Cable news mood management (15 Oct 2009)

Matt Yglesias noted the other day that no one but pundits watches cable news.

Just like traders have CNBC and Bloomberg on in their offices, political operatives are constantly tuned in to what’s happening on cable news. The result is a really bizarre hothouse scenario in which people are basically watching . . . well . . . nothing, but they’re riveted to it. How things “play” on cable news is considered fairly important even though no persuadable voters are watching it. And cable news’ hyper-agitated style starts to infect everyone’s frame of mind, making it extremely difficult for everyone to forget that the networks have huge incentives to massively and systematically overstate the significance of everything that happens.

You'd think it would be sensible if they all simply stopped watching, since hyper-agitation is in no policymaker's best interest and it leads to superfluous and counterproductive commentary. With not enough organically occurring news to fill 24 hours, the news channels are becoming ongoing emotional barometers instead, but they are tuned only to themselves. They try to make news themselves with a variety of cooked-up debates and pseudoevents and that sort of thing, reporting on the import of their own reports -- nothing new, as Daniel Boorstin's 1961 book The Image demonstrates. It's only a slight exaggeration to say that if you don't watch TV news at all, you are better informed than those who do, even if you are completely ignorant. (At least then you are capable of a genuine response to something that you learn about.) The recursive meta-news that makes up cable news regarding what's being talked and talked about on cable news just seems like information pollution.

Like Kevin Drum, I get virtually all of my news from online versions of newspapers and from blogs. I'm skeptical of TV news generally because I don't like emotional presentations of news or pretentious newsreaders or phony objectivity (as though the choice of presenting a story isn't subjective) or the oversimplification. Most "news" strikes me as attempts to regulate my mood -- build my confidence in the government or the economy or undermine it, bludgeon me with scare tactics ("What item in your closet is slowly poisoning your infant? News at 11") or feed me "human-interest" stories to, as Stewie Griffin might say, "make me smile." Am I just weird in that I want news as neutral and unengaging as possible, that puts me in a state of suspended emotionality? I miss the old Wall Street Journal.

Anyway, this interview at Boing Boing with a health news watchdog, journalist Gary Schwitzer, whose organization gave up on trying to critique TV health stories, offers some perspective.

In the early days of CNN, we had this tremendous, exciting opportunity. The channel could be place to go in-depth with background and be analytical and contextual. But then the management side swung the other way and preferred to be the wire service of the air -- take anything happening anywhere and report it with a quick turnaround.

If cable news simply was a wire service, that would not be so terrible, but when you pit three commercial would-be wire services against one another, we see what happens -- noise.

Happy talk (26 Feb 2009)

Over the weekend, economist Robert Shiller argued in an NYT op-ed that we basically need a stimulus package of happy talk. Distilling the thesis of his recent book, Animal Spirits, co-authored with George Akerlof, Shiller claims that "the Depression narrative could easily end up as a self-fulfilling prophecy." The idea behind this is basically the same as the one that causes economists to fret over consumer-confidence surveys. Economic behavior is guided by people's expectations, which are shaped not by rational assessments of their prospects but by their feelings (Shiller identifies these as including confidence, the ability to trust, and a faith in an economic system's fairness) which in turn are shaped, presumably, by the narrative driven by the media. If people invest, or spend, not out of strict need or want, but in accordance with how they feel about wanting, then the implication is that the media owes society some happy talk about the economy to keep up the "animal spirits" -- Keynes's term for the irreducible ambition that drives entrepreneurs regardless of their probability of success. As Chris Dillow puts it, in a review of Shiller and Akerlof's book,

given that the private benefits of innovation are low, and the probabilities of success in many arts and industry small, it might be only animal spirits that give us artists and entrepreneurs. As Richard Nisbett and Less Ross wrote years ago: "We probably would have few novelists, actors or scientists if all potential aspirants to these careers took action based on a normatively justifiable probability of success. We might also have few new products, new medical procedures, new political movements or new scientific theories."

Rational motivations are insufficient to explain entrepreneurialism. (Marx, for what it's worth, argued that technological innovation was a requirement of capitalism, which shapes would-be capitalists in its image. "Animal spirits" might be considered a ideological, pseudo-naturalistic account of that otherwise contradictory process in which insecurity and confidence merge to produce ambition.)

According to the "fragile animal spirits" thesis -- the idea that at any given moment, a culture bears responsibility for bolstering these tenuous entrepreneurial impulses -- not only do we need happy talk, but the state must take action -- passing a big stimulus package, for instance -- to try to change the public mood. As Akerlof put it in this interview with Conor Clarke of the Atlantic Monthly:

one of the things is that one of the roles of the government is to offset the animal spirits. So that when animal spirits are high -- and people are too trusting and they engage in investment projects that they shouldn't engage in -- one of the roles of the government is to offset them. More should have been done to curb the over-exuberance and excesses in the housing market. That's one. But at the same time, if the confidence then dries up, it's the role of the government to stimulate the demand that's fallen because of the lost confidence.

