You know there is something weird happening on Wall Street when you start receiving economic reports in your E-mail inbox titled "Angst isst seele auf (Fear eats the soul)," as I did recently from Bruce Kasman of JPMorgan Chase. If that's the attitude among the pros, no wonder the market has been selling off lately.
But it's Main Street, too, that has the willies. The great economic conundrum of the past few years has been the strange inability of so many Americans to notice and fully comprehend the indisputable fact that over the past five years, the economy has been expanding (up 15 percent), stock market rising (up 53 percent), real incomes rising (up 16 percent), and unemployment falling (to 4.7 percent from 5.7 percent, with 8 million new jobs). (Thanks to Ed Yardeni of Oak Associates for crunching the data.) As CNBC's Larry Kudlow loves to say, this economy is the "greatest story never told."
But the "greatest story never told" is a mere tale of fantasy to others. "Behind the statistics, there are real families and real lives and real pain," says Republican presidential candidate Mike Huckabee. It's time to "rebuild the middle class," says Democratic presidential candidate Hillary Clinton. "Our country's middle class is not just collateral damage in what has become all-out class warfare," says possible independent presidential candidate—and current CNN news personality—Lou Dobbs.
And to be sure, a good chunk of the American public would agree with those gloomy assessments. According to a USA Today-Gallup Poll taken last month, more than one third of Americans surveyed say the economy is in recession, while some 40 percent say a recession is likely next year. Overall, 72 percent of those surveyed say they are dissatisfied with how things are going, the worst numbers since 1992.
Now the economy may indeed slip into a recession in 2008 because of the mortgage mess and credit crunch, but the past two quarters have been quite strong, with economic growth right around 4 percent and unemployment below 5 percent. So why are so many people already so glum? There are many possible reasons:
1) The hard, costly struggle in the nation-building phase of the ongoing Iraq war.
2) The housing downturn, which may be causing people to feel poorer and to worry that the real-estate recession could turn into a much wider problem.
3) A psychological phenomenon called "aversion to loss" where people feel losses (in, say, real estate) more strongly than gains (in, say, the stock market).
4) Rising gas prices, an easy-to-grasp touchpoint with the broader economy in a way gross domestic product stats are not.
5) An in-your-face, materialistic society that displays the opulent wealth of the super-rich Hollywood-Davos elite as well as those average folks lucky enough to get "extreme makeovers" to their homes.
6) A news industry—itself fearful of changes in its own business—that has overhyped the dangers of outsourcing, aided and abetted by politicians doing the same to win votes.
You could probably add a few more to the list. But maybe Kasman has it right. Fear eats the soul. Fear of the falling dollar, fear of Islamic terrorists, fear of Social Security going bust, fear of illegal immigrants, fear of peak oil, fear of global warming, fear of Iranian nukes, fear of a housing-caused depression, fear of existential threats such as asteroids and supervolcanoes. (Thanks, Discovery Channel!)
Not that some of these fears aren't completely valid concerns. But perhaps in toto they have created a noxious miasma that is feeding our national funk—so much so that we may be talking ourselves into a recession if frightened consumers stop spending.
But whatever the cause, the depressing result has given Hillary, Huckabee, and Dobbs reason to be especially thankful come Thanksgiving. If the economy does slip into recession, then their message of malaise may well resonate even more strongly, perhaps propelling Huckabee to the national GOP ticket, Dobbs to Perot-like prominence, and Hillary to the White House.
But in the long term, the cyclical ups and downs of the economy are irrelevant (though not, it should be noted, to politicians, especially those running for president in 2008). Take a look at the just related quarterly economic forecast from the Federal Reserve. The central bank is predicting sub-3 percent GDP growth for the next three years. Even worse, Bernanke and company seem to believe that so-so performance is the current speed limit of the U.S. economy without causing inflation.
And trust me, picking a trade war with China or battling income inequality will do nothing to boost that speed limit so we get the kind of growth we had—more like 4 percent—during the Clinton-Gingrich and Reagan booms. We should be constantly working to boost that speed limit through pro-economic-growth policies that boost American innovation and productivity.
A wealthier America makes all those fears and problems easier to manage and solve. Well, maybe not the supervolcanoes.