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.
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 panic.
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 been discredited.
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.