Posted on Tue, Feb. 24, 2009

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Psychology drives the world economy

In desperate circumstances, saying that things will get better cannot ensure that they will. Cancer? Optimism, prayer, determination can help, but other, more tangible things must happen if it is to be overcome.

But there is no directly obverse truth. In desperate circumstances, saying that things will not get better can ensure that they do not. It's human nature and economic truth.

That's the situation half the nation, including half of the U.S. Senate, faces as we struggle with a decaying economy. As Yale University economics professor Robert J. Shiller wrote Sunday (the New York Times and NYTimes.com) under the headline "Expect the worst and you may get it," psychology drives the world economy. Psychology drives it almost by default, because economic theory has not been able to provide a more rational explanation for why recessions turn into depressions.

The Great Depression narrative haunts even those too young to remember it, and President Barack Obama riskily played into it as he sought support for the economic stimulus plan that finally passed despite loud opposition and virtually no votes from Republicans.

Rarely, if ever, in the nation's history has the ideological gulf between the two parties been more clear-cut in the Congress, so staunch Republican fervor for tax cuts as the primary recession remedy was distressingly predictable, as was Democratic fervor for massive spending. The Obama plan combined the two, though not in the proportions the Republicans preferred.

So we have a plan, and it has a chance to work. There is no guarantee of success, because if we cannot say with certainty why depressions occur, then we cannot know with certainty how to avoid them.

But we do know that once a recession starts, fear invades the marketplace, people and businesses stop spending, and jobs go away. A stimulus plan will work to avoid a depression only if a sufficient proportion of the population believes that it will work.

Thus both sides of the ideological divide have an obligation to do more than fight over tactics and then retire to their respective corners to sulk as "losers" or preen as "winners."

Congressional Republicans and ordinary citizens who share their views have a choice. They can continue to condemn the plan as full of pork, wrongheaded and the "European Socialist Act of 2009," and continue to misquote Ronald Reagan about government and to declare, inaccurately, as did Rep. Steve Austria of Ohio, that "when Roosevelt did this he put our country into a Great Depression. He tried to borrow and spend, he tried to use the Keynesian approach, and our country ended up in a Great Depression. That's just history."

Or they can give the plan a chance to work. This does not necessitate that they actually endorse the adopted plan, but they do need to recognize the self-fulfilling prophecy potential in continuing to totally condemn it as unworkable. The price of "winning" that policy argument is far too high.

Obama has two more chances this week to provide more than policy leadership, to address directly the nation's negative mood and deepening fears. He cannot make things better by simply declaring that they will be better, but he should sketch a reasonable recovery scenario and try to mobilize the considerable power that attitude has to affect action.

Davis Merritt is a former editor of The Eagle. Reach him at dmerritt9@cox.net.

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