FEAR ITSOWNSELF:

Risk-averse America (Robert J. Samuelson, October 2, 2011, Washington Post)

"Risk aversion" -- understandable for individuals and firms -- has become a collective curse. When everyone is super-cautious, the result is stagnation or worse. Imagine an economy doing just slightly better: Consumers work off some pent-up demand; stock prices are 10 percent higher; companies channel $200 billion of their cash to new products or plants; entrepreneurs nurture 10 percent more start-ups. A stronger recovery would be self-sustaining.

The good news is that this could happen. Mood swings can go both ways. Objectively, some economic conditions have improved. Households, for example, are much less indebted. Much mortgage and consumer debt has been paid down or written off. Federal Reserve statistics show debt service burdens (the share of income devoted to repaying) at their lowest levels since 1994. Consumers could be more expansive.

But that's hardly preordained. Shifts in psychology mean shifts in economic behavior. One reason many 2011 forecasts were too optimistic is that economists discounted psychology. Some prominent forecasters have admitted the error. "Confidence normally reflects economic conditions; it does not shape them," notes Mark Zandi of Moody's Analytics. But at times, he says, "sentiment can be so harmed that businesses, consumers and investors freeze up. . . . This is one of those times."

Fickle psychology also explains why massive economic "stimulus" (low interest rates, big deficits) didn't trigger a powerful recovery. Government stimulus can be diluted if households and businesses move, for whatever reason, in the opposite direction. Paradoxically, the call for stimulus can cause consumers and businesses to retrench by focusing their attention on the economy's weakness. Alternatively, people might be reassured if the government supports the economy with more spending or tax cuts. Some of both reactions apparently occurred.

But Democratic policy and Republican politics require whingeing about how tough times are.

Posted by oj at October 3, 2011 7:33 AM
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