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Confidence Game.
It's hard to believe Phil Gramm said the U.S. is only in a "mental recession." These are times of tremendous economic anxiety: consumer confidence is sagging, banking and housing sectors are verging on panic, and the Bush Administration is scrambling to soothe markets. Now a key adviser to John McCain says the economy is some kind of psychological thing?
Well, Gramm has a point, even if McCain is acting as if he never met the guy. It's no coincidence that economic terms like anxiety, confidence and panic--and for that matter, depression--are all psychological terms as well. Markets get jittery because investors do; they calm down when those who invest in them are reassured that their prospects are brighter.
To some extent, every economic transaction is psychological. There's no inherent value to a house, a stock or even the U.S. dollar--just the value on which a buyer and seller can agree. IndyMac bank failed because of a perception that it was dangerously overextended. Once the panic began, the reality was irrelevant. McCain himself has argued that eliminating a moratorium on offshore drilling would have a positive "psychological impact" that could reduce gas prices.
Of course, after Gramm let slip his inconvenient truth, McCain publicly rejected the notion that our economic pain is in our heads. So did Barack Obama, who quipped that America doesn't need another Dr. Phil. They've got a point too. Unemployment, inflation, a $9 trillion national debt and $4-per-gal. gas are very real phenomena. It's no mere figment of our imagination that prices are rising at their fastest rate in 27 years. It also just so happens that IndyMac really was dangerously overextended. The panic was ultimately justified.
There's a reason economists track consumer confidence: the economy, after all, is basically a confidence game. It's a problem, therefore, that Americans are so anxious. But it would be less of a problem if someone could offer a good reason they shouldn't be.
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