Recessions Are Stupid
Dolors & Sense
by Sanford Rose
KISSIMMEE Florida—(Weekly Hubris)—10/10/11—At the highest level of generality, all matter is non-material. It is a mere artifact of human perception.
At a lower level of generality, economic recessions are mere artifacts of human misperception.
The current recession is a balance-sheet one caused by a decline in the value of property. The perceived value of real property was over-stated in the past. The initial stages of the recession served to correct, and ultimately over-correct, this misappraisal by changing the way people capitalized or discounted future property income.
Thus, the immediate cause of the recession was financial, not “real.” There was no fall in the capital stock or in the skill level of those who work with that capital stock.
Our productive apparatus and its potential output remained undisturbed.
Up to a point.
That was a point at which people began to translate their perceptions of increasing poverty into reduced purchases that served to initiate what is commonly called a positive feedback loop.
People, feeling poorer, spent less, which led to declining sales, which increased unemployment, which crippled tax revenues, which exacerbated a budget deficit, which foreshortened the size and duration of a fiscal stimulus, which led to more persistent unemployment, which is eroding work skills and thus circumscribing potential output and productivity gains.
It is perfectly understandable that individuals should behave the way they did.
It is perfectly indefensible that governmental and opinion leaders should behave the way they did.
Their role was to offset the fallacy of composition—that is, the belief that the collective should behave in the same way as the individuals that compose it.
When so many stop spending so quickly, the intelligent response is to do the reverse. To do otherwise was, and is, stupid.
Sanford Rose
Sanford Rose, of New Jersey and Florida, served as Associate Editor of Fortune Magazine from 1968 till 1972; Vice President of Chase Manhattan Bank in 1972; Senior Editor of Fortune between 1972 and 1979; and Associate Editor, Financial Editor and Senior Columnist of American Banker newspaper between 1979 and 1991. From 1991 till 2001, Rose worked as a consultant in the banking industry and a professional ghost writer in the field of finance. He has also taught as an adjunct professor of banking at Columbia University and an adjunct instructor of economics at New York University. He states that he left gainful employment in 2001 to concentrate on gain-less investing. (A lifelong photo-phobe, Rose also claims that the head shot accompanying his Weekly Hubris columns is not his own, but belongs, instead, to a skilled woodworker residing in South Carolina.)