The dangerous power of negative thinking

By Edward Hadas
October 12, 2011

Another recession could be about to arrive, or even be here already. Some people fear it will be as bad as the last one, which reduced output in the U.S., euro zone and Japan by 5.1, 5.5 and 8.9 percent respectively. Those GDP declines are often described in cataclysmic terms: staggering, disastrous or traumatic. Such words are vast – and dangerous – exaggerations.

Even at the trough of the last recession in 2009, real GDP in most rich countries was as high as it had been five or six years earlier – when economic conditions were not considered particularly bad. And that comparison is too harsh on the 2009 consumer experience, which included iPhones and the Airbus A380 super jumbo jets, both better than the comparably valued goods available in 2003.

Americans and Europeans have little enough reason to moan about their recessions; citizens of the world have much less. For mankind as a whole, the small travails of the wealthy are much less important than the entry of the truly poor into the modern economy. Industrial production in emerging economies, a good measure of that development, has increased at a heartening 6 percent annual rate over the last decade, according to the most recent data from Dutch consultants CPB. The recession reversed two years’ progress, but only briefly.

Of course, production is only one part of the economy. The recession has been harder on other parts. It led to both increased unemployment and a decline in the relative position of the poor, especially in the U.S. Neither of those bad trends has been fully reversed. But the former was caused mostly by the end of an unsustainable excess of construction activity while the latter only amplified a decades’ old pattern.

The last decline is often compared to the Great Depression, but was nothing like the economic pains experienced during the two decades after the First World War. Then a series of crises, including a 25 percent reduction in U.S. GDP, helped lead the world into the most destructive war in history. The desire not to repeat the inter-War experience spurred on the potent official response to the 2008 financial crisis.

That response basically worked, but the scary headlines and wild assertions continue, as if fascist governments were once again coming into power and hungry mobs were breaking into food stores. In fact, the few rioters have had less noble objectives: the defense of unaffordable pensions in Greece and the acquisition of branded consumer goods in the UK.

What causes the wide gap between perception and reality? I have two suggestions.

First, too many people look at the economic world largely through financial glasses. The recession made only a slight dent in industrial prosperity but the financial crisis which preceded it really was cataclysmic. Several major institutions almost failed, central banks lent and governments borrowed as never before, and the cult of free financial markets was discredited. And unlike the economy, the financial system has not really recovered. If anything, the crisis has broadened – from banks to governments.

Still, financial insecurity cannot really explain the prevalence of tragic rhetoric. The fear and trembling reflects a more profound error – a mistaken understanding of the economic good. Many people judge economic success only by the pace of expansion. For them, it is not enough to have adequate or even abundant quantities of necessities, comforts and luxuries. They say that an economy is only good if it consistently provides more of all these things, and that the faster the pace of increase, the better the economy.

That approach to life has bad consequences, even ignoring the limited satisfaction provided by material things. For individuals, it is a recipe for discontent. Those who always covet more wealth will inevitably spend much of their life feeling that they do not have enough, with or without recessions. The irrational craving for GDP growth also distorts economic policy. It makes small, temporary and otherwise trivial setbacks in consumption – a few less days of holiday or a few more months with the old car – look like, yes, staggering disasters.

It is right for policymakers to respond strongly to genuine or possible disasters. But when economic times are good, financial conditions should be something like normal. That is not happening right now. Despite three years of stability in rich countries and strong growth in poor ones, monetary and fiscal conditions remain extreme and policymakers, worried about another recession, are reluctant to make big changes.

The combination of financial extremism and fear of any decline in GDP could lead to a truly painful decline in output, if the already weakened global financial system becomes totally dysfunctional. The irony would be painful. The foolish desire for constant and fast economic growth would have made those scary headlines – otherwise completely unmerited – come true.

 

23 comments

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‘Tis true, and ever so:

Count de Monet: It is said that the people are revolting. King Louis XVI: You said it! They stink on ice!

Mel Brooks’ History of the World: Part I (1981)

Posted by CarlOmunificent | Report as abusive

We need more rational thoughtful pieces that approach the economic picture as a whole and not focusing on the parts that fit political objectives.
Trying to get this kind of message to the vast majority of people is like shoveling sand against the tide. As long as Fox News and other outlets continue to scare people into falsely believing that we pay the highest taxes ever in history, and everything is getting worse at an accelerated pace totally attributted to Obama taking office, we don’t have a balanced educated electorate. The elections, unfortunately will be determined by how much money, how much mud, and how many untrue charges are made, which surely isn’t the republic the founders had envisioned.

