The Self Fullfilling Prophesy of Zero Leadership

Does hysteria breed hysteria? I think that is the message of Professor Larry Kotlikoff;s article at VOX.

Imagine that you are an employer. Every day you hear, “the economy’s going over a fiscal cliff. Tax hikes and spending cuts totalling $600 billion will kill the economy”. Everyone is saying it – the politicians, the media, the economists, the Fed, the CBO, the IMF. So it must be true. Sure, the Republicans and Democrats may make a deal and save the day. But these guys never agree and, meanwhile, economic doomsday – January 1st – is just weeks away.

What do you do? Do you wait for your customers to disappear, as they surely will, or do get a head start and start firing now – or at least stop hiring? You get a head start And in so doing, you make the prophecy come true. Other firms see less demand from your erstwhile and prospective workers. But the other firms – there are 30 million of them – all do the same thing. So, voilà, you see fewer customers and weren’t all the pundits right. And weren’t you smart to get a leg up?

The professor then makes a case that the crisis of 2008 was more the result of panic than anything else. Hmmm. I don’t know Professor. There was a little thing of losing 40 to 50% of the value of one’s home that is something worth panicking about, I think.

Then he moves on to talk about what is occupying the President and Congress today; the Fiscal Cliff. He says that all the scare talk is causing businesses to take measure that will ensure that we have a recession. But, it seems to this humble observer that Kotlikoff contradicts himself with these two statements.

Let us be clear; absent collective panic, our economy will not implode if we move from running a 7% of GDP deficit to a 3% of GDP deficit. The Federal Government ran deficits of 3% or less during most of the post-war era and the economic sky did not fall in.

{…}

Ten thousand baby boomers are retiring each day. Within two decades all 78 million will be retired and collecting $40,000 per person (in today’s dollars), on average, from these three programs. These and other projected expenditures combined with our low average tax rates – historically speaking – have produced not a fiscal cliff but a fiscal abyss. The fiscal gap separating the present values of all future expenditures and all future revenues is now $222 trillion.

It seems to me that a $16 trillion debt, the insolvency of Social Security and Medicare, and the devastating burden of ObamaCare along with a deluge of new regulations to cripple businesses are more than enough reason to panic.

But, maybe the professor agrees with me after all:

As we justify doing far too little far too late, the fiscal gap, the only economically appropriate measure of our government’s true indebtedness, is growing at a colossal pace – by $11 trillion over the past year alone. To put $11 trillion in perspective, it’s as large as the entire stock of official debt in the hands of the public. So if we want to panic, there is something real to panic about. It’s the fiscal abyss, not the fiscal cliff.

And then again, maybe he doesn’t agree with me

But, of course, what is needed is not panic, but leadership. The President and other politicians need to stop scaring the nation. In so doing they are coordinating everyone’s expectations on recession and, thereby, assuring it will come. Two thirds of the public are now convinced the economy will face major problems come January 1st (Cowan 2012), whilst corporate America is already cutting back on investing and hiring (Son 2012).

If Congress remains deadlocked – which seems likely – and recession ensues, both parties will say “I told you so”. What they will miss is that their telling us so, not making minor fiscal adjustments relative to what’s needed, will likely be the true source of the recession. Our economy is crazy enough. We don’t need hysterical leaders to make it more so.

Leadership??? When is the last time anyone has seen any signs of leadership in Washington? No, Professor, I think Americans have every reason in the world to panic These clowns are going to take us down while playing their blame game. We are not going to find any leadership, Professor.

Well, now you know what I’m thinking. What are your thoughts?

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9 thoughts on “The Self Fullfilling Prophesy of Zero Leadership

  1. Leadership? President Obama seems more intent on playing golf, going shopping and enjoying the perks of being king than doing some good old fashioned deal-making.

    The Republicans? A scared, tired, small party. Don’t expect leadership from them.

  2. The good doctor, and most economists I read, seem to spend way to much time talking about two disciplines outside their areas of expertise – psychology and social morality. They should leave those to psychologists and religious philosophers.

    A lot of economists like to blame fear over rational numerics for economic ills. If we just believe that things are better and keep spending, they say, then they will be better. Poppycock! There is no such thing as an unlimited credit card… even for big government.

    The good doctor is confused. Fear didn’t create the crisis; the crisis created fear.

    Businesses are making rational decisions right now based on the best information they have. And none of that information suggests expanding your business and hiring new employees when the very real possibility of recession and a smaller market for your goods or services is staring you in the face.

    Some businesses have been suffering indecision so long over the uncertainty of government schizophrenic behavior for so long that their accumulated cash has probably got moldy!

  3. I agree Jim, Barack Obama is no leader and as we sit here and watch this play out we have to wonder if this would have happened if there was someone in Washington who was willing to lead.

    1. I don’t know where we are going to find them, Steve, but we need to find some soon at every level and maybe most importantly at the local level. We can then start taking back our towns and then our states and eventually our country.

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