This sort of thinking has apparently been driving Will Wilkinson nuts. He seems to regard it as voodoo macroeconomics. "It now seems pretty plainly true that the thrust of prescriptive macroeconomics is propaganda." He adds in another post:

I’m extremely suspicious of what strike me as intellectually contentious, ad hoc interventions into the economy aimed at expectation management. Countercyclical economic mood-control initiatives seem to me inconsistent with the maintenance of a general framework of stable rules — that is, they don’t take the importance of expectations seriously enough — while also smacking of illiberal state propaganda.

Elsewhere, he cites another stimulus skeptic, economist Greg Mankiw, who writes

The sad truth is that we economists don't know very much about what drives the animal spirits of economic participants. Until we figure it out, it is best to be suspicious of any policy whose benefits are supposed to work through the amorphous channel of "confidence."

Moreover, Wilkinson argues that it's incoherent to use Depression fears to marshal support for stimulus spending: By the logic of fragile animal spirits, scare tactics hurt confidence while trying to garner support for a policy that will boost it. "The economics says we need confidence. But political reality says we need panic. So we try to induce panic so that we can later induce confidence. This seems an extremely awkward and implausible approach, but that doesn’t keep anyone from trying it." Well, now that the stimulus bill has passed, it's intellectually consistent, at least, that Shiller would take to the media to address the panic problem.

But the deeper problem here, of course, is that talking up the necessity of happy talk seems to lend support to the idea that the press should be censored for the economy's sake. Wilkinson: "If the thoughts and feelings of the population are the issue, then maybe the real problem is that the mass media are unduly scaring people. Wouldn’t it follow, then, that good economic policy would have at least as much to do with controlling the media as controlling the money supply? If the problem with handing Maria Bartiromo a script of state-mandated talking points is that it wouldn’t work, how do we know that? It would be pretty interesting if it turned out that manipulating the money supply is what an efficient state turns to when it can’t more directly manipulate 'animal spirits' through propaganda."

If reality is too scary for our fragile animal spirits, and helicopter drops and massive fiscal spending don't work to shift that reality, will we lose our scruples about the Potemkin option? Economic data could come out along the lines of how the Soviets would present data on their five-year plans. Politicians would then lie about conditions (Herbert Hoover style, as Shiller pointed out) until the populace begins acting against their instincts to hunker down as unemployment and hardship afflicts them or the people they know.

Delusional thinking about credit risk got us into this mess, so now the only thing to get us out is more widespread and more doggedly institutionalized delusional thinking? All right then! Not sure how this would help the "trust" and "faith in the system" components of animal spirits, but oh, well. Maybe if we perfect the dissemination of these delusions, we'll be free at last from those ultimately irrelevant real economic conditions, and the state can just drop in to tell us what condition our animal spirits should be in.

Consumer confidence and optimism (13 Nov 2008)

This is the last paragraph from David Leonhardt's article yesterday about consumer confidence (I would have made it the lead):

It would be silly to insist that a few terrible months meant the end of American consumer culture. But it would be equally silly to assume that culture could never change. It might be changing right now.

Data and anecdotes support the notion that consumers are currently spending less and mean to cut back even more -- Best Buy's CEO declared that "rapid, seismic changes in consumer behavior have created the most difficult climate we've ever seen." The FT's Lex column today wondered whether "conspicuous aceticism" might become the "new ostentation," producing "structually lower levels of demand across all areas of discretionary spending." I'm still pessimistic, though, that this amounts to a rupture with the culture that is all any of us born after World War II have known.

Nevertheless, I don't think that means Americans are incurably optimistic. One of the strangest things about the business press, and I'm still not used to it, is how optimistic is usually a complimentary term, a boon and a benefit. Where I come from intellectually, it tends to mean you are a useful idiot or a rube. That seems especially true when applied to consumers.

Andrew Kohut, president of the Pew Research Center, noted that his recent polls showed a sharp rise in the number of people planning to cut back on spending — but also a clear increase in the number who expected the economy to be in better shape next year. “What the American economy has going for it is the innate optimism of the public,” he said. “Americans get optimistic at the drop of a hat.”

We don't need a reason to expect the best; we're just dog-like in that way. Our masters are going to put something good in the bowl; we just know it.

Also, is shopping rather than saving really an expression of optimism? "I am feeling very positive. I'm going to go buy a TV set." Seems like it is a preference for living for today instead of having faith or concern with tomorrow. I guess the idea is that confidence in our future earning capabilities makes us more likely to spend now, but I always (wrongly) interpret consumer confidence as meaning "confidence in the consumer way of life." When it is high, it suggests to me a vote of no confidence in the possibility of meaningful work, of finding purpose, confidence, hope, etc. in making and doing rather than spending and getting. It's as though consumers are surrendering by being confident in the pleasures of consuming, and that when consumer confidence falls, people are indicating that they suddenly enjoy consumption less. Falling consumer confidence seems like it should mean rising personal confidence. But that of course isn't the case. They just aren't confident enough about having a healthy flow of cash to support all the spending they wish to perform.

