Economies are mobs. Prices are set by the number of people who are willing to buy something and what they are willing to pay for it - they are determined by collective, rather than individual decisions. In times like these, they are increasingly characterized by mass panics and mass rallies - by emotions and fear.
As much as economists like to cite historic trends or graphs or abstract indicators about what is going to happen and when, there is no intrinsic rule that says oil will become less expensive in the month of June or that gold will skyrocket in even-numbered years. There is especially no intrinsic reason why all stocks should rise and fall together, like they did today, by news stories that have nothing to do with the individual companies being traded, but rather, the collective abstract sense of the entire economy's well-being. They move together because of collective emotion. The prices of these things go up or down because of our collective choices, which essentially means they go up or down as much because of other peoples' choices as our own, and under the premise that people tend to act alike under similar circumstances.
For all the Objectivist's claims about the intrinsic ties between capitalism and individuality, there is no one less individualistic in this world than an investor in a volatile market.
Similarly, the rise and fall of the entire economy is determined, not so much by complicated graphs and hidden variables that nobody can understand, as much as by one simple thing: our collective actions.
So when you're trying to figure out whether the economy is going to grow or shrink over the next six months, it boils down to one simple question: are people going to be more productive over the next six months than they are now, or less? That breaks down into two specific areas to look at: are people going to spend more money, or less? Are companies going to hire more employees, or fewer?
Businesses right now are in a place of hesitation. Collectively, when you read the stories you hear nearly all of them saying that they've been making more money than they were last year. On its face, that is proof-positive that the economy is growing. On the other hand, they've been saying that they don't want to respond to this growth by hiring more employees - even when they feel they could use them - because they don't know if the boost in sales is going to last. Sales are tied to the collective actions of all potential customers, choosing to buy or not to buy. They are tied to the entire economy.
In other words, Companies don't want to hire and be more productive because they don't know what the whole economy is going to do over the next six months.
Imagine the absurdity of that statement, considered simplistically. When businesses hire and do more, that is growth in the economy. If every company in America decided today to add 1 employee for every 10 employees currently working - a 10 percent expansion in workforce - the entire economy would roar ahead at a tremendous speed. Unemployment would plummet. Profits would skyrocket. The vast majority of the companies would almost certainly be able to profit from the investment, because more people working would mean more people would have money to spend, there would be more demand for goods and services, and on top of that there would be more work actually being done. So refusing to hire because you don't know what the economy is going to do is literally stagnating the economy in case it stagnates. It's circular.
This would imply that taking action, choosing to hire or invest, is good. The only downside of action, is being the only person to make the choice you are making. Companies are timid. In one sense, being first to act can be good; being first to buy stock that suddenly rises in value can be immensely profitable because you get it cheap and can sell it for more money. That's part of why the stock market has done well over the last year, as the first segment of the economy to expand. Being first to come up with a product that people need has produced millionaires and billionaires throughout recent history. On the other hand, if nobody acts - if you attempt to be first in a trend and the trend never materializes, the outcome could be rocky and even a loss. Hiring ten people and not having sales increase means that everything you paid those employees is a loss for you. In other words, adding employees to your workforce only works when all other companies do so too.
Ideally, the best economic stimulus that the government could possibly offer is an order that every business expand workforce by five percent. This, of course, is illegal and unconstitutional. But it would work.
This is an extremely simplistic view of the economy. People don't pay thousands of dollars and work for four years to learn economics in a form as simple as this, which is something a fifth grader can understand. Still, the fact that the economy is as much a matter of psychology as it is material remains true.
We are now in an economy ruled by fear. Growth boomed in April, but then in May, bad news abounded. A leaky pipe in the Gulf of Mexico is pumping millions of gallons of petroleum into the ocean, which is shutting down the fishing and tourism industries in the area. A bad financial situation in some of the smaller economies in Europe is creating a financial crisis there, which has the potential to impact the United States. It's causing the Euro to decline in value, which causes the U.S. dollar to rise relative to other currencies, which causes a state of deflation in which stocks decrease in numerical value even if they are keeping the same absolute value. These things have little real impact on you and me. However, they have immense psychological impact in the U.S. American companies are saying maybe right now isn't the best time to invest or hire, even as their bottom lines show that it would be relatively safe to make such an investment, just because, you know, we're watching the news and it looks like it might be risky.
That is a self-fulfilling prophesy. If a huge number of CEO's and managers decide it may be too risky to hire now, based on a slight possibility that the economy won't grow, then the economy won't grow. They will make it become true.
Right now it is those who are mediating the information that have all the power.
Optimism is the medicine that will save us right now. That can come from a number of places. One potential source of optimism is inflation. If the value of a rising dollar can create the perception that everything is worth less and less than it used to be (which can have a very detrimental effect when you are trying to sell your product or wondering if you should invest in a new home or in stocks), then it reasons that the alternative, inflation - the lessening of the value of currency so that people will have a sense that things are increasing in value - has a huge positive psychological effect. People get paid more than they were getting paid last year. People can sell their product for more money.
In a state of inflation, even stagnating wealth feels like growth. It's an illusion, but a very effective one. That's why the last ten years - an era of absolute stagnation for most middle-class Americans - wasn't perceived as a total loss for Americans during those years. If you make a thousand dollars more this year than you did last year, you're quite proud of yourself, even if it is exactly as much as the price of everything you buy increased.
Printing more money and causing inflation also has the effect of making a given federal debt less significant, and increases the dollar value of GDP so that current government expenditures shrink by comparison. Economic conservatives call it a hidden tax, but it's hard to see how even economic conservatives want to stagnate the economy when deflation is part of what is destroying it.
Another thing that can have a huge difference is to focus on the good when it comes to media and news. That's something that nobody, regardless of their ideology, should dispute. Newspapers and magazines should run regular features on businesses that have been thriving in spite of the recession; they should feature companies that choose to hire anyway, and root in favor of them. Give investors the sense that the economy is doing better, and it will.
My cynical suspicion is that secretly, a lot of people either want or think the economy will fail because the government is now run by Democrats, and they distrust the Democrats on economic matters. A lot of people with money prefer a divided or Republican government. Whether it be by desire or just circumstantial, they can refuse to invest right now out of distrust, and the economy will suffer.
Thus, my suspicion is that whatever happens, November 2010 will be a month of growth. The moment midterm elections are over, Democrats will have either won or lost. Conservative economists and investors may want to see Obama out of office, but they are not going to want to wait another 2 years until 2012 to move; they'll act in November 2010. If Democrats win, conservative investors get over it and start investing anyway, and the economy will grow, because they aren't going to sit around and get older without doing anything productive. If Democrats lose and Republicans take Congress, they will be elated that we now have a divided government that is now more favorable to the wealthy, they will start investing, and the economy will grow.
This, of course, is all psychological. They could choose to invest right now and the economy would grow.
Or, we could talk up what's going right with this country, try to put all the bad news in perspective, and watch growth and prosperity begin to return right now as people glean some hope and make an effort to do something with their time.