I am not an expert on economics by any means, but there are some economic arguments I think I understand, including the uncertainty argument. What follows will be a somewhat sloppy mix of psychology and economics:
When people - individual consumers, investors, business owners, etc. - are uncertain about what is happening in "the market" they get worried. When they are worried, they tighten up on spending. Bizarrely (IMHO) people often tighten up beyond the level of the worst-case scenario they are worried about, because the uncertainty makes them even more worried than they would be if they were certain that the worst-case scenario was going to happen. Two examples: First example. My wife invites people over for a party. She invites 20 people, but gets only 3 RSVPs to attend, with most people not getting back to her at all. She becomes very distraught over this. At some point I interject, "Well, how bad would it be if only 3 people show up?" "I guess that wouldn't be too bad," she replies. "Well," I tell her, "how about you not be more worried than you would be if you knew for sure that only those 3 people were showing up." She thinks for a bit and then gets less worried. Second example. Let's say that my brother is part owner of a company that installs solar panels. Let's say that his two work crews are pretty busy, and he is thinking about hiring a third. If he is confident the business will continue to grow at it's current rate, he would hire them in a heartbeat. But in these economic times, he needs to seriously balance the potential for future profit with a third crew vs. the risk of having to pay employees to sit around and do nothing if he can't get those jobs. The more uncertain the future seems, the less likely he is to take that risk. Note: Like the party example, the question should come down to a simple economic analysis of something like "Well, if you only had the jobs you currently have contracted, how screwed could you possibly be with a third crew?" Likely the answer is something like "Well, that wouldn't be so bad for at least the next six months, and because we take orders well in advance we'd have a lot of advanced warning if it was going to be a problem." But most people are not that rational. The fact that things are going south in Greece, that we are bombing Lybia, that Apple stock dropped 20% in the last two weeks, that you heard unemployment jumped in some other part of the country, that Glen Beck again predicts that the dollar with be worthless in 6 months, and all sorts of other things sure seem relevant. A non-rational mind is just worried and uncertain about the ambiguous future, and when you are worried you tighten up - no new hires, no big spending, the economy slows down. (P.S. My brother is pretty rational, they hired the third crew.) So, if you assume that business inherently involves risk, then people should always be worried. But, we can also assume that most business is actually fairly predictable, at least in the medium term, so they shouldn't be too worried. This is the basis for a stable, grounded economy, one filled with "prudent" men of industry. How do we then judge the current situation? Well, there are two things that seem very important to me. First, by many measures things would be better if people felt more certain. People would spend more, banks would give more loans, businesses would hire more, etc., etc., etc. However, it is my personal belief that part of the reason that we keep bubbling over and making a mess of the economy is because people get too confident. My intuition is that a confident business man in 1998 or 2007 bore little resemblance to the confident business man of yesteryear. The confident business man of yesteryear thought things would go well, but was still concerned with putting on too much debt, still judged each investment carefully, etc. (Isn't my hindsight rosy?) However, the confident business man of 1998 thought anything with ".com" after its name had to be a billion dollar company, and a confident business man of 2007 simply thought there was no end to how many condos people would need in Florida. The former, despite the investor having little idea what the company did, how it was managed, etc. The latter, despite the investor having no information on how many people need houses in Florida, how many other houses were in construction, etc.; and especially in the latter case the investor had no problem borrowing out the wazoo to fund the investments. So, it seems to me that the current lack of confidence is a proper corrective measure that is actually moving people back towards sanity. I suspect that the recent bubbles were the result of what would, in almost any other contexts, be viewed as clinically insane overconfidence. The question that remains up for grabs is whether 1) our economy is now at a sane point, and we should just be happy that the uncertainty level is reasonable, or 2) if we are now even less confident than we should be. That I'm not sure about. Locally, it feels to me like people are very sane when talking about their personal economics, but I don't really know what's going on country wide. In any case, the economist is right that the economy would grow if people were confident, what I don't see economists talking about is having a target level of confidence that is judged "sane." Blah, blah, blah, to much already so I'll sign off, Eric P.S. Did you ever see the rap battle between the economics of Hayek battling Keynes? It is really good: <http://www.youtube.com/watch?v=d0nERTFo-Sk> On Mon, Jun 20, 2011 05:06 PM, Russ Abbott <[email protected]> wrote: >> ><http://delong.typepad.com/sdj/2011/06/collapse-of-the-chicago-school-gary-becker-edition.html> > talks about business investment, when it collapsed (before Obama took >office), and how it's done since then, which