Still, the term consumer confidence seems to relegate people to their passive roles, whereas these same people also are part of the production process. But we are accustomed to thinking that the only role we take pride and pleasure in is our role as consumer; it's through that process that we make ourselves with as much autonomy as we like -- not the working world. What's hard to take is how often disappointment in American consumers is expressed, for letting the economy down, for their thinking of other ways to make it through their days without ceaseless spending on consumer goods. How dare they? Have they lost their minds? Why can't they be more optimistic and compliant?

Second stimulus (21 Oct 2008)

Just in time for flagging consumers, Fed chairman Ben Bernanke came out in favor of another stimulus package, some of which would possibly take the form of the government sending us all some money (as opposed to dropping it from a helicopter, or burying it in holes for us to dig up, as Keynes once suggested).

This might help cushion the blow of recession, but it seems like another Band-Aid, temporarily forestalling the eventual reckoning that American consumers must inevitably face -- that we can't go on spending more than we save. (Of course, we could all use stimulus checks to pay our credit-card bills, but that would negate their intended purpose, which is to increase demand.) As Yves Smith notes, now might not be the ideal time for consumers to start saving, worsening the economic downturn, but it has to happen at some point. So it would be better to direct a fiscal package at infrastructure investments:

We have long warned that America's debt-fueled consumption, at over 70% of GDP, was unsustainable and that bringing it down to a healthier level would lead to an economic contraction. Having consumers get the savings religion during a downturn will make the recession more severe.
While we think that the pain of increasing savings is salutary (akin to lancing and cleaning out a festering wound), the powers that be want to keep demand up via another stimulus package. I'd be much happier if measures like that went to well-targeted infrastructure programs and other investments in the future productivity of the economy, rather than trying to keep the consumer spending bubble aloft.

That's a good way to think of what has happened in the past few decades: a consumer-spending bubble. But of course, it doesn't feel that way to we who have enjoyed it. It just feels deserved. The same is true of the housing bubble to a degree; people don't believe their houses are overvalued, regardless of how out of whack the ratio to rents or to median incomes have become. They just don't believe it can go backward and that value can disappear into thin air once it has been created and made palpable to them. So it seems odd that the state would intervene to boost consumer-spending at the very moment that they begin to deal with the painful reality that their consumption level was something of an illusion and adopt a propensity to save and conserve. Instead, the government wants to continue the infamous Bush program of patriotic shopping: For the good of country, we must consume.

"The faith-based economy" (15 Oct 2008)

Via 3QD comes this intriguing essay by Arjun Appadurai about the role of faith in capitalism.

we are in a new Weberian moment, where Calvinist ideas of proof, certainty of election through the rationality of good works, and faith in the rightness of predestination, are not anymore the backbone of thrift, calculation and bourgeois risk-taking. Now faith is about something else. It is faith in capitalism itself, capitalism viewed as a transcendent means of organizing human affairs, of capitalism as a theodicy for the explanation of evil, lust, greed and theft in the economy, and of the meltdown as a supreme form of testing by suffering, which will weed out the weak of heart from those of true good faith. We must believe in capitalism, in the ways that the early Protestants were asked to believe in predestination. Not all are saved, but we must all act as if we might be saved, and by acting as if we might be among the saved, we enact our faith in capitalism, even if we might be among the doomed or damned. Such faith must be shown in our works, in our actions: we must continue to spend, to work hard, to invest, and, as George Bush long ago said, “to shop” as if our very lives depended on it. In other words, capitalism now needs our faith more than our faith needs capitalism.

Capitalism no longer has to justify itself through its efficacy; we are simply supposed to believe in market magic, which tests our individual worthiness by requiring us to believe -- to trust and take on debt and spend -- whether or not we ultimately profit from it. The faith alone is presumed to be edifying, its own reward. This faith, which we the subjects of capitalism must demonstrate, is different from the trust required by capitalism's high priests -- the financiers who fuel its wondrous achievements. That has broken down, and the state is laboring to rebuild it -- it remains to be seen whether trust can be compelled with a mountain of money. But in the process of chasing risk to enhance yields in the past decade, prompting ever more opaque means of risk management, capitalism took on further religious overtones. Derivatives worked not because anyone could explain the mechanism but because investors seemed simply to accept them as truth, especially since the initial outcomes were favorable. Appadurai mentions "re-enchanted capitalism," alive with the sort of faith sociologists once expected its rational underpinnings to obviate. Instead, As Appadurai explains, we are not trying to rescue capitalism by ending superstition and letting economics work scientifically, but instead we are taking measures to restore faith, to encourage the belief in belief despite economic fundamentals.

