The Magazine

This Is No Time to Panic

Our economy has recovered before and can do so again.

Feb 2, 2009, Vol. 14, No. 19 • By JOHN STOSSEL
Widget tooltip
Single Page Print Larger Text Smaller Text Alerts

Politicians are in agreement: Government must spend, spend, spend to solve the economic "crisis." The words "economic crisis" are accepted as fact. Why? Why is America in "crisis"?

Treasury secretary Hank Paulson wrote in the New York Times, "We are going through a financial crisis more severe and unpredictable than any in our lifetimes." Is he right? Okay, the Dow Jones Industrial Average fell more than 5,700 points, but bubbles have to pop. In the summer of '82, the Dow was at 776. At 8,228, as of this writing, stocks have risen 1,047 percent in 25 years. America is still way ahead of the game.

But people are losing their jobs! President Obama frets that "the unemployment rate could reach double digits." Yes, that would be bad, but in the recession of '82, it reached 10.8 percent. Yet no one even remembers the "crisis" of '82. Today's 7.2 percent unemployment rate is higher than we've grown used to, but we've experienced that rate 16 times over the past 35 years. And it pales in comparison to the 25 percent rate of the Depression era.

"The bad news is that our economy is broken and there is nothing the government can do to fix it," economist Peter Schiff told the Wall Street Journal. "The free market does have a cure: It's called a recession."

Have we become so fragile that we can't handle any recession? The 11 recessions since World War II are part of the "creative destruction" that ultimately drives our economy, yet today politicians act as if they can insulate us from pain with bailouts and "stimulus packages."

Even smart people like Paul Volcker say, "This crisis is different." Politicians say things like this because they're too close to the problem. They've panicked. I saw this again and again doing consumer reporting: People closest to problems often panic beyond reason. After 9/11, people overreacted because of fear of terrorism. We federalized airport security and spent tax money on nonsense like bulletproof vests for dogs. In 1999, it was the Y2K computer technicians themselves who were most convinced that computers would freeze and planes crash. It was the bird flu specialists who were convinced that millions would die from the bird flu. Today, it's the scientists creating global warming computer models who are most insistent that we take economically destructive steps to stop climate change.

Fortunately, the bird flu doctors and global warming fanatics didn't hold the reins of government. Unfortunately, today's most frightened people do. Hank Paulson is surrounded by panic; I assume many of his Wall Street banker buddies called to shout: "It's a catastrophe! I've lost everything!" In the echo-chamber of Washington and Manhattan, one starts to believe that this deleveraging is different. This one requires more government. But it doesn't. More government will just delay recovery.

Vice President Biden informed ABC News that "Everyone .  .  . says the scope of this package has to be bold. It has to be big." Everyone? Hardly. More than 100 prominent economists signed a petition against the stimulus package, and more than 200 signed a petition against the financial bailout.

I liked the headline that the Wall Street Journal gave to an op-ed by George Mason University economist Russ Roberts: "Don't Just Do Something, Stand There." Roberts pointed out that politicians can't wisely spend the trillions they commit, "even if they want to. The information about who needs to be bailed out and who needs to fail is too complicated. .  .  . It is time to let the imprudent fail and the prudent pick up the bargains."

What if the government had cut loose GM, Citigroup, and the others, forcing them to do what businesses do in hard times: renegotiate with creditors and revalue assets? Wouldn't prices have found a more solid floor? We'll never know. But today the CEOs of those companies would be suckers to drastically revalue assets or sell off a cherished part of the company. If they did that, and then Congress showered their industry with money, they would have cheated their shareholders. Better wait to see what the politicians will do. And so government programs frighten private investors away from making the tough decisions that would start them on the path to real recovery.