Saturday, November 21, 2009

Economic View: What if a Recovery Is All in Your Head?

By ROBERT J. SHILLER in the NY Times:

Beyond fiscal stimulus and government bailouts, the economic recovery that appears under way may be based on little more than self-fulfilling prophecy.

Consider this possibility: after all these months, people start to think it’s time for the recession to end. The very thought begins to renew confidence, and some people start spending again — in turn, generating visible signs of recovery. This may seem absurd, and is rarely mentioned as an explanation for mass behavior late in a recession, but economic theorists have long been fascinated by such a possibility.

The notion isn’t as farfetched as it may appear. As we all know, recessions generally last no more than a couple of years. The current recession began in December 2007, according to the National Bureau of Economic Research, so it is almost two years old. According to the standard schedule, we’re due for recovery. Given this knowledge, the mere passage of time may spur our confidence, though no formal statistical analysis can prove it.

Read full commentary

1 comment:

  1. If the cycle theory of four years up, two down, is to be believed; dosen't this negate the justification for a stimulus and the FED injecting capital?

    What was the justification for people returning to the malls? Was it simply the itch to go get a new shirt or the latest game console? Are Americans really that lame? What was the one thing that did work?

    As a social science, economics must quantify the irrational component of economic group decision making.