Hypochondriasis Economicus

One of the downsides to the growth of a broad-based "investor class" in this country is that increasing numbers of Americans suffer from "economic hypochondria."

In medical parlance, a hypochondriac is a person who is excessively preoccupied with bodily functions and who frequently interprets normal physical sensations and minor ailments as portending major illnesses.  Likewise, an economic hypochondriac is someone who obsesses about the "health of the economy" and who is prone to viewing the natural and inevitable fluctuations of the marketplace as a sign of impending recession, or worse.

Today millions of Americans -- including the President, the Federal Reserve Board, and most members of the mainstream media -- appear to be in the grip of a full-blown hypochondriac attack over the economy.  Why?  Because for the past few weeks Wall Street traders have been selling stocks in anticipation of what they believe is a looming recession. 

Are we in a recession now?  No.  A "recession" means two or more consecutive quarters of declining real gross domestic product.  Far from being in a recession, through the third quarter of 2007, the United States has enjoyed 24 consecutive quarters of GDP growth.  Furthermore, the Bureau of Labor Statistics reported in January 2008 that unemployment was at 5.0 percent, which is low by any measure, and that real average weekly earnings were higher in December 2007 than in December 2006. 

The economy, overall, is doing quite well.  Despite what the media tells us about gasoline prices or the housing market or job layoffs among Fortune 500 companies, the economy is not in ‘crisis."  There certainly is no rational, objective reason for Americans to be as concerned about the economy as they have become over the past few weeks.

Well, what about those Wall Street traders?  Don't they know more about the economy than the average person, and aren't they able to forecast economic conditions, good or bad, that are coming in the future?  Yes and no.  There is no question that Wall Street traders are intelligent and sophisticated, and that some are brilliant financial analysts and strategists.  However, it has been demonstrated again and again that, when it comes to picking "winners" and "losers" in the stock market, most traders do no better, or even worse, than random.  The fabled monkey throwing darts at a list of stocks will perform about as well as most experienced traders.  (Not surprisingly, I am a strong believer in investing in index funds.)  So why should we assume that when Wall Street traders suffer a collective panic attack and start selling stocks en masse that they are doing any better job of analyzing actual economic conditions?  We shouldn't. 

The incessant, mind-numbing focus these days on the minute-by-minute ups and downs of the stock market - with numerous television, radio, and internet programs devoted to little else - is directly akin to the hypochondriac who constantly "monitors" his head and chest and stomach for signs of impending sickness.  It accomplishes little more than creating needless anxiety - anxiety which interferes with the more important business of getting on with life. 

Instead of sitting around worrying about every little cough and ache and upset stomach, the hypochondriac simply needs to make sure he is eating right, getting regular exercise, enriching his mind, and enjoying the good things that life has to offer.  From an economic perspective, this means working, saving, investing, building, creating, and consuming.  If the fundamentals are sound, then both the person and the economy will be healthy.  But it must be remembered that "healthy" does not mean without any ailments or illnesses or injuries.  Human beings, after all, are not gods.  And human society - even the wonderful, wealthy country we have in the United States - is not paradise.

In a column  he wrote in October 2006, George Will similarly warned against "economic hypochondria."  He argued that this condition was "a derangement associated with affluence" and "a byproduct of the welfare state."  Together these have produced in Americans "a low pain threshold . . . and a sense of being entitled to economic dynamism without the frictions and ‘creative destruction' that must accompany dynamism."  Will also placed blame on the news media for its Dracula-like aversion to reporting sunny economic news.  (This, of course, is a function of which party controls the White House.  When a Democrat is president, the economic news suddenly appears quite rosy.)  I agree with Will's analysis, but think that the real driving force behind the country's economic hypochondria are the tens of millions of Americans who now own stocks, and who consequently - and mistakenly - believe that the stock market is the be-all and end-all of economic life.

The worst thing Americans, and the government, can do right now is overreact to Wall Street's actions.  Flooding the economy with easy money or additional deficit spending may give a short-term "stimulus" to the economy (mostly through additional consumer spending), but at the price of eroding long-term fundamentals, including a low inflation rate.  We need to focus instead on making sure that the building blocks for a healthy economy are in place - e.g., low taxes, minimal regulations, a stable money supply, incentives for savings and investment, an educated and skilled workforce - and stop worrying nearly so much about either the stock market or the business cycle.

