Microfearonomics

Will Wilkinson rants:

In the debate over economic stimulus, I hear many otherwise brilliant people making a lot of baseless conjectures about mass psychology — about consumer and creditor “fear” and “uncertainty,” and what to do about it. But, as far as I can tell, none of them has even a rudimentary theory about the causes of micro-fear or how it scales up to aggregate consumer demand or aggregrate credit supply, etc...

Nevertheless, I hear economists saying things about how easy money is needed to soothe investor worries, about how a surge of government spending is needed to quell consumer anxieties, about how the government’s “doing nothing” would cause people to panic and make everything worse, and so on. Do any of them have any idea what they are talking about when they say these things? I’m afraid they don’t. And, frankly, I think they should be ashamed of themselves.

Like usual, I agree with a lot of what Will is saying. Monetary and fiscal stimulus have become such an expected response to recession that perhaps the best way for the government to restore consumer confidence would be to do nothing, signaling that no stimulus is even necessary.

One problem is that the politicians in power have an incentive to make the situation appear worse than it really is. That way, if the solution fails they can deflect the blame onto the situation itself. I believe we have a massive principal-agent problem on our hands, with politicians focused more on applause lights and showing care than on the actual results.