Fear is Good

2017-05-31T20:24:41-04:00April 4th, 2009|Economics (General), General Topics, New Economics, Psychology|

Fear is bad, according to conventional wisdom. Our economy is in trouble, we hear, because banks are too afraid to lend and consumers and companies too afraid to spend. Less lending and spending further depresses the economy, which begets more fear. And to top it all off, some analysts irresponsibly exploit these fears for their own ends, by arguing that the crisis may get far worse before it gets better, and in the process sensationalize and exaggerate the problem. But, in this case, conventional wisdom is wrong. The truth is that fear is good. The economic crisis we’re facing is not at root the result of too much fear but of too little.

The Stag Hunt: Deflation as a Collective Action Problem

2017-05-31T20:24:02-04:00November 26th, 2008|Economics (General), General Topics, New Economics|

In the worst case, deflation becomes its own cause. People become afraid their incomes might fall in the future. Or they see their savings being ravaged by the stock market collapse. So they stop spending and instead hoard their money. As demand for goods and services drops, companies' profits plummet, leading to layoffs, reduced working hours, and yet more declines in stock prices. The fear of lost income becomes a self-fulfilling prophecy, and people cut their spending further. Once the downward spiral starts, it's maddeningly hard to stop. People expect prices will keep falling, so they decide to put off their spending, because they think things will be cheaper in the future.

Unbounded Uncertainty #2

2017-05-31T20:24:26-04:00September 26th, 2008|Economics (General), New Economics|

Most of us want to believe that our institutions are rational, durable and fair, directed by experts who have a grip on bedrock reality and understand how things work, who will take care of severe problems when they arise. The possibility that no one knows enough to protect us is terrifying, almost unthinkable.Now, as we've watched the deal-making in Washington, we've looked into the abyss of the unthinkable.

Everything is not Peachy

2017-08-02T07:11:23-04:00August 18th, 2008|Economics (General), New Economics|

with Sarah Wolfe | Self-sufficiency isn’t a sexy idea. At best, people who say they’re interested in being self-sufficient are stereotyped as dour, old-fashioned rural-types. At worst, they’re seen as fanatical survivalists planning for an apocalypse. Economists also tell us that self-sufficiency is an anachronism. Instead, it’s specialization that produces wealth, and economies – including the world economy – produce the most wealth when everyone, including countries, specializes in what they do best and then trades their products for the other things they need. The more specialization, the more connectivity among specialists, and the more trade along those connections, the better. But there are problems with this model.