Tornado Alley (PROG)

[StephanieVanbryce]

That 1937 Feeling

Jonathan Cohn June 30, 2010 | 8:00

There are suddenly a lot of portents of economic doom. Annie Lowery notes that consumer confidence fell through the floor this month:

America’s consumers — aware of the bad economic stats and suffering from high rates of unemployment — are not feeling confident. From the Conference Board’s report on its closely watched consumer confidence index:

[The index], which had been on the rise for three consecutive months, declined sharply in June. The Index now stands at 52.9 (1985=100), down from 62.7 in May. The Present Situation Index [which measures how consumers feel about their current financial state] decreased to 25.5 from 29.8. The Expectations Index [which measures where consumers feel things are headed] declined to 71.2 from 84.6 last month. [...]

Consumers’ appraisal of present-day conditions was less favorable in June. Those saying conditions are “good” decreased to 8.0 percent from 9.7 percent, while those saying business conditions are “bad” increased to 42.4 percent from 39.5 percent. Consumers’ assessment of the labor market was also less favorable. Those claiming jobs are “hard to get” increased to 44.8 percent from 43.9 percent, while those saying jobs are “plentiful” decreased to 4.3 percent from 4.6 percent.

Economists had expected the index to have fallen to 62 in June, according to estimates by CNN.

Meanwhile, Calculated Risk predicts a slowdown. This again raises the question of why policymakers are contributing to the slowdown by pulling back on economic stimulus. David Leonhardt doesn't break a ton of new conceptual ground in his column today, but he makes the case with perfect clarity. The advanced world is making a very risky bet that the private sector can pull the economy into recovery in the face of contractionary public policies:

The world’s rich countries are now conducting a dangerous experiment. They are repeating an economic policy out of the 1930s — starting to cut spending and raise taxes before a recovery is assured — and hoping today’s situation is different enough to assure a different outcome.

In effect, policy makers are betting that the private sector can make up for the withdrawal of stimulus over the next couple of years. If they’re right, they will have made a head start on closing their enormous budget deficits. If they’re wrong, they may set off a vicious new cycle, in which public spending cuts weaken the world economy and beget new private spending cuts.

On Tuesday, pessimism seemed the better bet. Stocks fell around the world, over worries about economic growth.

[ 2nd Half: Slowdown or Double-Dip? http://www.calculatedriskblog.com/2010/06/2nd-half-slowdown-or-double-dip.html ]

It's really worth reading Leonhardt's entire column. This section is especially good, explaining why various advanced countries don't act:

China, until recently at least, has been worried about its housing market overheating. Germany has long been afraid of stimulus, because of inflation’s role in the Nazis’ political rise. In responding to the recent financial crisis, Europe, led by Germany, was much more timid than the United States, which is one reason the European economy is in worse shape today.

The reasons for the new American austerity are subtler, but not shocking. Our economy remains in rough shape, by any measure. So it’s easy to confuse its condition (bad) with its direction (better) and to lose sight of how much worse it could be. The unyielding criticism from those who opposed stimulus from the get-go — laissez-faire economists, Congressional Republicans, German leaders — plays a role, too. They’re able to shout louder than the data.

There's a strong chance the United States would be acting were it not for the unusual rules of the Senate which allow the minority party to block action. That's not the only reason -- during recessions, the public sours on government, which paradoxically makes government action to cure recessions difficult. In any case, it's not clear that even aggressive American action could succeed in the face of worldwide contraction.

http://www.tnr.com/blog/jonathan-chait/75932/1937-feeling