The joke is on me. Moments after posting about some positive economic indicators that (along with big manufacturing growth numbers from China) are continuing to goose the U.S. stock market, my attention was drawn to Paul Krugman’s column today thundering against the perils of complacency and false optimism.
As you read the economic news, it will be important to remember, first of all, that blips — occasional good numbers, signifying nothing — are common even when the economy is, in fact, mired in a prolonged slump … the odds are that any good economic news you hear in the near future will be a blip, not an indication that we’re on our way to sustained recovery.
Krugman’s fear is that politicians will take too much heart from a few good indicators, and turn their attention, too soon, to self-defeating efforts aimed at deficit reduction, instead of continuing to forcefully address mass unemployment with additional economic stimulus measures. To do so would repeat the mistakes of 1937, a point that Krugman and Obama economic advisor Christina Romer have been making since the beginning of the year.
It is a valid point. There is no question: The economy is quite weak and the time is almost undoubtedly not yet right for budget-balancing. But one must also guard against the tendency to discount any good news at all, because it leads to silliness such as Krugman’s reaction to the November labor report: — which documented the smallest monthly job loss in two years — “in a real sense good news is bad news, because this month’s not-too-bad number deflates the sense of urgency.” In other words, for political reasons, we needed more jobs lost because that would have encouraged the government to take stronger action.
I think there are some holes in that argument. Higher unemployment would also be seized upon by Republicans as evidence that Obama’s stimulus efforts were not working, which would fuel a different kind of urgency, in the run-up to the midterm elections now only 11 months away, than that sought by Krugman.
At Slate, Daniel Gross makes the bold prediction that the economy will grow twice as fast in 2010 as the consensus expectation currently predicts, and declares that we need more “blind faith” to help propel a self-fulfilling virtuous cycle in which “people fully commit to recovery, both financially and psychologically” and that in turn feeds further recovery.
But if excessive optimism was the near-fatal pose in 2008, blind pessimism has emerged as the reflexive post-bust crouch. And it has led the economic establishment to miss yet another inflection point. While we were wringing our hands about America’s financial and industrial crisis, we ignored a parallel narrative that was emerging: the repairing of balance sheets, an embrace of reality, a nascent recovery.
Blind faith strikes HTWW as a little risky, and a little too millenarian in tone. But surely there is a sweet spot somewhere between relentless pessimism and starry-eyed optimism?