From those humble beginnings we now have the field of behavioral economics. It applies scientific research into people's cognitive and emotional factors to better understand economic decisions by consumers, borrowers & investors, and how they affect market prices, returns and the allocation of resources.
At the highest levels in government, behavioral engineering was applied during the Great Depression. President Herbert Hoover said that prosperity was just around the corner even as the economy continued to deteriorate.
Later in Franklin Delano Roosevelt's inaugural address he said that the only thing we have to fear is fear itself.
That same type of psychology is not being used today. The president has used jargon that risks making it worse.
In Elkhart, Indiana, President Obama warned that if we don't act immediately, our nation will sink into a crisis that, at some point, we may be unable to reverse.
During his first press conference he referred to potentially negative spiral that becomes much more difficult for us to get out of.
I understand that he needed to motivate Congress to act quickly on a stimulus package. But such rhetoric is also dangerous, and undermines one of the root causes of our recession--a slowdown in the velocity of money, which I've discussed before.
As people spend less, and save more, it makes it difficult for our economy to grow. This started last September following the difficulties with Fannie Mae & the meltdown of Lehman Brothers.
At that time President Bush came on TV...and he also frightened Americans. Our entire economy is in danger, he said. Without immediate action by Congress, America could slip into a financial panic, and a distressing scenario would unfold. Ultimately, our country could experience a long and painful recession.
Business cycles are often a product of human nature. The Administration needs to be more adept at recognizing & applying these psychological principles. Otherwise the R-word (let's hope not the D-word) becomes self-fulfilling prophecy...and actually prolongs the pain.
There are three main emotional motivators of stock markets and business behavior:
- Greed
- Herd instinct
- Fear
These in turn psychologically effect bull markets, business cycles & bear markets.
The ordinary Joe still has to eat...buy clothes...purchase a car. The president should not be afraid to tell them to spend. That's what President Bush recommended after 9/11.
We are far, far from a depression. Have you seen a food line lately? How about a woman selling apples on your local street corner?
There was a reason this positive outlook was emphasized when Bing Crosby, and the Andrews Sisters, sang:
You've got to accentuate the positive
Eliminate the negative
Latch on to the affirmative
Don't mess with Mister In-Between
You've got to spread joy up to the maximum
Bring gloom down to the minimum
Have faith or pandemonium
Liable to walk upon the scene
Today President Obama signed the American Recovery and Reinvestment Act.
In his Denver address he said, Today does not mark the end of our economic troubles. Nor does it constitute all of what we must do to turn our economy around. But it does mark the beginning of the end -- the beginning of what we need to do to create jobs for Americans scrambling in the wake of layoffs; to provide relief for families worried they won't be able to pay next month's bills; and to set our economy on a firmer foundation, paving the way to long-term growth and prosperity.
Let's hope he has turned over a new leaf--to Latch on to the Affirmative.
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