is quite well. That's not >consistent with the uncertainty story most Republican politicians are trying >to sell. >> >>> > >>I'm not clear about what you (Eric) are getting at in your post. You start >>out by saying that the uncertainty arguments have merit, but then you seem to >>go on to say that spending when uncertainty is low is a bubble. So what are >>you saying? > >> > >>For the most part people are not spending money because they are too much in >>debt or don't have jobs. That's not a matter of what Republicans are >>referring to as uncertainty. >> > > >>With respect to uncertainty due to new regulations, I'll believe it when you >>can show me all the new regulations that have been put in place in the past 2 >>years. (Very few!) >> > >>With respect to uncertainty in the job market, that certainly is the case. >>How can that be reduced? A good way is for the government to take on the >>responsibility of providing jobs when the private sector can't. But the >>people complaining about uncertainty are not likely to allow that any time >>soon. One of the functions of government is to help smooth out the >>uncertainty of the business cycle. The people complaining about uncertainty >>want to eliminate that function--thereby increasing uncertainty. And >>speaking of uncertainty, all this demagoguery about the debt limit isn't >>helping to reduce uncertainty, but it's the people complaining about >>uncertainty that are the primary debt-limit demagogues. > >> > >>In my mind, the only thing certain about the discussion of uncertainty is >>that it's almost all political and has virtually nothing to do with economics. >> > > >> >> > >-- Russ Abbott >_____________________________________________> Professor, Computer Science > California State University, Los Angeles > > Google voice: 747-999-5105 > blog: <http://russabbott.blogspot.com/> > > > vita: <http://sites.google.com/site/russabbott/> >_____________________________________________ > > > > > > >>On Mon, Jun 20, 2011 at 1:55 PM, Owen Densmore <<#>> wrote: > > >Great pointer to Clinton's points. > > >In terms of uncertainty, I think there are two different kinds being discussed. > >- The republicans discuss certainty in regulations and new laws. > >- Tom discusses certainty of the job market and downturn direction. > > > -- Owen >> >> >> > > > >On Mon, Jun 20, 2011 at 11:39 AM, Russ Abbott <<#>> wrote: > >> I'm, pretty skeptical about the uncertainty argument. That seems to me to be > >> a Republican ploy to argue for lower taxes, which in their view is the > >> solution no matter what the problem is. For the most part companies aren't > >> hiring or adding new production capacity because there isn't the demand to > >> justify it. > >> > >> But there are some things that can be done. Here are some very ideas that > >> Bill Clinton is suggesting. We miss him as president. > >> > >> -- Russ Abbott > >> _____________________________________________ > >> Professor, Computer Science > >> California State University, Los Angeles > >> > >> Google voice: <> > >> blog: <http://russabbott.blogspot.com/> > >> vita: <http://sites.google.com/site/russabbott/> > >> _____________________________________________ > >> > >> > >> > >> On Mon, Jun 20, 2011 at 9:08 AM, Owen Densmore <<#>> wrote: > >>> > >>> Tom Friedman's Op Ed > >>> > >>> <http://www.nytimes.com/2011/06/12/opinion/12friedman.html?_r=1&partner=rssnyt&emc=rss> > > > >>> > >>> He starts with shocking mortgage statistics, but then discusses > >>> unemployment and its causes via this report: > >>> <http://www.mckinsey.com/mgi/publications/us_jobs/index.asp> > >>> > >>> Quote: McKinsey Global Institute released a long study of the > >>> structural issues ailing the U.S. job market, entitled: “An Economy > >>> That Works: Job Creation and America’s Future.” It begins: “Only in > >>> the most optimistic scenario will the United States return to full > >>> employment before 2020. Achieving this outcome will require sustained > >>> demand growth, rising U.S. competitiveness in the global economy and > >>> better matching of U.S. workers to jobs.” > >>> > >>> Interestingly enough, they still feel education is important but > >>> stress areas of current need. > >>> > >>> BTW: The tech bubble folks are afraid of is likely NOT to be one. Marc > >>> Andreessen (admittedly a techie) has compiled P/E ratios of the new > >>> tech market and shows them to be well under traditional values. They'd > >>> please any conservative investor. > >>> > >>> Tom is concerned about the Uncertainty Tax .. our loss of production > >>> due to fear of downturn unknowns, but ends: Any good news? Yes, U.S. > >>> corporations are getting so productive and sitting on so much cash, > >>> just a few big, smart, bipartisan decisions by Congress on taxes and > >>> spending (and mortgages) and I think this whole economy starts to > >>> improve again. Workers with skills will be the first to be hired. > >>> > >>> -- Owen > >>> > >>> ============================================================ > >>> FRIAM Applied Complexity Group listserv > >>> Meets Fridays 9a-11:30 at cafe at St. John's College > >>> lectures, archives, unsubscribe, maps at <http://www.friam.org> > >> > >> > >> ============================================================ > >> FRIAM Applied Complexity Group listserv > >> Meets Fridays 9a-11:30 at cafe at St. John's College > >> lectures, archives, unsubscribe, maps at <http://www.friam.org> > >> > > > > > > > > ============================================================ >FRIAM Applied Complexity Group listserv >Meets Fridays 9a-11:30 at cafe at St. John's College >lectures, archives, unsubscribe, maps at http://www.friam.org > Eric Charles Professional Student and Assistant Professor of Psychology Penn State University Altoona, PA 16601
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