Tuesday, July 20, 2010

The End of Wishful Thinking

The End of Wishful Thinking

By Ben Stein on 7.19.10 @ 6:08AM

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.

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