Globally Rational

We hear politicians talk a lot about “a lady I met who couldn’t afford to pay for xxx” or “a man in Ohio who lost his job”.  I’ll accept that unemployment rates are a little bit higher than last year, but we can find stories like that at any time, even if the economy is booming.  The question I’d like to ask is this: as a society, are we really worse off than we were in 2000?

The Dow Jones is higher today than it was then, even if you adjust for inflation.  The dollar may be a bit weaker, but that’s more of an international issue than a domestic one; also, the “housing crisis” and the “recession” are supposed to affect other countries just as much as they affect the US.  Gas prices are high, but that’s just supply and demand.  As a nation, is the average person doing better or worse?

Gregg Easterbrook, a fellow at the Brookings Institution, argues (in a Wall Street Journal article) that we’re better than ever:

• Housing prices may have dropped, but that’s only because they surged a few years ago.  People always talked about the “housing bubble”, but people ignored it until the bubble decided to burst.  Easterbrook points out that the average house value today is still about 30-40% higher than it was in 2000 (before the price boom).
• The unemployment rate (~5.5%) is pretty low by historical standards.
• Income is still rising faster than inflation.
• The definition of a recession is “two consecutive quarters of negative economic growth”.  We still haven’t even had one such quarter… the economy may not be growing as fast as before, but it’s still growing.

I think a big part of our problem is that people think the economy is worse than it is.  In a recent survey, 79% of Americans were worried that we may go into a depression (not a recession)… I don’t think they realize exactly how extreme a depression is.  The media hype is fueling our tendency to act like we’re in a recession, which fuels the possibility of a real recession.

The reason why we’re worried is because we’ve become accustomed to the “Great Moderation” of the last couple of decades; economists agree that normal economic volatility has decreased substantially in recent years.  Because of this, every slight downturn seems much worse than it actually is.

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