The appetites of the beast require restoring uncertainty to its more calculable form as risk, as a first step in restoring trust between lenders, so that they will move money to yet others, so that in turn the wheels of commerce can begin to turn and our faith in the eternal mysteries of capital can be restored. Among these are the mysteries of debt as the virtuous bride of consumption, money as capable of begetting more money, and profit for the few as the key to the welfare of all. The cardinal mystery of the market, of course, verily its Spirit, is the Invisible Hand. For the Invisible Hand to move again, it needs a Helping Hand from us, the wretched of Main Street. And in lending this helping hand, in the biggest bailout in human history, we are asked to show our Faith in the Economy. For once, and perhaps for the last time, capitalism needs our Faith as much as we need its mysteries. The global economy will never be secular again.

Stimulating spending and manufacturing optimism (9 Feb 2008)

Congress recently passed a stimulus package -- which has become one of those weird set phrases in the recent news cycle, like "rogue trader" Jerome Kerviel, or the subprime meltdown or the "credit crunch." The demands of internet search engines seem to encourage the formation of such news nuggets. These set phrases become concrete abstractions, holding together and stabilizing a collection of related ideas that are actually in tension. Thereby simplified, they circulate like currency and can be deployed in lieu of a richer understanding or a more comprehensive explanation of the forces at work. The main thing I know about the stimulus package is that it means the government will send me $600 simply for being a taxpayer.

You would that would be delightful, but it seems more frightening, like something a banana republic would do. It seems akin to giving hobos booze on election day as a reward for their vote. Also, the economic problems seem to be derived from too much irresponsible borrowing and spending, so it seems peculiar that the solution would be to give consumers more money and tell them to spend it freely. It's like giving kids pudding when they haven't eaten their meat.

Built into the phrase stimulus package are assumptions about what fiscal policy (aka money spent by the government) can accomplish. The main assumption is that the economy is moving into a recession because of a failure of aggregate demand, which is a consequence of credit suddenly becoming unavailable for risky and non-risky borrowers alike. Therefore the government borrows from the future (by increasing the deficit) and hands out checks to regular folks and encourages them to spend it. You don't have to revile Keynes to be skeptical of this. Tyler Cowen makes a good case against it here:

Most fundamentally, more aggregate demand is not the answer because insufficient aggregate demand was not the problem in the first place. Just as a social framing effect (and lots of fraud) led subprime loans to be perceived as "not very risky," right now social framing effects -- call them collective fear -- are causing lower asset prices, some degree of credit constipation, and higher risk premia. The economy is undergoing a sectoral shift toward less risky assets and that can bring an economic downturn. The shift itself is costly, it brings thorny coordination problems (e.g., sudden insolvencies, overturning of credit expectations), and lower-yielding assets also mean less wealth. Lack of liquidity simply is not the fundamental problem.

But then logic of the stimulus package may be less economical than political, as is usually the case when it comes to fiscal policy -- who should get the fruits of government spending is always a political question. This package is not likely to have much direct effect on the economy, but it will certainly affect voters' attitudes. The stimulus seems a matter of preventing a hiatus in standards of living -- of habitual shopping, that is -- and forestalling the unrest this would cause. So instead of helping adapt consumers to more "realistic" limitations on their consumption, we will do what we can to encourage them that no limits exist. This is called bolstering consumer confidence, and seems likely enough to work. America is an optimistic place, after all.

The NAR's sunshine boys (19 Dec 2007)

Daniel Gross pointed out the obvious in this recent Slate column about the National Association of Realtors: You can't trust anything their forecasters say.

Within the fraternity of financial and fiscal forecasters, the seers at the National Association of Realtors—longtime chief economist David Lereah and his successor Lawrence Yun—may be uniquely ill-equipped to deliver sobering forecasts. They work for a trade group whose mission is to buck up the spirits of real-estate brokers. And real-estate brokers—who live to sell, promote, and market—are constitutionally disinclined to hear anything but good news.

This is apparent to anyone who follows developments in the housing industry in the business press, yet the business press continues to report their meaningless sunshiny accounts of the economy as though it constitutes news, discrediting other analysts across the board. Journalosts could get much more reputable numbers from the National Association of Home Builders, a trade association rather than a sales association, with less of an agenda in its forecasts.

Since economic analysts have such strong incentives to be optimistic -- it's what clients generally want to hear, and optimistic forecasts foment increased confidence, which tends to feed on itself -- a knee jerk pessimism is almost de rigeur for economists who wants to establish their independence. Nothing but innate contrarianism gives incentive to be negative. As a result, bearish views on the economy always seem to be more credible, regardless of the underlying economic data. Of course the data itself can be made to tell whatever story is preferred, if analysts are suitably unscrupulous and the reporters gullible enough. That's why CEPR economist Dean Baker will never run out of material for his blog, Beat the Press, which recounts examples of shoddy or biased economic reporting -- usually this is a matter of failing to give reference points for figures presented for shock value, or neglecting to adjust for inflation, or cherry-picking data, or presenting predictions as facts, or cheerleading for the Dow or the S&P 500 as though investors' fortunes were synonymous with the fortunes of the economy at large. But like the NAR, the business press has the interests of its readers at heart, and seeks to keep them cheerful and reassured.

