Tuesday, February 23, 2010


Discussing emotions, political relations, and even gets around to the deficit.

Economists refuse to call the economic downturn that began in the last month of 2007 a "depression" because it is not as serious as the 1930s depression as measured by decline in GDP, unemployment rate, and deflation. That is absurd. It would be like refusing to call the Korean War a war because there were fewer casualties than in World War II. But, the root error of the economists is failing to consider the emotional consequences of an economic downturn and how those consequences in turn generate both direct economic effects and indirect economic effects via politics. Behavioral economists such as Robert Shiller do talk about the effects of emotion on economic behavior, but their focus thus far as has been on booms ("irrational exuberance") rather than on busts. Keynes--ignored until the current crisis--discussed the economic dimensions of busts perceptively, emphasizing the dampening effect of economic uncertainty on investment and consumption; and we have seen that in the present crisis. Private investment has fallen precipitously, and consumption has flattened because fearful consumers are allocating more of their income to savings than in earlier years.

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