Why is consumer confidence dropping when the economy is doing OK?

Freakoutonomics -- by CHARLES R. MORRIS

LAST month saw one of the sharpest drops in consumer confidence since the recessions of 1979-1982. But those were truly dreadful times. Oil prices tripled, rates on home mortgages shot into the mid-teens, the stock market was a disaster area and unemployment rates reached double digits.

Over the past three years, by contrast, American economic performance has been almost glittering. Inflation is still low, while employment and productivity have all been rising strongly. True, stock markets are clearly nervous, and the sharp upsurge in gas prices is adding to consumer skittishness. But the reaction still seems inconsistent with the economy's underlying strengths.

There are parallels with another historical period, however, that suggest the deeper currents of uneasiness.

Pan the camera back to Pittsburgh, July 1877. The Pennsylvania Railroad yard, stretching along the city's riverfront, is a raging inferno, set afire by angry mobs of railroad workers. A contingent of state militiamen, trapped in a burning railroad roundhouse, fight their way through the flames with a Gatling gun.

Over the next few weeks riots rage throughout the country. In Chicago, newspaper headlines declare that "howling mobs" control the city. In New York, The Sun demands a "diet of lead" for rioters. Unrest in San Francisco explodes into a vicious anti-Chinese pogrom. The same period marks the glory years of the rural Granger movement and the Roman-candle growth of the Knights of Labor. American Populism puts down permanent roots.

Historians long attributed the turmoil to a "great depression of the 1870's." But recent detailed reconstructions of 19th-century data by economic historians show that there was no 1870's depression: aside from a short recession in 1873, in fact, the decade saw possibly the fastest sustained growth in American history.

Employment grew strongly, faster than the rate of immigration; consumption of food and other goods rose across the board. On a per capita basis, almost all output measures were up spectacularly. By the end of the decade, people were better housed, better clothed and lived on bigger farms. Department stores were popping up even in medium-sized cities. America was transforming into the world's first mass consumer society.

But why did people feel so miserable? Partly they were confused by prices, which were dropping sharply. Farmers thought falling grain prices meant they were getting poorer, without noticing that the price of everything else was falling too. Farmers' terms of trade — the price differences between what they sold and what they bought — actually racked up solid gains in the 1870's.

But ordinary people still had good reason to be terrified, just as ordinary people do today. Midwestern 1870's factory farms — thousand-acre spreads with 70-horse plowing teams — quickly dominated world markets but also wiped out the much smaller grain farmers of New York. Globalized grain markets were more volatile: good weather on the Russian steppes could ruin an American grower's year. Farmers found themselves caught in the coils of grain futures markets.

After the Civil War, artisanal local manufacturers usually enjoyed comfortable mini-monopolies. But with the rapid spread of the railroads and the telegraph, new department stores and mail-order catalogs pressured local producers and middlemen with mass-produced goods, a precursor to the Wal-Mart era. In the mid-1880's, the Bloomingdale's catalog promised that orders would arrive within two weeks in virtually the whole of the United States, including large swathes of territory reachable only by wagon-train a decade before. The productivity shock was comparable to that from the Internet in our own day.

Before the Civil War, America was perhaps the most egalitarian society in the world. But the unbridled entrepreneurialism of the 1870's gave rise to the robber barons. Even if ordinary people were doing better in the 1870's, the yawning gap between the very rich and everybody else fanned resentments. Interestingly, wealth inequality in today's America is roughly the same as in the Gilded Age.

The sharply increased social and geographic mobility of the 1870's set people adrift from traditional sources of security in families and villages. In our own day, the destruction of employer-employee relationships, the erosion of pension protection and employee health insurance may be creating a similar loss of moorings.

If one counts only the size of houses and cars, and the numbers of electronic gadgets stuffed into rec rooms, Americans are probably better off than ever before. But as the 1870's suggest, economic well-being doesn't come just from piling up toys. An economy has psychological or, if you will, spiritual, dimensions. A conviction of fairness, a feeling of not being totally on one's own, a sense of reasonable stability and predictability are all essential components of good economic performance. When they were missing in the 1870's, in the midst of a boom, the populace was brought to the brink of revolt.

(Charles R. Morris is the author, most recently, of "The Tycoons.”)