"Reading the spreadsheets upside down" (17 Dec 2007)

Last week, the Economist's Buttonwood columnist, who writes about Wall Street, had an interesting piece about falling corporate profits. With the credit crisis taking its economic toll, corporate profits were bound to start falling -- don't tell the analysts though.

The consensus is that earnings will grow by 14% in 2008, with every single sector managing an advance. In the first half of the year, when many economists think that America will be dicing with recession, analysts are forecasting that corporate profits will be growing at an annual rate of 9%.
Going by experience, profits start to fall when the annual rate of economic growth falls below 1.5%. “Consensus forecasts for next year's US profit growth border on the hallucinatory,” says Tim Bond of Barclays Capital. “Even allowing for the typical bullish bias, the prevailing consensus suggests that equity analysts are collectively reading their spreadsheets upside down.”

Earnings are likely to fall because consumer spending is likely to drop. The article mentions the hit consumer discretionary sector (carmakers, retailers, etc.) taking a hit, a reflection of faltering consumer confidence. I'll add the usual caveat here -- I tend to root against consumer spending, particularly of the discretionary sort, because, paradoxically, I take it as a proxy for rote, thoughtless consumerism. Rather than exercising discretion or saving, consumers seem as though they are obliged to spend, going into debt to perpetuate their habits. But it's probably not a good idea to extrapolate individuals' psychology from these aggregate numbers; that's why they conduct the confidence surveys, I suppose. Nonetheless, consumers cannot continue to overspend, no matter how convenient that is to companies' bottom lines and to the economy as a whole. A story in BusinessWeek last week noted the rise in America's credit-card debt, and the rise in delinquincy rates on payments -- if this debt has been keeping consumer spending aloft, it seems in imminent jeopardy. And in the New York Times recession-forecast bonanza yesterday, economist Stephen S. Roach argues that

The current recession is all about the coming capitulation of the American consumer — whose spending now accounts for a record 72 percent of G.D.P. Consumers have no choice other than to retrench. Home prices are likely to fall for the nation as a whole in 2008, the first such occurrence since 1933. And access to home equity credit lines and mortgage refinancing — the means by which consumers have borrowed against their homes — is likely to be impaired by the aftershocks of the subprime crisis. Consumers will have to resort to spending and saving the old-fashioned way, relying on income rather than assets even as mounting layoffs will make income growth increasingly sluggish.

The inevitable retrenching will likely be painful, crimping the standards of living of even upper middle class families (those jumbo APR mortgages to buy those oversize homes don't seem so smart anymore), but it presents an opportunity nonetheless to transform values toward a more conservational, spartan ethic. I glamorize spartanism (hypocritically no doubt) because it seems simpler and inherently a more creative way to live than letting consumerism supplant creativity (what is noxious to me about the term creativity is how it reifies the process, makes it into a commodity). But it is certainly inconvenient to live that way, and convenience is so easy to become accustomed to and celebrate as an end unto itself, or as a means to enable even more consumption.

Corporate profits have been unusually high for several years, and there are different explanations for this, as the Buttonwood column points out:

The optimists argued that profits could stay high because the balance of power had moved in favour of capital and away from labour, thanks to the globalisation of the workforce. But perhaps profits had been boosted by accommodating monetary policy, a credit boom and the associated surge in asset prices.

It's funny how optimism equates to workers getting shafted. The idea is that outsourcing gives capital more leverage over workers, because they can draw from a much larger reserve army of the unemployed. This forces them to accept wages that are below the marginal product of their labor, meaning more profits accrue to the companies. That theory was influential enough to persuade Alan Greenspan (if we can believe his memoir) to keep interest rates low without fear of stimulating inflation -- wages would remain tamped down, so the increase in the money supply would lead to capital investment rather than inflation and a more rapid circulation of funds. But then this logic leads to the other explanation for erstwhile surging profits. Interest rates were low, money was nearly free, and inflating house prices were making consumers feel flush, giving them access to equity lines of credit. So when wondering where the money went as homes are foreclosed and banks go under, those fat profit margins might be somewhere to start.

Consumer confidence and consumerism (23 Nov 2007)

After years of people going into deeper debt to fund steady increases in consumption, it seems like consumer spending is finally going to give, just in time for Black Friday and the high retail season buckling under the strain of increased fuel prices, drops in housing prices, and suddenly tighter lending standards. Both the Economist and BusinessWeek ran cover stories about the possibility of a recession in America stemming from consumers inability to keep on consuming. The Economist story notes that "even if the economy technically avoids a recession, it will feel like one to most Americans—because it will be led by consumers. That will be a big change. Consumer spending has not fallen in a single quarter since 1991; it has not fallen on an annual basis since 1980. Consumers barely noticed America's last recession—when low interest rates and high house prices kept them spending solidly." In other words, easy credit has made consumers feel entitled, even obliged to spend. The loss of disposable income/loan funds to spend will force consumers to get more creative to stretch their dollars to provide the same amount of shopping excitement. If shopping action can be likened to gambling action, shoppers may have to drop down to cheaper tables and throw out fewer bets for the dealers.