Contact Steven M. Warshawsky   
One of the downsides to the growth of a broad-based "investor class" in this country is that increasing numbers of Americans suffer from "economic hypochondria."

In medical parlance, a hypochondriac is a person who is excessively preoccupied with bodily functions and who frequently interprets normal physical sensations and minor ailments as portending major illnesses.  Likewise, an economic hypochondriac is someone who obsesses about the "health of the economy" and who is prone to viewing the natural and inevitable fluctuations of the marketplace as a sign of impending recession, or worse.

Today millions of Americans -- including the President, the Federal Reserve Board, and most members of the mainstream media -- appear to be in the grip of a full-blown hypochondriac attack over the economy.  Why?  Because for the past few weeks Wall Street traders have been selling stocks in anticipation of what they believe is a looming recession. 

Are we in a recession now?  No.  A "recession" means two or more consecutive quarters of declining real gross domestic product.  Far from being in a recession, through the third quarter of 2007, the United States has enjoyed 24 consecutive quarters of GDP growth.  Furthermore, the Bureau of Labor Statistics reported in January 2008 that unemployment was at 5.0 percent, which is low by any measure, and that real average weekly earnings were higher in December 2007 than in December 2006. 

The economy, overall, is doing quite well.  Despite what the media tells us about gasoline prices or the housing market or job layoffs among Fortune 500 companies, the economy is not in ‘crisis."  There certainly is no rational, objective reason for Americans to be as concerned about the economy as they have become over the past few weeks.

Well, what about those Wall Street traders?  Don't they know more about the economy than the average person, and aren't they able to forecast economic conditions, good or bad, that are coming in the future?  Yes and no.  There is no question that Wall Street traders are intelligent and sophisticated, and that some are brilliant financial analysts and strategists.  However, it has been demonstrated again and again that, when it comes to picking "winners" and "losers" in the stock market, most traders do no better, or even worse, than random.  The fabled monkey throwing darts at a list of stocks will perform about as well as most experienced traders.  (Not surprisingly, I am a strong believer in investing in index funds.)  So why should we assume that when Wall Street traders suffer a collective panic attack and start selling stocks en masse that they are doing any better job of analyzing actual economic conditions?  We shouldn't. 

The incessant, mind-numbing focus these days on the minute-by-minute ups and downs of the stock market - with numerous television, radio, and internet programs devoted to little else - is directly akin to the hypochondriac who constantly "monitors" his head and chest and stomach for signs of impending sickness.  It accomplishes little more than creating needless anxiety - anxiety which interferes with the more important business of getting on with life. 

Instead of sitting around worrying about every little cough and ache and upset stomach, the hypochondriac simply needs to make sure he is eating right, getting regular exercise, enriching his mind, and enjoying the good things that life has to offer.  From an economic perspective, this means working, saving, investing, building, creating, and consuming.  If the fundamentals are sound, then both the person and the economy will be healthy.  But it must be remembered that "healthy" does not mean without any ailments or illnesses or injuries.  Human beings, after all, are not gods.  And human society - even the wonderful, wealthy country we have in the United States - is not paradise.

In a column  he wrote in October 2006, George Will similarly warned against "economic hypochondria."  He argued that this condition was "a derangement associated with affluence" and "a byproduct of the welfare state."  Together these have produced in Americans "a low pain threshold . . . and a sense of being entitled to economic dynamism without the frictions and ‘creative destruction' that must accompany dynamism."  Will also placed blame on the news media for its Dracula-like aversion to reporting sunny economic news.  (This, of course, is a function of which party controls the White House.  When a Democrat is president, the economic news suddenly appears quite rosy.)  I agree with Will's analysis, but think that the real driving force behind the country's economic hypochondria are the tens of millions of Americans who now own stocks, and who consequently - and mistakenly - believe that the stock market is the be-all and end-all of economic life.

The worst thing Americans, and the government, can do right now is overreact to Wall Street's actions.  Flooding the economy with easy money or additional deficit spending may give a short-term "stimulus" to the economy (mostly through additional consumer spending), but at the price of eroding long-term fundamentals, including a low inflation rate.  We need to focus instead on making sure that the building blocks for a healthy economy are in place - e.g., low taxes, minimal regulations, a stable money supply, incentives for savings and investment, an educated and skilled workforce - and stop worrying nearly so much about either the stock market or the business cycle.

Contact Steven M. Warshawsky