Published: March 08, 2008 05:00 pm            

Economics, recession, emotion

Many of us might prefer to think that we human beings are driven by reason, but such a conclusion misses the mark. We humans can respond to reason, but many of us make decisions on the basis of emotion – an inner feeling. Like Darth Vader’s admonition to Luke Skywalker, our criterion is, “you know it’s true in your heart.” Even though emotionally driven decisions are typically our worst decisions, only some connect the dots.

What is particularly frightening is how emotions determine much of America’s economic direction. If you think about it, Wall Street mingles information (reports, studies, projections) with emotion (feeling) and this “premonition hybrid” determines the rises within corporate America. A bit of information disturbs buyers, so stocks plummet downward. An encouraging wink from the Federal Reserve chairman shoots prices upward. It is ludicrous.

One major player in our economic health is that creature called “consumer confidence.” If most Americans feel upbeat about the economy, the stock market is happy and people spend. When Americans lose confidence in the economy, we’ve lost ground. Once again we see a strong element of emotion in the process.

Then we have more objective influences, like the current credit crunch. Personal debt and loan payment defaults can be measured. Housing sales (or starts) can be measured and are not strictly emotional (though they can be affected by our emotional hunches about the economy).

Right now, many of us seem to sense that a recession is looming ahead. The president and Congress have taken steps to help reinvigorate the economy. Because we are in this mode, many in the media interpret information from this perspective. We are in the mood for a recession. Like perspective homebodies who hoped for the massive snow so they could stay home with a clear conscience, some will be disappointed if the massive recession doesn’t hit.

For example, inflation for 2007 registered 4.3 percent, higher than the 2.8 percent registered in 2006. Because we are “in the mood” for economic miseries (out of boredom?), economists are warning us of “stagflation” and perhaps the worst recession since the Great Depression. All of a sudden we are on the verge of repeating the massive inflation rates of the late 1970s and early ’80s.

They fail to report that inflation ran 3.4 percent in 2004 and dropped to 3.2 percent in 2005 and 2.8 percent in 2006. In other words, inflation had dropped the two previous years in a row. If you think about it, the inflation rate tends to reflect the change in gasoline prices. Why does one annual increase (preceded by two annual drops) signal the beginning of runaway inflation? The answer is obvious: We are working ourselves up to a frenzy.

Many of you can remember that gal or guy in school who would share their worry, “I think I flunked the test,” only to get the highest grade in the class and ruin the curve for the rest of us. Ever wonder what happened to those kids? They became our economic journalists!

America’s economic situation is much more complicated than we can imagine. Experts still argue as to what caused the Great Depression. Modern issues are very different than past ones. Even in “good” economic times (as measured by low unemployment and low inflation) good jobs are shifting to India and China or being displaced by technology. Whether we are in a recession or not, things are not good. And whatever is bad has been edging forward for a couple of decades, at least. Yet, in light of all these changes, we could be doing a whole lot worse.

Economic fears are natural because our livelihood depends upon them. We want our children to find good jobs. Still, we need to figure out a way to take some of the emotional volatility out of our economics. To worsen a recession because people are spooked or to experience prosperity because people are spending like drunken sailors does not seem reasonable.

Ed Vasicek is pastor of Highland Park Church and a weekly contributor to the Kokomo

Tribune.

        

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