An internet friend asks: Why do I find this economics stuff so confusing?
I could only guess, but knowing her to be an intelligent, financially-responsible type of person, as well as the mother of four children, my thoughts immediately went to potty training.
Potty training? Here’s why:
One of the famous potty-training motivation techniques is the Sticker Chart. We used a sticker chart once, and it was spectactularly unsucessful, but other people find the stickers quite helpful. You put up a calendar-type chart, and each time the child uses the potty, you put a sticker on the chart. If yours is a child who is highly motivated by the earning of stickers, this can be just the thing to motivate the ready-but-reluctant preschooler to make the move into world of No More Diapers.
What does this have to do with the ecomony? (Sorry, no it isn’t the potential for toilet humor.) It is this: The stickers provide a record of your childs’ potty-training accomplishments. More stickers on the chart is evidence of more sucessful trips to the bathroom. Nice little visual indicator to see how the whole program is progressing.
Economics is like this. Instead of sticker charts, we used things like “GDP” to represent national wealth production or “the Unemployment Rate” to represent how many people are looking for work. [We call these types of calculations ‘economic indicators’. Just like the number of stickers on the chart is an ‘indicator’ of how potty training is coming along.] It should all be pretty simple. You have to learn a little more than Shiny Star = Pants Clean and Dry, but the concept is the same. Most people understand the real-world concepts behind unemployment or GDP, so learning the technical terms and how they are calculated is not all that hard. If you’re a person who can balance your own checkbook (my friend is such a person) you can learn economics. Given a good instructor, anyway. (I was blessed with a handful of these.)
But the trouble is this: Sometimes economic-policy talk degenerates into sticker management. Rather than focusing on “is my child making progress in using the potty”, we work on managing the indicator – how many stickers are on the chart? How can I get more stickers up? If I can just get a few more stickers up, that means I’m closer to Diaper Emancipation, right? Maybe I should start giving more stickers per trip to the potty, that’ll help my chart fill up faster . . .
Think I’m kidding? I once read an actual economics professor (remaining nameless to protect the guilty) state something along the lines of, “Hurricane Katrina will result in increased wealth because of all the proceeds from insurance companies and the employment due to rebuilding.” That’s right. Money is changing hands, which increases GDP, and unemployment will be helped by all the new jobs in construction, therefore, we as a nation are richer because the gulf coast was just destroyed? No no no. The hurricane *destroyed* wealth. The fact that we’re going to replace a portion of what was lost does not make us wealthier.
Put concretely: I had six apples. Five were destroyed. I picked two more off my tree. So I’m richer than before, because I just earned two apples? No. I’m still three apples poorer than when I began. Looking at income alone doesn’t tell the whole story.
***
We get into economic trouble, whether in our personal life or as a nation, when we lose track of our economic reality. When we get too focused on managing a calculation, and too little on the facts behind that calculation.
The mortgage crisis, and the resulting credit crisis, are a classic example of imaginations run wild followed by sober reality. I [the hypothetical homebuyer] imagined I could afford a house, because I qualified for some kind of loan and was, at the time, capable of making the payments. My lender imagined I could afford the house for the same reasons. We used the fact that we were able to make up a financial instrument – a calculation – that ‘proved it’ to us. Perhaps we persuaded ourselves that rising housing costs were based on some inherent increase in the value of homes, rather than a temporary surge in demand over supply, and used the ‘promise’ of a continued rise to justify excessive borrowing.
And then reality struck. Now we have a ‘credit crisis’, in which lenders are doing crazy stuff like saying that if can’t you afford to pay for a particular car, perhaps you should buy a less expensive one. The Wall Street Journal is reporting that about 64% of car loans are being approved as of Sept. 20th. Down significantly from an 83% approval rate a year earlier – but knowing what we know about American’s spending and lending habits a year earlier, one has to wonder if maybe it is simply lenders catching on to the financial reality a little bit more quickly than borrowers?
I’m not saying there is no crisis whatsoever. The normal thing for humans to do in the face of disaster is to over-compensate. After a fire, we become hyper-vigilante about fire safety. After a car wreck, we become excessively cautious drivers. After a credit fiasco, we become overly cautious about lending. (And we ought to become more cautious about borrowing as well.) The potential for a real downward economic spiral is certainly there.
But we kid ourselves if we think that we, as a nation, ought to try to manipulate the markets in order to return to the old ‘normal’. Because the old normal was built on imagination, not reality. Large amounts of debt are a sign that we are pretending to have wealth we simply don’t posess. We were pretending, as a nation, to be richer than we were. In potty-training speak, we were handing out too many stickers. We are not significantly poorer now than we were a few months ago – but our numbers look quite a lot worse, because they are now closer to reality.
I don’t think nothing should be done. We are in the post-traumatic-stress phase of an economic eye-opener, and we need to make sure that we, as a nation, don’t curl up into an economic corner become completely dysfunctional. We do need to make sure that those who are most vulnerable economically can ride out the wave of post-crisis panic without suffering physical harm (hunger, lack of medical care, sleeping out-of-doors, etc.).
As I write this, the bailout just passed the House. I’m afraid at this time the best I can manage is a gape-mouthed, ‘Wow, that’s a lot of money.’ (Same reaction I’ve been having for the past week or so – apparently I’m consistent this way.) But I will say: Inasmuch as the bailout is based on trying to bring the American economy to a viable, stable, realistic level of activity, it has the potential to be helpful. To the extent that the bailout is designed to make things look good, to build up a ‘confidence’ in the economy that is really foolish bravado, it will only be a very expensive way of putting ourselves back into trouble.
[BTW, I promised my friend I would try to fish out a really good library book that teaches Econ 101 in a readable, understandable manner. If I find it I will post it here.]