"Depressing" is the adjective we're hearing a lot when it comes to the U.S. economy.
There are reports of how the University of Michigan's consumer-sentiment poll is lower than at any time in the past quarter century. Senator Obama speaks of how, in some places, "the jobs have been gone 25 years and nothing's replaced them." A recent Pew survey suggests that fewer Americans see their lives improving than at any point in almost half a century. The gloom is so thick that it feels positively German. And that's just our domestic press. The Brits have long since decided that doom is around the American corner. Covering Bear Stearns Cos., a reporter from the Independent wrote, "Wall Street traders said they had never experienced such fear."
The suggestion behind such talk is that the current situation isn't merely depressing. It is that the slowdown is like the Great Depression of the 1930s. You almost expect Senators Obama and Clinton to repeat the lines from President Roosevelt's inaugural address of 75 years ago: "The only thing we have to fear is fear itself."
The analogy is absurd. This economy is to the Great Depression what an April drizzle is to Hurricane Katrina. So far, the Dow has declined about 12% from its record high of last fall. In the Depression, it dropped more than 80%. Unemployment is about 5%. In the Depression it was 25%. Maybe 2% of mortgages are in trouble, and abandoned homes line some parts of Cleveland Heights. During the Depression, more than half of Cleveland was underwater. Today, one big bank has collapsed. In 1931, 1,400 banks collapsed.
Even a comparison with more recent periods is a stretch.
Today, everyone is concerned about the consequences of the Bear Stearns rescue. On the right, critics argue that the Federal Reserve's decision to make funds available to Bear created moral hazard on a scale that can bring down our markets. These critics forget that in 1984 Washington actually nationalized a big bank. That bank was the nation's seventh largest, Continental Illinois. Yet the Reagan Revolution didn't stall.
In the late 1970s and early 1980s, the Dow languished in the 800s for a period longer than it takes to collect a college degree. Unemployment in 1982 was close to 10%. Yet you didn't hear too much talk about the New Deal or FDR's speeches.
So why so dark this time?
One reason is that last year and the year before felt so bubbly. As John Lipsky, then of JPMorgan Chase & Co., said, the market was so confident that "the only thing we have to fear is the lack of fear itself."
Another reason for the current gloom is U.S. susceptibility to foreign wisdom. Americans tend to believe that if the Brits say something and it's reported on Drudgereport.com, it must be so. But the Great Britain press derives some pleasure in seeing misfortune in America, and often hypes that misfortune.
Yet another problem is our addiction to Markets TV, which bears more similarity than any of us like to acknowledge to the Weather Channel. Lacking a truly dramatic winter to report, the anchors will yap about wind chill. Hear enough about wind chill, and eventually you begin to believe in it.
The most important reason for the current mood is demography. Our trouble isn't that we have it so bad. It is that we have had it so good. Anyone who graduated college after that early 1980s' snap hasn't seen the Dow do much but go up. The share of those who experienced the economy of the bumpy 1970s is fading. Too few people recall what it was like when mortgage rates approached 20%. There are fewer grandparents around to bring back the 1930s for us. If you have never seen a Katrina — if you don't even know someone who has seen one — then every little windstorm looks ominous to you.
In this election year, both parties are using the slump as an argument to gain votes — the Democrats are offering a New New Deal, and Republican President Bush is offering New Deal Lite in his stimulus package.
By writing stimulus programs now, the federal government is wasting firepower it would need in a real bust — such as when, say, unemployment hits the levels of the early 1980s. By expanding Fannie Mae or Freddie Mac now, a move politicians seem unable to resist, we are inviting institutionally caused stagnation like Japan's.
Talk enough about people losing their homes, and Washington will pass a law that "encourages" — or forces — banks to forgive principal on some mortgages. Banks will take the lesson and restrict credit later.
In other words, the Depression image is one America simply can't afford to luxuriate in. Doing so takes away time from devising policies that would really make the economy more competitive.
One such policy includes a cut in corporate taxes of the sort that John McCain suggested this week in an economic speech. Another is passing trade agreements with countries such as Colombia. But anxiety and an affection for free trade are located in different parts of the human brain.
FDR's motto applies today, albeit in a fashion he never intended. The only thing we have to fear is fear itself.
Miss Shlaes, a senior fellow in economic history at the Council on Foreign Relations, is a columnist for Bloomberg News.