The Dangers of Economic Optimism

Who's optimistic about 2010? Slate's Daniel Gross is:

My bold prediction for 2010 is that the consensus of the forecasters surveyed by the Philadelphia Federal Reserve, which projects the economy will grow only 2.4 percent in 2010, is too pessimistic, perhaps by half.

The Menu title of Gross' article is: "The dangers of economic pessimism." The basic idea is that we were too optimistic about the economy in the boom times, and now we're being too pessimistic in the bust. But isn't the much graver danger today in economic optimism?

Gross is right that there have been plenty of happy surprises in the upturn. Many of us thought the Dow would languish in the 5000s in March. Today it's in the 10,000s. We thought some of our biggest banks would be hosed for years, whereas many are already paying back their TARP funds with interest. So yes, the Debbie Downers can be wrong too.

But Gross is omitting some important reasons why pessimism remains popular. Our big Q3 GDP recovery was initially reported at 3.5%, then revised to 2.8%, and then again to 2.2%. Low 2% growth will barely be enough to hold the unemployment rate steady much less provide jobs for an expanding population and today's unemployed. The housing market remains weak. The Federal Reserve is planning to rein in its asset purchases even with unemployment over 10 percent. Relaxed housing standards are set to end. There's no guarantee of another round of stimulus spending to juice Americans' depressed consumerism. In other words, we're barely growing and the very government programs that lured Americans to the nation's storefronts in Q3 are ending.

The danger of too much economic optimism is that it coincides with too much fiscal caution. We tell ourselves the '09 stimulus will be enough, and that doing too much will upset the fragile bond markets by making American debt look dangerous and driving interest rates through the roof. We hasten the rush to normalcy and in the process turn 2010 in 1937, the year the Great Depression double dipped as FDR and his advisers tried to balance the budget and shrink the money supply.

To be sure, I don't know what's going to happen in the next 12 months any more than Gross does. But it's important to note that there's a danger to both economic optimism and pessimism.