The Mental Side To The Recession

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ALEX COHEN, host:

This is Day to Day from NPR News. I'm Alex Cohen. Not to get too new-age-y on you, but you know, there is that idea that if you truly believe things will get better, then they will. If you subscribe to that belief, now, you would think, would be a really good time to start envisioning a healthier economy. It's a strategy NPR's Planet Money has been looking into, and here to tell us about it is correspondent David Kestenbaum. Hi, David.

DAVID KESTENBAUM: Hi, Alex.

COHEN: So, is there any truth to this idea that we could just shrug this off; we could keep our chins up, and all these problems will just go away?

KESTENBAUM: In some ways, yes. I mean, there are definitely real problems out there. But look at what just happened during the holiday season, right? You know, sales at the malls in the stores were way, way off, despite the fact that most people out there still have jobs, but people are afraid anyway, and they're pulling back with their spending.

COHEN: So, people are just overreacting to what they're hearing in the news?

KESTENBAUM: They overreact - you know, it seems to me what happens is that we overreact on both sides. So, we overshoot; you know, we get too optimistic, and then times like this, we get too pessimistic. So, before the crisis, you know, people were willing to take on way too much risk, and now, we're not willing to take on the risk for any reward. This actually came up in the discussion I was having, sort of half jokingly, with Russell Roberts, who's an economist at George Mason University.

Wouldn't it be great if we just pretended that there wasn't a crisis? Then we'd all be OK.

Dr. RUSSELL ROBERTS (Economics, George Mason University): I sometimes think that might work.

KESTENBAUM: It could. There's never been a president capable of doing it. Roosevelt...

(Soundbite of laughter)

KESTENBAUM: Roosevelt - Roosevelt tried the happy-days-are-here-again strategy. It was a very mixed bag. It did not - the decade of the '30s was - started off horribly under Hoover with the Depression, and the recovery was extremely slow.

COHEN: This sounds familiar, David; this is the only-thing-we-have-to-fear-is-fear-itself motto, right?

KESTENBAUM: (Laughing) Right, right.

I actually have the tape. Do you want to listen to it? It's kind of interesting to hear it.

COHEN: Yeah, let's do it.

(Soundbite of inaugural address, March 4, 1933)

Former President FRANKLIN DELANO ROOSEVELT: This great nation will endure as it has endured. We'll revive, and we'll prosper.

(Soundbite of applause)

Pres. ROOSEVELT: So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself.

KESTENBAUM: Now, he was talking about, you know - he was worried about a run on the banks there, and that's real total fear. But it was the same basic idea, you know, which is that you have to have faith in the system for the system to work. And we don't have that kind of fear he's talking about today, but my Planet Money colleague, Adam Davidson, said the other day, he says, yeah, the only thing we have to fear is fear itself and the underlying factors that are all causing that fear.

COHEN: Well put. You know, David, I was having almost this exact conversation on New Year's Eve with a friend of mine. She has a young baby, she's a writer in Hollywood, and she's actually doing totally fine right now. She's turning down work; she's employed. But she says, you know what? You never know what's going to happen later, so she's spending as little as possible. Isn't part of her fear totally rational?

KESTENBAUM: It is totally rational, but this is what's called the paradox of thrift. So, what's right for one person, we're going to save money on the large scale, is totally insane for the economy. So, I mean, I have this fight with my sister, right? She also has her job, and she said to me, you know, we were going to redo the downstairs bathroom, and we're not going to now. And I said, no, you are the problem! You have to redo that bathroom, because, you know, if you don't redo that bathroom, that guy's going to lose his job, and then he's not going to buy to build - to buy the stuff that your company makes, and it's a downward spiral. So, she's being rational, because, you know, they have some reason to worry about their job, theoretically. But you know, as a result, this guy who redoes bathrooms could definitely lose his job.

COHEN: David, so, we saw over the holidays, retailers drastically reduced prices. That didn't quite work. But if that happens again in 2009, will that gets spending going again?

KESTENBAUM: I mean, there's this question, right? Will the ship, sort of, right itself? Eventually we'd lower the prices enough, and you know, more people are unemployed, and wages drop, so the people will be incented to hire them again. But you'd - the concern is the thing called deflation, where if, you know, I want go buy a coat and it's 60 percent off, I think, well, I'll wait 'til next week when it's going to be 70 percent off, and then...

COHEN: Right.

KESTENBAUM: Everybody waits, and it just makes things worse.

COHEN: OK. So, give us a solution. What's the answer to all of this?

KESTENBAUM: One idea is we could all simultaneously take a drug that would make us go out and spend with abandon.

COHEN: Nice.

KESTENBAUM: That was Adam Davidson's idea. But the only big idea out there right now is this idea of a stimulus package, which is that if no one is willing to take risks spending, the only person left, the only entity left, is the government, and so that's why they're talking about a stimulus package of $700 billion, $800 billion, maybe a trillion dollars, of government spending to go out there and be the buyer of last resort.

COHEN: NPR's David Kestenbaum. Thank you, David.

KESTENBAUM: Thank you.

BRAND: If you want to hear more from our Planet Money team, check out their podcast at npr.org/money.

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