For years, credit was easily available, at interest rates that almost made it imprudent not to borrow, especially considering that housing prices were perpetually increasing, supplying new collateral for further borrowing. Hence people would extract equity from their homes in the form of loans and spend it on consumer goods. The stereotype -- one I admittedly have a weakness for -- is that self-indulgent Americans were splurging on flat-screen TVs, luxury cars, electronic gadgets and whatnot, but it also includes things like college tuition, cell-phone services, child care, medical expenses, and things less glamorous and easy to condemn as wasteful. (Law professor Elizabeth Warren has a good paper on the "overconsumption myth." She argues that "The Over-Consumption story dominates any discussion of the financial condition of America’s families, but when all the plusses and minuses of changes in family spending are added up, a very different picture emerges. Families are spending less on ordinary consumption and more on the basics of being middle class." Whether the basics of being middle class are skewed, or subject to hedonic-treadmill style escalation into frivolous unnecessaries is a different question, but people feel obliged to spend what they must to hold on the status they achieved, regardless of whether what they spend it on is truly useful or necessary in the abstract).

Michael Mandel's piece in BusinessWeek surveys the likelihood of a consumer pullback, balancing the optimists against the pessimists and ultimately making it seem as though consumer spending is divorced from underlying economic forces, and that consumers instead respond to vague impressions they get from the economic zeitgeist. Thus, Mandel comments that the Fed needs to use rate policy to encourage consumers to remain calm. "More rate cuts by the Fed can cushion the impact of the consumer cutbacks but not avert them altogether. It's best to think of this as the end of a long-term spending and borrowing bubble, where the role of policy is to keep the inevitable adjustment from turning into panic." If rates stabilize, perhaps people will continue to feel comfortable tapping the "about $4 trillion in unused borrowing capacity on their credit cards" that remains available to them in the aggregate. Because ours is such a consumerism-oriented culture, institutional forces to encourage shopping regardless of conditions are already entrenched -- think of the expanse of the advertising infrastructure, or the way shopping today is a news story on every local news program across the country, or the flood of credit card solicitations that come to our mailboxes virtually daily.

I'm prone to mistaking a drop in consumer confidence as a pervasive and potential loss of faith in consumer values, even though the two have little to do with each other. Just because people report that they are worried about how much they can spend doesn't mean they have suddenly made their peace with doing less shopping and finding alternative preoccupations. It's not like they are losing confidence in the promised power of things to make them happy. If anything, advertisers likely redouble their efforts in down times and people rely more than ever on the fantasies ads evoke, in lieu of being able to actually get the things advertised. The fantasies can sustain them until purchasing power returns, and the objects of the fantasies probably become even more alluring.

But whenever consumer confidence dips, or consumer spending drops, or retailers report weaker earnings than expected, I tend to see this as good news, as proof that people are busy doing something else. That's probably because I think of consumption mainly as frivolous consumerism, as a self-defeating preoccupation with acquiring things rather than making the best use of them. If economic conditions diverts people from consumerism, maybe then they will refocus on making the most of what they already have, better conserve what already exists and find alternatives to consumption for ways of spending time -- to consume leisure rather than goods, to avail oneself of shared, cooperative public activities rather than retrench in private and partake in invidious comparison -- figure out ways to gloat about how much higher on the ladder one is, or how one's belongings prove how much better one's taste is in things.

But of course, when consumer confidence drops, and consumption levels suffer, growth is restricted, investment falls off, and unemployment rises along with general anxiety. People are not likely to seize upon recessions and relative privation as great opportunities to get in touch with the "things that really matter in life," as consumption measures do take those things into account. This is where the longstanding argument about whether levels of consumption correlate with levels of reported happiness come into play. On the face of things, the correlation seems weak; people don't tend to be any happier as their incomes improve, since they adapt quickly to their new horizons, and the stress of keeping up with unfamiliar mores in new socioeconomic classes takes its toll. But some argue that self-reporting is no way of measuring happiness because people have no useful perspective on themselves, and that the clear improvements in standards of living measured in other terms -- in productivity and leisure and in the richness and diversity and quality of goods -- are, though taken for granted, extremely significant advances that no one would voluntarily surrender. These things clearly derive from economic growth driven by stimulating consumption.

