If we find the words, numbers will follow

No one doubts the power of words. A single word can transform a relationship, start a riot, free a defendant, begin a friendship or end one.

This is a complicated world, though, and often words can reveal inconsistencies and bring internal conflicts to life. It happens in economics a lot, especially in the areas of fiscal policy.

In our economic situation, for example, the housing bubble collapse and the subsequent near-meltdown of the financial sector have forced some real pain on the rest of the economy. One of the major ingredients in any economic recovery is the restoration of confidence. That seems simple enough, and it is, at least in theory. The government would simply reassure people that it has the necessary power to turn things around and is going to use it. In practice, however, it is a bit trickier than that, and sometimes our words trip us up.

When it comes to restoring economic confidence, the classic words are those of Franklin Delano Roosevelt: “The only thing we have to fear is fear itself.” Maybe we live in less-than-classical times, though, for in today’s rhetoric the words never seem to come out so clearly, or so free of inconsistency.

There is a logical conflict, for example, between the need to justify immediate action and the need to calm people down and restore confidence. Not surprisingly, in economic issues the Congress is at the center of this problem. Its normal mode of operation is indistinguishable from suspended animation — but they will respond to a crisis.

For economic policy, then, what you end up doing is drumming up the idea that we’re in a crisis in order to get the Congress to act, at the same time hoping that people really don’t believe it so that you won’t undermine their confidence.

It’s pretty obvious that this strategy is doomed, but that hasn’t stopped people from using it. The net result is that currently we have the executive branch of government encouraging a mood of desperation and panic while the legislative branch proceeds at a speed that a tortoise would mock.

In another example, this past week the Treasury Department announced its latest plan to prop up banks and other financial institutions. And it, too, contained some interesting economic implications embedded in its use of words.

The new Treasury secretary, Timothy Geithner, said that in the new plan to help banks they would be applying, “a carefully designed stress test, to use the medical term,” to banks to see if they were worthy of receiving federal assistance.

This was the wrong medical term to describe accurately what they will be doing. A stress test is not an end in itself. What they really are using it for is a financial form of “triage.”

Triage is a procedure used to ensure that limited medical resources are applied to the patients most likely to benefit from it. It often involves making tough decisions. In emergency medical situations, especially following military combat or a natural disaster, a doctor or nurse will examine incoming patients and divide them into three categories: those who can be saved with immediate attention; those who can survive to wait a bit for their care; and those who are beyond help.

In our banking situation, what the Treasury’s stress-test-triage plan means is that the banks most in need will be the least likely to receive help. That is certainly a reasonable strategy by its own logic, but it is not without economic consequences.

The banks most likely to be in need are the smaller ones throughout the country. These were, in many cases, affected less by their own decisions and behavior than by the sudden credit collapse and economic downturn caused by the actions of larger banks. The banks most likely to get help are the larger ones — the same ones who created this mess in the first place. Maybe this is the right thing to do, but it sure gives off an unpleasant odor — and it will change the face of banking in our country for a long time.

There are inconsistencies in the words being used in arguments over the federal government’s fiscal policies, too. There is some truth, for example, in the argument that “it was borrowing that got us into trouble. … More borrowing won’t get us out,” but it ignores a fundamental difference among individuals and businesses. Individuals can function without credit; businesses cannot. Unless business credit recovers, or is restarted, the chances of a full economic recovery anytime soon are pretty slim.

Economics has always been more about words than numbers, even though it doesn’t seem that way sometimes. If the administration and the Congress could get the words right, the numbers will follow.

James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Snohomish County Business Journal.

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