Posted by mikemm | Report as abusive

Leader of Senate: All fellow members of the Roman senate hear me. Shall we continue to build palace after palace for the rich? Or shall we aspire to a more noble purpose and build decent housing for the poor? How does the senate vote?
Entire Senate:

Mel Brooks’ History of the World: Part I (1981)

Posted by CarlOmunificent | Report as abusive

Pessimism is healthy.

Posted by Shenzen | Report as abusive

Wow, lets forget about $ 13 000 000 000 000 of US debt and $ 1 400 000 000 000 US budget deficit. Caused by banks and government. Yeah, that makes life much easier.

Before you know it is said that it is the people’s fault: we were too pessismistic.

Posted by FBreughel1 | Report as abusive

Stick your head in the sand like an ostrich … happiness will be with you… :)

Posted by robb1 | Report as abusive

From the article- “It is right for policymakers to respond strongly to genuine or possible disasters.”
Certain natural laws apply. One is gravity: one cannot expect it not to exist the next moment. Another is the mathematical marvel of compound interest, the eighth wonder of the world- that is as long as you are the lender/saver and not the borrower. The West continues to borrow into deeper and deeper debt at a breath-taking pace to fund its well-intended programs. With the certainly of the law of gravity this borrowing shall end.

Posted by oregun | Report as abusive

As always, the debts of the wealthy and powerful become those of the poor, and the poor also suffer blame for being the victims of fraud. Guess who benefits from the fraud?

Yes, negativity indeed. How can we bear to draw attention to such things? The sufferings of the unfortunate are inconsequential by definition, no?

Posted by txgadfly | Report as abusive

As always, the debts of the wealthy and powerful become those of the poor, and the poor also suffer blame for being the victims of fraud. Guess who benefits from the fraud?

Yes, negativity indeed. How can we bear to draw attention to such things? The sufferings of the unfortunate are inconsequential by definition, no?

Posted by txgadfly | Report as abusive

Hey Kool-aid!

So let me understand this. Your rational for having “positive” thoughts on the global economy is as follows:

1 “Emerging economies have increased at a heartening 6 percent annual rate over the last decade”. So this of course means we will continue to see 6% each year, right? China grew at 9% over that period. No change for the next decade, right?

2 The pessimism in Greece is simply the result of excessive pensions. So let’s simply raise the retirement age and reduce benefits so that pension eat up only 500% of GDP (just like the US).

But what about the 15% increase in the Greek budget deficit from 2010-2011? Had nothing to do with pension costs- it was all revenue related. How do you fix that? I know, provide more debt! Italy, Spain, Portugal and Ireland have already queued up for their share.

3 We’ve had three years of stability in rich countries. Yes, if you want to ignore the health of banks, soaring debt levels and a flat employment trend (not sure that I agree that the a US unemployment rate that hasn’t breached 10% passes the red-faced test. Unless this red-faced test is similar to the stress tests the European banks passed last year).

This is a crisis of faith. Or rather a lack of. The Blitzkreig of favorable opinions emanating from the self-described big brains on Wall St is a thinly veiled attempt to provide faith to the faithless. The problem is that it is not working. The faithless have heard the argument from the brains before: Who are you going to believe… me or your own eyes?

The eyes have it.

Posted by Spottoad | Report as abusive

And then, of course, there’s the issue of the democrats using class warfare to fuel the rage and prevent a republican from winning the White House. Today’s oppressor is the “millionaire” (a/k/a republican).

Posted by AndyAE | Report as abusive

This piece of writing is very disappointing and seems to consist of what I would call “ethereal economics”. There are no concrete facts, figures or charts presented to back his own very limited views and Mr Hadas seems to have absolutely no feelings or perceptions about long-term downward trends and what actually drives them.

Instead Mr Hadas would seem to be promoting yet another version of hope and change thruough rosy but very distorted spectacles. These arguments will not work or convince even my budgie. And if I were a poor or middle class American, I would quietly advise Mr Hadas to retire to his bathroom, have a bath and play with his plastic duck for some more constructive and logical inspiration.