Chinese arithmetic (26 May 2007)

I have a naive faith in the transparency of numbers, trusting that they have no significance in themselves but allow us to see directly through to the importance of the amount they have measured. Numbers are truly floating signifiers, with no meaning until they are given a context, something to count. I naively believe that everyone else fundamentally feels the same way, in the abstract. This seems a cornerstone principle of what it means to be rational, and it draws the boundaries that mark off the territory of superstition. The incantations of economic data or earnings reports, with their endless litany of percentage gains and year-over-year comparisons and moving averages, seem in part an elaborate ritual to testify to the neutrality and clarity of numbers, so solemnly are they invoked to give meaning not to themselves but to large intractable phenomena in the economy. Few reading these stories about economic indicators or market performance reports care about the specific numbers, only the justification and the argument that the numbers allows to be built around them. They anchor the ongoing narrative of capitalist practice without usurping it. The efficient transparency of numbers facilitates the smooth series of exchanges and calibrations capitalism requires -- the price system works because no one presumably fetishizes the price itself but rather allows it to shift freely according to conditions.

That's why a story like this one from the Wall Street Journal a few days ago is so disturbing: it relates how numerology contributes to driving the Chinese stock markets.

Part superstition and part self-fulfilling prophecy, numerology is a basic trading strategy in China. The philosophy reflects the widespread belief in Chinese society that numbers contain clues to good fortune.
It is a little noticed force adding fuel to a roaring market in the world's fourth-biggest economy. The benchmark Shanghai Composite Index is up 56% this year and quadruple its level at mid-2005, a spike that is raising concerns about an investment bubble.
Investors' zeal to base decisions in numerology also helps explain why Beijing has been unable to temper enthusiasm in the stock market through conventional measures, like credit tightening last week.
To professional observers, the Chinese investing public's trust in the predictive power of numbers -- rather than fundamentals like business prospects or profit -- is one of many reminders of how buying on the Shanghai and Shenzhen stock exchanges looks like gambling.
Brokerages are set up like casinos. Investors drink tea, smoke and chat as they make trades on computers lined up like slot machines. Instead of dropping in coins, they swipe bank cards to pay for shares.

What makes this so flabbergasting, I think, is the enormous effort made in business discourse to make stock markets not seem like gambling. a great deal of emphasis is placed on providing information that justifies stock prices, connecting them to earnings in elaborate ways. But if the stock prices have more to do with the numbers themselves, then it's just roulette. Then it's predictable only in the sense of self-fulfilling prophecy mentioned above, which scuttles the idea that economic growth and the stock market are connected, that stock market bubbles are producing real progress or change in the society at large.

And then an article like this one, from last week's Economist seems scarier.

For the government the situation poses quite a challenge, particularly as anecdotal reports indicate that the stock buying craze is rampant both among the urban middle class and less well off sections of society like taxi drivers, pensioners and students. Should the market suffer a downturn these people could vent their fury, as investors did in the late 1990s when stock price crashes occurred, threatening political stability. The government will want to avoid such scenes in 2007 and 2008, as the Chinese Communist Party holds its five-yearly congress and the Olympics kick off in Beijing.

Inducing novice investors with possibly numerologically based investing strategies into an overheated market seems like a recipe for catastrophe.

Hence, from this week's Economist:

The Chinese consider four to be a very unlucky number (because in Mandarin it sounds like the word death). The number 4444 is thus presumably as bad as it gets. So suppose the Shanghai A-share index closes during the next week at 4,444 (it stood at 4,375 on May 23rd), which is quite possible given its 258% gain since the beginning of 2006; might that frighten investors enough to cause the share-price bubble to burst?

It just seems terrifying to me that stock markets can aggregate people's superstition and give it agency in the nonbelieving world at large.

Pent-up pessimism (28 Feb 2007)

A break from Billy Squier video deconstruction for something more trivial: Yesterday, stock markets around the world fell precipitously: In America the Dow dropped 3.3%, the S&P 500 was down 3.5%. What prompted the sell off seems to have been the Chinese market falling by 9% on Monday (which may or may not have had something to do with Greenspan talking about recessions in Hong Kong) and the report that durable goods orders fell 7.8%.

But the truth is, as Felix Salmon reminds us here, that no one knows exactly why this happened.

any halfways-decent financial journalist gets it, and, if honest, would simply write a story saying "the market went down and we don't know why". But instead we're inundated with "explanations", from an assassination attempt on Dick Cheney (Daily Intelligencer: "Are investors balking because Cheney was attacked? Or because he wasn't hurt?") to a drop in one of the most boring economic series in the US. (Go on – quick – tell me what a durable goods order even is.)

CNN quoted Hugh Johnson, chief strategist at ThomasLloyd Global Asset Management, who shares this scary perspective: "Markets can decline in one seemingly isolated part of the world and that decline can be transmitted to other parts of the world through the psychology," he said. This is by no means an isolated or unusually insightful comment about investor psychology. The Capital Speculator blog echoes the sentiment:

we don't have a clue about what's coming. But we do have a firm grasp of history, which is conveniently available for all to see in full clarity.
The fact that China and subprime mortgage markets have slipped may be dismissed as marginal events of no real relevance to the capital markets. But we think such stumbles are early warning signs of things to come. Granted, this is a highly speculative notion and so readers should proceed accordingly. Nonetheless, we think our view has merit if only because bull markets have flourished across the spectrum of asset classes for some time and, well, nothing lasts forever.
As such, we're keeping a diary of market corrections large and small. If and when they accumulate, the broader investment community may become jittery. It's virtually impossible to predict market peaks and troughs, but at this late stage in the bull market cycle we're increasingly anxious and so we're keeping an eye out for additional warning signs. Having built up a tidy nest egg, we're in no rush to watch it evaporate. Been there, done that. Wealth preservation, in short, is at the top of our financial priorities at the moment.
It's never clear what might trigger a broader sell off, but we're mindful that it could be seemingly low-risk events when the supply of optimism reigns supreme around the world. History suggests no less. No, the financial gods don't wave flags or ring bells at market tops or bottoms, although sometimes they whisper in your ear and suggest things.

