interest rates to
zero percent. After that, all that's left is offering a free set of
steak knives with every bag of cash. We're moving quickly toward
nationalizing the domestic auto industry, fast on the heels of
partially nationalizing banking. The outgoing Bush administration is
having a clearance sale on its few remaining items of fiscal
restraint, while the incoming Obama crew is promising infrastructure
"investments" the likes of which we haven't seen since the 1950s.
Meanwhile, journalistic Brahmins, who last year would have
spontaneously combusted at any hint of government meddling in the
Fourth Estate, now openly debate whether we should revive the Federal
Writers' Project to give jobs to scribes thrown out in the cold by
The freakout is understandable. Economic trust is breaking down.
Investors are buying Treasury bills that pay no interest because
they're scared to leave their money even in insured banks. Consumer
spending has dropped off a cliff. Some analysts forecast an annualized
GDP rate of negative 8% for the fourth quarter. Soon you'll be able to
pay for a Cadillac with chickens.
But here's a point nearly everyone understands from his own life
experience: It is not a good idea to make big, life-altering decisions
when you're freaking out.
Everyone's had moments when everything appears to be falling apart.
(If you haven't, here's a heads up: You're long overdue.) And these
are precisely the moments when we should take a walk around the block.
After all, we adopt healthy habits and strong principles because we
trust that they will minimize chaos and misery in our lives. The
inevitable crises don't call for trading that course for eternal
The same holds true with public policy. George W. Bush's harshest
critics certainly understood this point when it came to 9/11. Their
narrative holds that the Bush administration and its enablers, driven
mad by 9/11, made wholesale changes to our constitutional order in the
name of an elusive "security" that were unwarranted, counterproductive
and immoral. I don't think the Patriot Act was overkill, but anyone
who has dealt with the absurdities of air travel in recent years knows
the drawbacks of policy by freakout.
But now that we have the equivalent of an economic 9/11, much of the
same crowd sees its chance to lock in ideas that would be unthinkable
during saner times, this time in the name of "economic security." As
Rahm Emanuel, President-elect Barack Obama's incoming chief of staff,
said last month, "You don't ever want a crisis to go to waste; it's an
opportunity to do important things that you would otherwise avoid."
So much for "the only thing we have to fear is fear itself."
Contrary as it might seem these days, economic knowledge is
cumulative. We know things today that we didn't know 50 or 100 years
ago. As Christopher DeMuth, outgoing president of the American
Enterprise Institute, noted in a recent speech, we know that
tightening the money supply at a moment like this is among the worst
things you can do. The United States tightened money at the dawn of
the Great Depression, and that's one of the reasons it was "Great."
Today, based on that knowledge, we're doing the opposite.
And the more we know, the richer we get. If you plotted a trend line
of Western prosperity since the dawn of capitalism, you'd see a line
moving reliably upward over centuries. Zoom in close on any given
period and the more jagged the line appears, zigging up and zagging
down like a stock that's volatile on a given day, but trending
steadily upward over the year.
Look at that line from, say, 1929 to 1939, and sure, there was a lot
more zagging down than zigging up. But in part that's because
policymakers thought the crisis was proof that capitalism itself had
Today you can hear similar talk from a chorus of progressives,
convinced that laissez faire is dead and we must now rethink
everything, reinvent our economic order or return to what New York
Times columnist Paul Krugman calls "New Deal economics."
By all means let the nation do what it must to keep the downward dip
as short and shallow as possible. But let's not, in a quest for
security, abandon good habits and forget the hard-learned lessons that
have given us so much.