The Main Thing We Have to Fear is Complacency
A rare moment of convergence between Atrios and Megan McArdle, neither of whom see much in the way of “green shoots” right now:
I don’t want to push the Great Depression analogy too far, but what’s surprising when you go back to primary sources from 1930 is the optimism. I don’t mean to imply that everyone thinks things are just swell. But while you know that they are facing the worst economic decade of the twentieth century, they don’t. They’re expecting something more like the recession that followed World War I. People are cutting back, but they’re still spending, particularly because companies are slashing prices to move inventory. It was the long grind of the years that followed, and the catastrophe of the second banking crisis, that scarred them permanently. And this shows up in the economics stats and the stock market, which did not, as we like to imagine, simply decline in a straight line.
I think it’s futile to predict the future course of the economy, since it’s so dependent on the policy response and that, in turn, is unpredictable.
I will say that I think the greatest objective economic risk at this point is policymaker over-optimism. We need the European Central bank to continue loosening monetary policy, and it wouldn’t hurt if some of the world’s lesser central banks followed suit. We could use more stimulus in the United States and elsewhere in the developed world. We need corporate executives to understand the main risk to their interests to be coming from a lack of adequate economic recovery efforts rather than from losing small-bore political arguments with congressional Democrats. We need smart growth policy in terms of tax reform and trade. We need, in short, policymakers to continue to be worried. If they’re worried, and if they act on those worries, then more likely than not things won’t stay too bad for too long. But if they feel confident, then we might really be in trouble.
Unfortunately, the policy world has a hard time steering a middle ground between an atmosphere of panic, which is counterproductive, and an atmosphere of overconfidence, which is also counterproductive.
20 Responses to “The Main Thing We Have to Fear is Complacency”
Register
RSSLogin
Topic Cloud
ArchivesBlog RollAbout Matt YglesiasContact Me
Donate
May 13th, 2009 at 2:16 pm
We need corporate executives to understand the main risk to their interests to be coming from a lack of adequate economic recovery efforts rather than from losing small-bore political arguments with congressional Democrats.
Yeah, but that would mean they’d have look a little beyond the next quarter and their next bonus payment, so forget about that.
May 13th, 2009 at 2:18 pm
The trick is we want the policymakers worried, and the people hopeful.
And which are we?
May 13th, 2009 at 2:37 pm
We need corporate executives to understand the main risk to their interests to be coming from a lack of adequate economic recovery efforts rather than from losing small-bore political arguments with congressional Democrats.
Maybe they believe that the Democrats will pass their economic recovery bills regardless of their involvement. Thus deciding their efforts are best placed finding areas for profit in the details.
May 13th, 2009 at 2:45 pm
Matt’s right and we don’t need to be spending time thinking about Social Security or too much government debt or how we’re going to tax Soda so all the fly-over chubbies will be skinny and healthy.
The open questions for me are: 1) were the stress tests too easy and the banks are actually insolvent? (I mean Bear Stearns, Lehmann Brothers, Meryll Lynch, AIG, Fannie Mae, Freddie Mac, IndyMac bank, etc were all techincally insolvent even if some were saved and/or forced to merge with other institutions. And they were insolvent because of the slutty Fed’s easy money? I don’t think so.)
2) will the psychology of fear transform to confidence in a timely matter so that the private sector starts spending and private sector credit markets thaw. This seems to me to be out of the hands of the government.
These are open questions, but Bernanke – who has access to all of the data and knows about the Great Depression – feels growth will turn around again this year followed by employment next year.
If it does the big question will be the character of new financial regulations.
Atrios doesn’t like “Timmeh” so he’s biased in a negative manner. If things do turn around Atrios will complain that Timmeh wasted taxpayer’s money. He’s probably galled that the Treasury Secretary hasn’t been fired yet.
May 13th, 2009 at 2:48 pm
Mr. Yglesias, why don’t you simply READ “Meltdown” by Thomas Woods and “The Politically Incorrect Guide to the Great Depression and the New Deal” by Robert P. Murphy?:
If you don’t want to read, then watch the brilliant Tom Woods explain how DOING NOTHING cured the 1921 depression quickly:
Since I first learned of the Austrian Business Cycle Theory in 1973 as a 21 year old hard core leftist (converted within a few weeks), I have never heard a single opponent of the theory bother to properly understand it or explain it, much less refute it.
The key point of the Austrian theory is that the various economic depressions and catastrophes (including this one) are CAUSED by Keynesian policies. All evidence points to a present calamity of at least the scope of the Great Depression. The people responsible should be held responsible.
As a bonus, here is the definitive take down of Krugman’s pathetic criticism of the Austrian theory:
And here is Tom Woods on Yglesias:
May 13th, 2009 at 2:54 pm
This analysis ignores the point that the original cause of the continued recession into 1932 was not the consumer pulling back, rather it was a series of bank crises spreading out from the Credit-Anstalt bank failure of 1931.
Megan’s analysis has the cause-effect relationship confused.
May 13th, 2009 at 3:22 pm
Roddis: Is there actually anything you’ve changed your mind about since 1971?
