PEOPLE everywhere are talking about the Great Depression, which followed the October 1929 stock market crash and lasted until the United States entered World War II. It is a vivid story of year upon year of despair.
This Depression narrative, however, is not merely a story about the past: It has started to inform our current expectations.
According to the Reuters-University of Michigan Survey of Consumers earlier this month, nearly two-thirds of consumers expected that the present downturn would last for five more years.
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The attention paid to the Depression story may seem a logical consequence of our economic situation. But the retelling, in fact, is a cause of the current situation — because the Great Depression serves as a model for our expectations, damping what John Maynard Keynes called our “animal spirits,” reducing consumers’ willingness to spend and businesses’ willingness to hire and expand. The Depression narrative could easily end up as a self-fulfilling prophecy.
Sunday, February 22, 2009
Sit Up and Pay Attention to This
This is something important. I believe that Robert Shiller is correct in this NY Times article:
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2 comments:
I was talking with people today about this because I had heard yet another commercial on the radio citing the "bad economy". I wondered to myself when I heard it if we weren't making it worse by thinking it is worse, or even creating it by talking about it in these terms. People are thinking; "economic slow down and so, it is. It is affecting my work performance and attitude almost like a depression has set in.
I don't expect you to post this but I do like to let you know that I read and enjoy reading your blog.
I'm not an economist -- I worked with computers -- but I had lots of debates with "true believers" in the Rational Expectations school of economics which views stock markets as rational and representing all available information. I always found this bizarre because the market bounces up and down with only loose connection to any facts that, to me, would justify the price changes.
Similarly the larger economy reflects expectations of real people -- not the idealized infintely rational calculators -- and their limited understanding of the future. So mood is very important.
I sure hope Obama and his team got the message from this last week that he needs to not just recognize the problems but come out with a plan that paints a happy path from here into a better future. Ultimately our economy is psychological. Even in the Great Depression the infrasture to produce goods was in place and a lot of people wanted to work, but the entrepreneurs cut back on plans hand-in-hand with the populace cutting back on spending as everybody worried about the future and, by this very fact, ensured that things spiraled down.
The paradox is that what is rational for the individual, entrepreneur or consumer, is in fact irrational for the whole. If everybody hunkers down, we get a Great Depression. But individuals would be crazy to try to act on their own to save us all. This is exactly the role of government. Just as it would have been irrational in Dec 1941 for an individual to "declare war on Japan". But as a collective, where risks are spread out and responsibilities are shared, it makes sense to do things like declare a war or put a stimulus plan in place.
The Republicans drive me crazy because they fail to see the distinction between individual and collective. Their ideology tells them "collective is bad". But in fact, there are many things we can't do as individuals, but working collectively through some kind of organization we can achieve.
Pulling outselves out of the pothole of the current economic slump is an excellent example of something that requires collective, organized action. That's why Obama needs a plan. And if the plan is to work, it must be communicated to give hope to individuals so that they will no longer be limited to rational calculations of individual benefit hedged in by gloom, but see a path forward that benefits not only them as individuals, but shows a path toward collective advancement.
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