One of the more persistent slogans of recent economic commentary is that Australia is in danger of “talking itself into recession”. This is, it seems to me, the kind of bastardisation that Australian populists are especially good at. Via the FT this morning, Wayne Swan illustrates the point nicely:
Over the years I have come to expect that there will always be those that seek to leverage the release of any kind of economic data as an opening to talk down the economy. But, the kind of negative commentary this quarter’s data release presaged, even surprised me. Using words like ‘recession’ when the facts simply do not support it is not only incorrect; it’s also deeply irresponsible. It poses a real danger to the economy because it has the potential to damage confidence. That is why it must be rebutted immediately and forcefully with the facts. I am always in the cart for scrutiny and discussion but I simply cannot abide inaccurate commentary that damages confidence, and puts jobs and growth at risk. In response, I am devoting a sizeable part of this week’s note to unpacking the National Accounts in a lengthy discussion of how the economy is currently tracking.
The FT describes this as a classic case of “shooting the messenger”.
The derivation of this idea in Australia has four sources. The first is that we now live in the kind of real estate economy that few nations have ever experienced. The most eye-opening moment for me in yesterday’s property podcast was when Catherine Cashmore, who has worked in both UK realty and on the ground through the US bubble, said the obsessiveness about information control in the Australian real estate industry was the worst she’d ever seen by a long way. Our household wealth is massively tilted towards housing, our governments and media are hopelessly addicted to the revenues. It makes a perverse kind of sense that we therefore begin to adopt real estate maxmins as macroeconomic slogans. Don’t talk down the market. OMG, no!
The second source for the notion that we can talk our way into recession is related. The Baby Boomer generation has a bad habit of privileging feelings over facts in its analysis. The doyens of Baby Boomer economic commentary stare endlessly into their navels on this topic, as if the ferocity of their gaze alone keeps doom from the door. Whether this self-importance is the hallmark of a generation or just a few of its shining lights I’ll let you be the judge!
Nonetheless, ideas about the source of capitalist confidence have a more august history than pop-psychology. The recent resurgence of Keynesian notions of behavioural economics, popularised by chaps like Robert Shiller in the US, that capitalism is in some way dependent upon “animal spirits” to function, is an example. Here is the original quote from Keynes’ General Theory about animal spirits:
Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.
So, Wayne Swan and his coterie of boomer gurus are right after all! Not so fast. Robert Shiller argues that it’s more nuanced, when discussing what went wrong in the US pre-GFC:
A critical aspect of animal spirits is trust, an emotional state that dismisses doubts about others. In talking about animal spirits, Keynes sought to convey the message that swings in confidence are not always logical. The business cycle is in good part driven by animal spirits. There are good times when people have substantial trust and associated feelings that contribute to an environment of confidence. They make decisions spontaneously. They believe instinctively that they will be successful, and they suspend their suspicions. As long as large groups of people remain trusting, people’s somewhat rash, impulsive decision-making is not discovered.
Unfortunately, we have just passed through a period in which confidence was blind. It was not based on rational evidence. The trust in our mortgage and housing markets that drove real-estate prices to unsustainable heights is one of the most dramatic examples of unbridled animal spirits we have ever seen.
Furthermore, while animal spirits have been high over a very long period of time, a whole new system for the granting of credit had been generated. Some 30 or 40 years ago there was much less intermediation in financial markets. But then along came financial innovation and a new financial system, not just in mortgages and housing but throughout the credit system, with complicated strategies of securitization and use of derivatives. The more complex the transaction the more trust is needed to sustain the transaction.
This seems to me a quite reasonable assessment of the role of animal spirits. It is not cause in itself but an essential corollary of the trust we gain from being surrounded by convincing institutions and fundamentals.
Folks aren’t stupid. They need a few basic building blocks upon which to base their positive decisions. If those fundamentals are there then animal spirits will prevail. If they are not then animal spirits will evaporate in a fume.
In Australia’s case for example, if the fundamentals of high population growth, low construction rates and affordability are fundamentally true, and the supply side that creates houses is free to work, then markets will climb the wall of worry and we’ll see a construction response. Or, if Chinese demand continues to outstrip supply then prices will remain high and we’ll see more mines built. Or, if the dollar falls persuasively and external demand returns for an enduring period then tradabale sectors will invest. So on and so forth.
Which brings me to my final point about where the current round of hand-wringing about talking down the real estate market economy comes from. If our institutions and leaders are making the right forecasts and calls, and are in tune with the population, then the trust essential for the development of animal spirits will also prevail. If not, then all of the rhetorical blandishments in the world from those same failing sources will drip like unprofitable ideas off an entrepreneur’s upturned back.
As The Economist notes:
The colourful name that Keynes gave to one of the essential ingredients of economic prosperity: confidence. According to Keynes, animal spirits are a particular sort of confidence, “naive optimism”. He meant this in the sense that, for entrepreneurs in particular, “the thought of ultimate loss which often overtakes pioneers, as experience undoubtedly tells us and them, is put aside as a healthy man puts aside the expectation of death”. Where these animal spirits come from is something of a mystery. Certainly, attempts by politicians and others to talk up confidence by making optimistic noises about economic prospects have rarely done much good.
In short, you can’t talk yourself into recession. Not unless you’re going there anyway.
