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.