The world is falling apart economically and this man worries about attitudes?

Can we have a proper economist please?

Posted by slowsmile | Report as abusive

Andy AE – Don’t weep for the GOP, Argentina! Nobody wages class warfare as well as Republicans. I think the point of the article is that, compared to previous generations who suffered far worse economic calamities, the current crop of Americans and Europeans are relatively insufferable. Throw in heaps of ignorance plus widespread suffrage, and you cannot be surprised if electorates cut off their nose to spite their face in upcoming elections. In the US, Republicans presently yield the most damage per vote, as we all saw in July. In short, Louis XVI was right.

Posted by CarlOmunificent | Report as abusive

Indeed… they are not yet the french prior revolution, hehe. Not yet, anyway…
Well… this article is… interesting…
I got curious and i read the autor’ previous article, with the title:
“World moves closer to 2008-style cliff”
And found something like:
“There is a mess in the euro zone and signs that GDP has stopped increasing in much of the world, but neither the markets nor any large economies have fallen off a 2008-style cliff. Not yet, anyway.”
“But there are good reasons to hope that the global economic fabric will not be torn.”
“But these bulwarks might not be strong enough to resist a Lehman-like unexpected calamity.”
“Everyone should hope that does not happen. After Lehman, the world’s authorities could offer effective relief. But now policy rates can no longer be cut and more stimulus, either monetary or fiscal, would be as likely to increase panic as to calm nerves.”

hmm… dramatic?…
The dangerous power of negative thinking… maybe is not about confidence in the markets(cause they only lose confidence if something big happens)… but about more people start thinking more about negative things that used to pass by without the proper attention… even because the problems already started to affect the people…
I grew up watching that american cold war movies about capitalism vs comunism… when would i imagine the capitalist people of america occupying wall street…

Posted by VonHell | Report as abusive

Excessive negative thinking is as bad as excess positive thinking that isn’t reality. When both sides are made up and you all go dancing on faux results you get what you deserve.

I’m pessisimistic that the politicians can solve anything. Now there’s reality staring us in the face.

Posted by Oren1 | Report as abusive

I lost my job, home and self-respect. I have been looking for a job for two years. What’s not to be pessimistic about?

I think a Portland Occupy Portland protester said it all with his sign. “If I still had a home, I’d be there now.”

Posted by mitchitoo | Report as abusive

Trust in Allah… But tie up your camel.

Sinbad the Sailor

Posted by rpodraza | Report as abusive

1. Even accepting your analysis, the damage being done to the poor and unemployed in the UK by the financial implosion (especially the young unemployed) is unconscionable.
2. What is the appropriate response on the part of Government? It seems that the current Chancellor is wedded to an ideological driven policy which takes little for no account of the common good?

Posted by saoirse | Report as abusive

Boundless optimism is the basis of the American dream. Looks like that’s working out really well lately. We CAN restructure Iraq and Afghanistan. We CAN continue to burn fossil fuels and delay setting (or even meeting existing) emissions targets. We CAN fix the economy by printing more paper. We CAN fight two insanely expensive wars and lower taxes at the same time.

What America really needs now is a great big injection of fear and uncertainty – and it sure is getting it. Risk should create negative feedback but people just kept handing out those loans and credit cards as if there was no chance of problems. The bottom fell out, and what happened? First, people panicked. Then they sobered up and realized that maybe they were a little too laid-back, had a little too much faith in things working out OK. They remembered that bad things can actually happen.

People need to be fearful, worried, concerned, cautious, even anxious. We’re able to feel those emotions because they have been retained throughout millennia of intense evolutionary pressure. In other words, those emotions are useful. There is still a place for them in American life.

People need to become more thrifty, more creative, more resourceful, and live lives that are more simple and austere. All of that is happening. People are saving what they have, reusing old things, fixing broken things instead of throwing them in the landfill and buying a shiny new one. Also, the EPA noted that US emissions dropped 6% in 2009 (compared to 2008). These are all positive trends, in my view.

Posted by Nullcorp | Report as abusive

The dangerous power of wealth.

Posted by truthpatrol | Report as abusive

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