By Tom Still

MADISON – A leading national magazine speculated the public mood might be a greater danger to the economy than black-and-white statistics. If too many consumers postpone purchases out of worry, the magazine story theorized, the drop in sales might turn a slowdown into a full-blown recession.

“Psychology,” said Dr. Arthur A. Smith of First National Bank in Dallas, “is the joker in the economy’s deck of cards.”

That was Dec. 2, 1957, and the recession of 1957-58 was already well underway. It turned out to be the deepest economic dip since the Depression of the 1930s. It was somewhat short-lived, however, with the official recovery beginning by late spring of 1958.

Today, psychology is still the joker in the economic deck. The other 52 cards are being played at face value as gasoline and other energy prices soar, the housing credit crunch unwinds, the stock market growls like a den of bears, the federal debt grows and the war in Iraq and Afghanistan drags on.

All of that is real. But how much of the current economic downturn is emotion; a mindset reinforced by non-stop messages about how bad things are?

The May edition of Monitor on Psychology noted that apprehension about a U.S. economic downturn may be enough to push the country into a recession. University of Hawaii-Hilo psychologist Stephen Worchel said he found similarities between the development of an economic recession and – of all things – ethnic violence. Both situations begin with fear, he said, and often as a result of feeling threatened.

That threat can be a drop in home values during an economic decline or a new political leader abruptly coming into power, sometimes the trigger point for ethnic conflict. These fears are heightened when people talk to neighbors and friends who may be facing a house foreclosure and who follow 24-hour news coverage that sensationalizes the country’s economic issues. In election years, candidates can add to these concerns by predicting financial doom and promising solutions in exchange for votes.

Following their fears, people often want to take action to protect their assets, Worchel said, perhaps by tightening budgets, reducing spending and selling stocks – but these measures can make the situation even worse, by further reducing consumer confidence levels and driving inflation.

“(But) fear is such a strong emotion that it doesn’t last very long,” Worchel noted. “There’s a recognition that we can’t continue to live this way… and people start to take a more cognitive approach.”

Of course, psychologists don’t analyze the economy – economists do, and they’re generally a pessimistic lot these days. They point to abundant evidence the economy is flagging. Some banks are hurting and credit continues to dry up. Consumer debt is high; foreclosures and credit-card defaults are mounting. Consumer demand has dropped and even the export boom will have trouble closing the gap.
A few see reasons for optimism. The worst of the housing crunch is focused in a few high-flying states (California and Florida, for example) that should have known economic gravity would someday bring prices back to earth. Mortgage rates are low if you’re looking to buy or refinance. Consumer incentives and deals abound. Productivity was up 2.8 percent in the first quarter of 2008, according to the Labor Department’s Bureau of Labor Statistics. And some market analysts say this is a great time to bargain-shop on Wall Street.

Called it a slowdown or a recession, the problems with the U.S. economy or real. But average people can aggravate them by buying into a doomsday psychology. Recessions periodically happen in a market economy. They flush out inefficiencies, sometimes painfully, while paving the way for another growth cycle.

Let’s use the summer and fall to listen to economists and policymakers alike as they propose solutions. And let’s get back our economic “mojo” by refusing to panic. We live in the most resilient and innovative economy in the world; it’s time to start acting like it.

Still is president of the Wisconsin Technology Council. He is the former associate editor of the Wisconsin State Journal in Madison.