May 13th, 2009 at 3:26 pm
Ask an Austrian about the Long Depression of the 19th century. That always amuses me. The combination of mendacity and dogmatic adherence to doctrine in the face of massive contradictory evidence has a special place in my heart.
May 13th, 2009 at 3:28 pm
Belief that “policy” will change the course of long term economic cycles is a mistake. An error of logic if not a cognitive error and a rejection of history. It is hubris.
May 13th, 2009 at 3:41 pm
As this thread is demonstrating, while I don’t think green-shoot-complacency alone is a serious threat, combine it with the Austrian-inclined (with many new converts as of January 20 this year) and now you might have a problem.
May 13th, 2009 at 3:44 pm
And this shows up in the economics stats and the stock market, which did not, as we like to imagine, simply decline in a straight line.
Has she looked at the stock market prices? After a brief rebound in the middle of 1930, the slope’ looks like one side of an equilateral triangle. Down.
Belief that “policy” will change the course of long term economic cycles is a mistake. An error of logic if not a cognitive error and a rejection of history. It is hubris.
Nonsense. If your policy is to destroy an economy, a couple of nukes in the right quarters would accomplish that. Even if it’s in the middle of a raging bull market. As for changing the severity of business cycles, most of the downturns of the 20th century are evidence that you’re taking debilitating drugs. Or are a dogmatic right-winger. But I repeat myself.
May 13th, 2009 at 3:46 pm
Ed Marshall:
Ask an Austrian about the Long Depression of the 19th century. That always amuses me. The combination of mendacity and dogmatic adherence to doctrine in the face of massive contradictory evidence has a special place in my heart.
That goes for me as well.
May 13th, 2009 at 3:46 pm
combine it with the Austrian-inclined (with many new converts as of January 20 this year)
That’s so damn depressing. Austrian economics isn’t even real. It’s more religion than science. I think it sucks in converts because it’s easy, there is no math, all you need to know is that the market is sort of like God and punishes bad behavior and any effort to correct it’s ivine judgement will earn more punishment.
May 13th, 2009 at 4:06 pm
I think it sucks in converts because it’s easy, there is no math, all you need to know is that the market is sort of like God and punishes bad behavior and any effort to correct it’s ivine judgement will earn more punishment.
I was a fan of it at one point (more recently than I’d like to admit). Mostly because it, well, makes sense. People really want to believe that stuff like economics is based on a set of simple rules, that it’s really not an incredible mess with no well-defined answer to every, or even very many questions. Because that’s a bit depressing to learn what an inexact science it really is.
#5 is particularly amusing though. I love that his one data point is the 1921 “depression”. I searched wikipedia for 1921 depression just to see if anyone calls it that. It wasn’t even a redirect.
I’d love to see him argue with a straight face that the Great Depression, as well as the current situation, would both be greatly lessened and be over a lot faster if we just did nothing. Perhaps actually stating the implications of your argument, like so many other conservative arguments, is enough to get people to not take you seriously based on how laughable they are.
May 13th, 2009 at 4:18 pm
[...] when Matt says: I will say that I think the greatest objective economic risk at this point is policymaker [...]
May 13th, 2009 at 4:23 pm
It is an excellent example of cognitive dissonance that someone can write….
“Unfortunately, the policy world has a hard time steering a middle ground between an atmosphere of panic, which is counterproductive, and an atmosphere of overconfidence, which is also counterproductive.”
…while maintaining a large degree of confidence in the ability of central planners, with a fragmentary and untimely grasp of a massively complex universe, comprised of a nearly uncountable number of human interactions, to pick the right policies.
Of course, whatever happens, after the fact rationalizations utilizing laughably small sample sizes will be employed, by people from all parts of the political spectrum, to “prove” that their view was right all along.
The beauty of economics punditry is that sample sizes rarely become large enough to definitively prove that the pundit’s theories were nonsense, in the way that hacks scribbling about, say, baseball players, have done to them with regularity. I’ll give McCardle this much; she’s one of the few who is willing to write that she really doesn’t have a theory well grounded in empirical observation as to what ended the Great Depression. If only all the econ pundits, especially ones who travel to Stockholm to grab large checks, were so honest.
May 13th, 2009 at 4:28 pm
Adam, what is more notable is that people have huge reputations while arguing with a straight face that pursuing policy x had effect y, in a one time experiment filled with a nearly uncountable number of variables which had influence on the outcome.
May 13th, 2009 at 5:59 pm
SqueakyRat asks if there is anything about which I changed my mind since 1971.
Yes. I used to think that liberals were well intentioned and I used to think that conservatives had a slight bit of good sense (pre-Dubya and the Iraq War). No longer.
Regarding this Austrians don’t do math nonsense, show me the Keynesian math formula that will predict RIGHT NOW the top 5 finalists for the 2013 American Idol and the Final Four for the 2013 NCAA tournament, including their starting lineups, the 2013 inflation rate and the 2013 unemployment rate.. If you are ultimately 100% correct, I promise that I will abandon the Austrian Theory and live my life pursuant to that formula.
May 13th, 2009 at 8:17 pm
McArdle is a fool, and should not attempt to write about economics.
May 13th, 2009 at 8:47 pm
Sean, if McCardle is a fool, then nearly all the rest, like DeLong, or most supply siders, to name a few, are lying fools.