In other words, bull markets last until they don't anymore.

It's disturbing to think that shareholders are like Wile E. Coyote having just run off the cliff, and they can stay aloft only as long as they don't notice there's no longer any ground beneath them. Suddenly business seems much more like astrology, and the copious amounts of carefully scrutinized market data (which usually reassure me) become no better than the careful tracking of the stars' movements and configurations. The data can be verified, but the interpretations seem more and more speculative.

Also, if confidence alone is what props up markets, the business press becomes implicated in either sustaining or undermining it; virtually everything one reads in it must be considered in that light and the optimism expressed must always be discounted: that means this sort of story about stocks bouncing back today must be held in some suspicion (unless, that is, you don't really care why markets move as long as they move upward) -- the headlines are almost always out of step with the information buried in the article. The widely disseminated bias against pessimism has roots in this; it's a crime against the economy (just as it lets the terrorists win if we don't go shopping).

For a real dose of unfettered skepticism, you need to dig a little deeper into to the econoblogosphere: Here's arch-pessimist Nouriel Roubini, by way of macroblog with some unpleasant medicine:

The US is likely to enter into a recession in 2007; and even a likely and early easing of monetary policy by the Fed will not prevent such a recession as there are too many weaknesses in the US economy: a housing recession, an auto recession, a manufacturing recession, a real investment recession (as corporations are reducing real capital investment and inventories are falling), a US consumer that is on the ropes and at its tipping point; a meltdown in sub-prime mortgages that is leading to a generalized credit crunch in the economy. It is already ugly and it will get uglier in the real economy and in the financial markets. We are likely to observe a vicious cycle where a credit crunch and a persistent sell-off in equities leads to a worsening of the real economy with a hard landing (recession) that then weakens further the financial system. One cannot rule out a broader banking crisis if a deep recession occurs.

Dean Baker, after ridiculing the business press's tendency to get only the opinions of the same prognosticators who failed to see the drop coming ("After all, once we accept that the earth revolves around the sun, we don't want to get all our information on astronomy from believers in an earth centered universe"), also looks at the fundamentals and doesn't like what he sees:

The fundamentals I see are the unraveling of a housing bubble, leading to further declines in the housing sector, and a big hit on consumption, as the fuel of bubble created housing equity disappears. The hope that declining construction and weak consumption would be offset by soaring investment disappeared with yesterday's data showing a sharp drop in durable goods orders. It looks like investment is going the wrong way. Throw in the fact that rising interest rates in Japan may slow the inflow of foreign capital that has kept long-term interest rates so low and productivity growth appears to have slowed sharply (benchmark revisions next week will push reported productivity growth over the last two years downward) and it's pretty hard to find much positive in this picture.

This WSJ editorial, hoping to forestall rate cuts by the Fed, blames the mortgage-related securities industry and the repackaged subprime loans that have been unwinding lately. You would think they would welcome rate cuts as stimulus, but that would run the risk of boosting inflation (which is bad for those who don't live off wages) and also could spur currency movements and jeopardize the mysterious carry trade -- borrowing money at low rates in Japan to invest elsewhere, where rates are higher. According to the NYTimes article:

The possibility of rate cuts by the Federal Reserve also kindled concerns that American interest rates might eventually fall far enough to significantly close the gap with Japan’s rock-bottom rates. That gap is wide now. Japanese overnight lending rates are 0.5 percent compared to 5.25 percent in the United States. But if the gap shrinks, it could slow or halt the so-called yen carry trade, in which investors borrow hundreds of billions of dollars worth of Japanese money to invest in stock markets across Asia and around the world in search of higher returns. If this flow of money stops, or reverses, it could prompt larger sell-offs on Wall Street and drive the yen even higher, hurting Japanese exporters even more, analysts said. “Bernanke holds the trigger,” said Kiichi Fujita, a strategist in Tokyo for Nomura Securities. “If he cuts interest rates in America, the worry is that the yen carry trade will unwind.”

I'm sure it's my financial naivete, but the carry trade (like many forms of currency arbitrage) always seems immoral to me, like cheating -- it seems weird to make money not for producing anything but for shifting nominal figures around -- but I suppose they are taking on a fair amount of risk. When the value is nominal, it can go against you in a hurry.