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Sunday, May 03, 2009

Who's Afraid of Depression?

Why aren't people as worried about the economy falling into "periods of widespread unemployment or depression" as they have been during other recent downturns?:

Depression Scares Are Hardly New, by Robert Shiller, Commentary, NY Times: What is the chance that the current downturn will morph into another Great Depression? That question has been preoccupying people for months.

The popular mood has a huge impact on the economy, so it’s worth noting what many people seem to forget: Depression scares come and go. And by one authoritative measure, the current outbreak of concern has been surprisingly mild.

The University of Michigan Surveys of Consumers have included in their regular measurements this specific question about fear of a prolonged depression:

Looking ahead, which would you say is more likely — that in the country as a whole we’ll have continuous good times during the next five years or so, or that we will have periods of widespread unemployment or depression, or what?

The Michigan surveyors produce a confidence score from the answer to this question. ... If we define a depression scare as any time the score is below 65, there have been four such scares since 1951. ... Note that so far, at least, the worst reading in the current scare has not been as bad as those of the previous episodes. ...

The good news is that from March to April this year, the score on this question jumped ... But that upward trend cannot be trusted to continue. Historically, big jumps in the score have tended to reverse themselves in later months. When people’s fear reaches depression level, the underlying emotion seems to persist for years, despite occasional oscillations. ...

Like its predecessors, the current depression scare is characterized by serious problems that won’t easily go away. After the bursting of bubbles in the stock market and housing market, balance sheets everywhere are out of whack, and millions of people are insolvent. So it’s hard to expect that there will be a sudden and impressive recovery of confidence.

But why is this new depression scare apparently weaker than the others...? ... One can only speculate. Now that oil prices have moderated, it’s possible that most people have less vivid worries than they did in 1974-75 or 1979-82 because their economic problems are not evident every time they shop or drive their cars.

During those earlier two scares, out-of-control inflation was widely visible, but today many people haven’t personally experienced rising unemployment and foreclosures. And it’s possible that the optimistic tone of the president and the Fed has assuaged some fears, and that people might believe that the government is fixing their problems.

This time, the reasons to fret about a possible depression may seem less concrete. For most people, the worries ... about things like bank stress-test results or the “OIS-Libor spread,” are rather hard to comprehend.

As Franklin D. Roosevelt famously said during the Great Depression, “the only thing we have to fear is fear itself.” Let’s hope that is true, and that the relative complacency in the general population is good news for the economy. ...

    Posted by on Sunday, May 3, 2009 at 12:46 AM in Economics | Permalink  TrackBack (0)  Comments (13)

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