June 2, 2006


Freakoutonomics (CHARLES R. MORRIS, 6/02/06, NY Times)

LAST month saw one of the sharpest drops in consumer confidence since the recessions of 1979-1982. But those were truly dreadful times. Oil prices tripled, rates on home mortgages shot into the mid-teens, the stock market was a disaster area and unemployment rates reached double digits.

Over the past three years, by contrast, American economic performance has been almost glittering. Inflation is still low, while employment and productivity have all been rising strongly. True, stock markets are clearly nervous, and the sharp upsurge in gas prices is adding to consumer skittishness. But the reaction still seems inconsistent with the economy's underlying strengths.

There are parallels with another historical period, however, that suggest the deeper currents of uneasiness.

Pan the camera back to Pittsburgh, July 1877. The Pennsylvania Railroad yard, stretching along the city's riverfront, is a raging inferno, set afire by angry mobs of railroad workers. A contingent of state militiamen, trapped in a burning railroad roundhouse, fight their way through the flames with a Gatling gun.

Over the next few weeks riots rage throughout the country. In Chicago, newspaper headlines declare that "howling mobs" control the city. In New York, The Sun demands a "diet of lead" for rioters. Unrest in San Francisco explodes into a vicious anti-Chinese pogrom. The same period marks the glory years of the rural Granger movement and the Roman-candle growth of the Knights of Labor. American Populism puts down permanent roots.

Historians long attributed the turmoil to a "great depression of the 1870's." But recent detailed reconstructions of 19th-century data by economic historians show that there was no 1870's depression: aside from a short recession in 1873, in fact, the decade saw possibly the fastest sustained growth in American history.

Employment grew strongly, faster than the rate of immigration; consumption of food and other goods rose across the board. On a per capita basis, almost all output measures were up spectacularly. By the end of the decade, people were better housed, better clothed and lived on bigger farms. Department stores were popping up even in medium-sized cities. America was transforming into the world's first mass consumer society.

But why did people feel so miserable? Partly they were confused by prices, which were dropping sharply.

Global deflation isn't going away, so folks will have to adjust their emotions to it. Of course, the great danger of deflation is that people start holding off on purchases in the accurate expectation that they'll get a better price down the road, but we appear to have adjusted just fine to still spending like drunken sailors even with falling prices.

Posted by Orrin Judd at June 2, 2006 8:22 AM

Inflation is "too many dollars chasing too few goods & services."

Everything that is "finite" is going up dramatically (oil, gold, copper) while things that are less finite (services, most manufactured goods, etc.) are coming down.

Add technology advances to the mix, and the huge overcapacity of labor and capital masks inflation in commodities.

Currently, there is fragile balance. Slamming on the brakes will cause the deflation to rapidly accelerate, but opening the flood gates will see inflation explode.

The Chinese curse is upon us, we are living in interesting times.

Posted by: Bruno at June 2, 2006 9:43 AM

None of those things is finite and as less people chase more stuff made cheaper prices can't rise.

Posted by: oj at June 2, 2006 10:13 AM


If dollars are created faster than the various goods you mention, then the prices of those goods when denominated in dollars will rise.

Is this my prediction? No. Is it possible as implied by Bruno? Yes.

History indicates that when an institution has the ability to devalue a currency, it will.

Posted by: h-man at June 2, 2006 10:58 AM

It's a global economy--you can't print enough dollars to make prices rise globally. Well, you can, but you'd have to have a Latin American regime running the Fed.

Posted by: oj at June 2, 2006 12:00 PM

But a price rise is not necessarily inflation. Indeed, a secular price rise in, say, oil, can't be inflation, which is a general increase in prices due to an increase in the money supply. The price of oil is going up for a bunch of reasons, some more sensible than others, but it can't be inflation.

Posted by: David Cohen at June 2, 2006 12:27 PM

"Everything that is "finite" is going up dramatically (oil, gold, copper"

When gold gets back up to the Malaise era $800/oz, and silver to $40/oz, then you might be able to make this point. (And funny how you don't mention fuel prices, where the current "rise" is more like a reversion to the historic norms.)

Posted by: Raoul Ortega at June 2, 2006 12:31 PM

Apparently, after reading the article, Charles Morris likes the "stability" and "predictability" of fewer players in the global economy. Can't have the rabble not know their place, you know.

Posted by: Brad S at June 2, 2006 12:44 PM