I am sixty-five now. I have lived through many recessions. The
first one I remember clearly was in 1958 and the worst one, by
far, until now, was the one in the late 1970s stretching into the
early 1980s, when we had double-digit inflation and double-digit
unemployment simultaneously. That should have been impossible,
but thanks to union Cost of Living Adjustment contracts and
skyrocketing oil prices, it was indeed possible.
But the current recession, which really started with some
very tense days in late 2007 and began in deadly earnest when
Hank Paulson, possibly the most incompetent Treasury Secretary of
all time, allowed Lehman Brothers to fail, has been the most
upsetting for several reasons.
For one, it has hit the people closest to me the hardest.
Until now, I never had a friend who was truly in financial
extremis from a recession. When recessions happened, they
happened to people in Ohio or Illinois or Michigan. Now, they
have hit hard in California and in the law field where so many of
my friends work and in Washington, D.C. (yes, even in D.C.) where
I am from. I never had a friend lose his house until this
recession and now I am sad to say I have many pals who have
either lost their homes or are in process of losing their
homes.
Next, because this recession hit employment so hard, but
also hit home values so hard, many of my friends, who thought
they were rolling in real estate equity, find themselves without
work and also upside down on their homes, with lofty mortgages to
pay, and no ability to sell their homes.
This is not happening to people in faraway places. This is
happening to people very near me. Extremely near me.
Because the correction has hit hiring, real estate, and
also stock prices so desperately hard, formerly upper middle
class people find themselves very short of assets for retirement,
owing more on their homes than the homes can fetch, and either
jobless or underemployed. They are truly afraid on a scale I
never expected to see.
In a word, I am seeing real desperation, which I have never
seen before up close and personal. This is especially true of
those facing retirement.
I see it even in the very tony neighborhoods where I hang
out, like Beverly Hills and Rancho Mirage and Malibu. Older
people and even younger people are scared.
However, as the economist I am, I try to not only watch and
wring my hands, but to draw lessons and rules from the
experience. Here are a few of them:
1. People who bought guaranteed income in the form of
annuities from insurance companies have been saved. As far as I
am aware, no insurers have failed to make the guaranteed payments
they were contracted to make. People who bought variable
annuities with value floors and guaranteed incomes and inflation
riders have been able to laugh at the economic tornadoes. There
are many people who hate insurers, but for those who put their
trust in insurance companies to guarantee their old age comfort,
there has been security.
2. The people who have been laid off and cannot find
work are generally people with poor work habits and poor
personalities. I say “generally” because there are exceptions.
But in general, as I survey the ranks of those who are
unemployed, I see people who have overbearing and unpleasant
personalities and/or who do not know how to do a day’s work. They
are people who create either little utility or negative utility
on the job. Again, there are powerful exceptions and I know some,
but when employers are looking to lay off, they lay off the least
productive or the most negative. To assure that a worker is not
one of them, he should learn how to work and how to get along —
not always easy.
(This brings to mind an idea I have long had: that high
schools and colleges should have a course on “how to get along”
and “how to do a day’s work.” This would include showing up in
clean clothes, smelling well, having had a good breakfast,
dressed in a businesslike way, calling the other employees “sir”
or “ma’am” and not talking back. This would include a teaching of
the fact that the employee is not there for amusement, but to
help the employer make money and to get a job done. It would
include the idea that once you are at work, you are not at play.
It is an idea whose time has come.)
Productive workers with real skills and real ability to get
along are also sometimes unemployed, but they will be the last
fired and the first hired.
3. Simple habits of prudence will almost save the day, even
in a bad recession. People who have meaningful savings, insured
retirement plans, diversification of assets, people who do not
buy what they cannot afford, people who do not simply assume the
money will materialize out of thin air for their next purchase,
people who add and subtract and see life plain, these people
rarely get in desperate trouble. It is amazing how old-fashioned
habits of buying modestly and living within one’s means, and
planning for bad times as well as good times, can get one through
earth shaking events.
When men and women do not do this, their lives become
horrible in bad times. In a recession like this, with
unemployment high, home prices devilishly low, and stock prices
falling, rising, then falling, lives can be turned upside down in
a hurry if they have not been lived with at least a modicum of
prudence.
I see this around me constantly. People in desperation
(that word again!), women selling their bodies, men turning to
drugs, families torn apart — all because they allowed themselves
to be ruled by magical thinking that things would be all right
because the wisher happened to wish that they be all right. I get
letters and e-mails from friends of decades standing asking for
money every single day. Their common denominator is that they
lacked prudence and lived in a dream world. I pray that I am not
as much like them as I often think I am.
This has been a recession that has hit wishful thinking
very hard, and has rewarded prudence lavishly.
