It's been nearly five years since the last recession, and when times are good we tend to forget what we learned when they were bad. So after several years of booming home values, inflated personal wealth, and overconfident spending, 2007 has brought a refresher course in the basic realities of a free-market economy: What goes up must come down. The laws of supply and demand usually prevail. Caveat emptor.
One of the byproducts of a strong economy is the Myth of Control: the notion that we can legislate, regulate, incentivize, intimidate, and even buy our way to unending prosperity. The Federal Reserve, of course, has some ability to fuel or restrain growth and rein in inflation. But as the economy sputters into 2008, we're learning once again that the wizards of Wall Street and Washington (or Shanghai and Bangalore, as the case may be) have no magic pill after all to cure our biggest ailments:
The housing bust. Despite high-level attention from Treasury Secretary Henry Paulson and the CEOs of the nation's biggest banks, the housing downturn will almost certainly persist well into 2008 and improve only when the inventory of cheap, overbuilt houses dries up and buyers return. One manufactured solution to this problem—the Bush administration's subprime survival plan to rescue troubled homeowners—is likely to have little impact on the broader economy, since it's voluntary and limited and may never go into effect as envisioned. More likely: We'll just have to wait this one out, until the housing market rebounds on its own.
The relearned lesson: If you gamble, be prepared to lose. Many of the people now defaulting on their loans bet that their home values would rise before low "teaser" rates spiked upward a couple years down the road. They guessed wrong. Others didn't even realize the starter rates would rise. They may have been deceived by slick lenders—but snake-oil salesmen aren't exactly a new phenomenon. Isn't that why consumer advocates for millenniums have been preaching "buyer beware"?
High gas prices. At least policymakers seem to have abandoned the old populist tactic of releasing oil from the Strategic Petroleum Reserve every time gas prices go up, to temporarily flood the market and soften prices for a couple of weeks. Drivers may even be getting used to $3 gas, which looks like it is here to stay. But many Americans remain stuck with big gas guzzlers they bought or leased just as gas prices started to rise a couple of years ago.
The relearned lesson: Frugality pays. Sorry to sound like a schoolmarm, but shoppers wooed by come-ons for the Dodge Hemi V-8 or copious horsepower are paying for it, with mileage in the teens and routine fill-ups of $75 or more. There are lots of more sensible choices that don't require you to surrender your manhood or rattle along in a rust bucket. Just use common sense.
The plunging dollar. A strong country has a strong currency, according to conventional wisdom. So shouldn't America's leaders pull the levers to keep the dollar strong? Well, maybe—except that the value of the dollar is linked like the blocks in a Rubik's cube to numerous other complex factors in the global economy, such as the U.S. trade deficit, foreign investment in the United States, and the maneuverings of currency speculators. The Fed could fiddle with interest rates to strengthen the dollar, but that could have other negative effects, like crimping credit at a time when it's already drying up. The only real choice is to endure the vagaries of currency fluctuations and be glad that U.S. exports, at least, are booming.
The relearned lesson: What happens in other countries matters, a lot. Strong Chinese investment in the United States, for example, helps keep mortgage rates down. It pays to understand foreign economies.
Unsafe products. It seems like a throwback to the days of thalidomide or the Corvair, yet once again we can't take the safety of everyday goods for granted. Skyrocketing recalls of toys and other products, mostly from China, revealed startling gaps in quality control at marquee American companies like Mattel and Fisher-Price. And it turns out that the federal government spends more money monitoring the safety of animal feed than testing the safety of products used by children. The good news is that this is actually one problem that's solvable, with better product design and more oversight of factory floors and imports.
The relearned lesson: Smart consumers still need to educate themselves and rely on their own judgment. Most toys from China, for instance, are safe. But concerned parents need to do some research to be able to tell which ones.
Travel misery. Air-travel frustrations boiled over in 2007, as planes became more crowded than ever and packed skies led to record delays. This resulted from a collision of two powerful forces: A healthy economy has generated strong demand for travel at the same time that the chronically troubled airlines are cutting back capacity to try to earn a profit. And despite talk of revamping the air-traffic control system or taking other drastic measures, travelers should just get used to it—because the economics are actually working in the airlines' favor, for once. Sold-out planes means they're pricing their product properly and selling about the right amount of it. Which means that there may be no more airline bankruptcies for the foreseeable future.
The relearned lesson: Fire sales are nice, but stability is better. Everybody loves to hate the airlines, but physical limits on airport space, huge security requirements, and ruthless competition make this one of the toughest businesses in any market. Healthy airlines mean fewer layoffs, more orders for U.S. companies like Boeing, and less chance of scrimping on safety. But the airline story never ends—it just repeats—and if there is indeed a significant slowdown in 2008, then maybe travelers will retrench and planes won't be so crowded after all. And it will happen without politicians or regulators lifting a finger.