Growing Ourselves Out of a Recession

Jan. 16, 2009 — -- Economic recessions always have solutions. There are always proven prescriptions for recovery. The problem is that most of them are wrong, like a useless medicine that is credited for a patient's natural recovery; and those that are right are usually implemented with such single-minded attachment to theory that they prove far less potent than they should be.

I also think, like dying, economic crashes go through their own emotional stages. Thus, we almost always begin with Denial – the notion that whatever is going on is merely a cough, not a full-blown infection … which is why it usually takes us months to even accept that we are in an economic downturn.

Then, of course, some shocking event – a stock market crash, a major institution goes into financial meltdown – finally makes it undeniable that we have a mess on our hands. This leads to the next stage, Frenzy, where everybody runs around in a panic (hence the use of that word), blaming everyone and everything for screwing up, hoarding cash, firing employees, calling for the economic equivalent of War.

Interestingly, as society has become more sophisticated about economic cycles and the regularity of market crashes, this Frenzy stage has not only become more complex … but, ironically, even more frenzied than in the past. Where Americans in 1890 just looked around in disbelief, their descendents in 2009 harkened up images of breadlines, Wall Street apple sellers and Hoovervilles – what is being called "Depression Porn" -- to make the economic Boogie Man even more terrifying.

The next stage is Combat. Suitably frenzied and terrified, we now declare we are facing an emergency of historic, even unparalleled, proportions. It's no time to be timid, we declare, but rather to gird ourselves for war.

And with war comes war powers: abandoning most traditional economic and political restraints, we start throwing around vast sums (trillions, this time), empower the government with the right to interfere with the market, and reward key individuals – henceforth, "czars" -- with powers that would never be acceptable during economic "peacetime." Everybody blames "capitalism," and everyone agrees that capitalism has failed.

Phase four is Recovery. As with most biological diseases, the patient usually recovers at about the same rate with or without the medicine. Historically, the recovery from major downturns usually take about the same amount of time – unless the economic physicians screw things up and attenuate that recovery with their various monetary medicines and regulatory nostrums.

Thus, the U.S. economy during Great Depression, that enduring reference point for all things economically ugly, can be seen as a healthy patient with a few aches and pains (America in the 1920s), that would have probably stayed that way (the homeostasis of market capitalism) had it not been hit with the double whammy of self-destructive behavior (the stock market bubble created from widespread buying on margin) and infection by a deadly pathogen (Smoot-Hawley and trade protectionism).