Bah vs. Rah!

So let’s start with the title of the article in the February edition of Psychological Science: Positive Thinking About the Future in Newspaper Reports and Presidential Addresses Predicts Economic Downturn written by academics from New York University and the University of Hamburg. Huh? “Rah” doesn’t trump “bah humbug”? Uh oh, we are watching lots of sooth-sayers, including experts from some of the world’s largest investment banks to the President of the United States, who are telling us that the global economy is accelerating into bullish.

Forget the growth declines in China and India, and the mega-chaos that defines the conflicts in Ukraine, Venezuela, Syria, Thailand, Sudan, etc., etc. Ignore that fact that the U.S. recovery is pretty much a corporate wealth recovery with the rest of the country living in the new, marginal-employment-driven, Barista Economy (See my February 23rd blog for details). We are hearing too much good news and truly ignoring unfunded government pensions, rising economic costs from unbridled pollution, higher prices for food and other commodities based on changes in weather patterns and new demands from the rise of the developing world and the polarization of right and left that has created a gridlock in Congress, fomented gerrymandering to de-democratize our system of government and over-empowered the uber-wealthy who fund the screaming voices of Super PACs.

Wealth, unleashed by the gross U.S. Supreme Court Citizens United ruling in 2010, feels that they are now entitled to call the shots in political agendas. “The Republican donors who have financed the party’s vast outside-spending machine are turning against the consultants and political strategists they once lavished with hundreds of millions of dollars.

“In recent months, they have begun holding back checks from Republican ‘super PACs’ like American Crossroads, unsatisfied with the groups’ explanations for their failure to unseat President Obama or win back the Senate. Others, less willing than in the past to defer to the party elders and former congressional staff members who control the biggest groups, are demanding a bigger voice in creating strategy in exchange for their continued support.” New York Times, March 1st. Is American Democracy dead?

So as we hear strong words of economic encouragement from any powerful set of voices, according to the above study in Psychological Science, we should instantly turn contrarian and run the other way. Here’s the abstract of that research: “Previous research has shown that positive thinking, in the form of fantasies about an idealized future, predicts low effort and poor performance. In the studies reported here, we used computerized content analysis of historical documents to investigate the relation between positive thinking about the future and economic development. During the financial crisis from 2007 to 2009, the more weekly newspaper articles in the economy page of USA Today contained positive thinking about the future, the more the Dow Jones Industrial Average declined in the subsequent week and 1 month later. In addition, between the New Deal era and the present time, the more presidential inaugural addresses contained positive thinking about the future, the more the gross domestic product and the employment rate declined in the presidents’ subsequent tenures. These counterintuitive findings may help reveal the psychological processes that contribute to an economic crisis.”

Here’s how the academics reached their diabolical conclusions: “The paper, by scholars from New York University and the University of Hamburg, speculates that widespread optimism could cause people to discount the risk of trouble ahead, make unwise investments, be less entrepreneurial and thus exacerbate or even create economic weakness.

“The research examined 99 articles that focused on business and economic conditions and were published on the front page of the Money section of USA Today from August 2007 to June 2009. More positive or optimistic language in the articles, which were chosen at random, correlated with relatively poor performance of the Dow Jones industrial average the following week and one month later.

“In a second measure, the scholars studied language used in 21 presidential inaugural addresses from 1933 to 2009. The more exuberant the speeches, the less prosperous the economic development in the subsequent term, as measured by gross domestic product and the unemployment rate.

“Those readers with a cynical outlook, or even just a realistic one, could fairly say: Come on, there must be a lot of explanations for this data… Absolutely. The finding is a correlation, not causation, meaning it doesn’t show that optimistic language causes downturns. And it is fair to ask whether articles from a single publication or presidential speeches are a fair proxy for the national mood. They might even be at odds with it, given that a president, for example, might try to sound excited as a way to rally dispirited citizens.” NY Times.

Whatever! What this study probably tells us that that instead of simply accepting these optimistic words, folks who care should themselves examine the facts, the big picture and not ignore the obvious. Think about how well sub-prime mortgages were rated by the big credit agencies in 2007, how hard they were sold by Wall Street, how exuberant traders were about growth (lemmings leading themselves off the cliff) and how hard the global economy fell immediately thereafter. Maybe Eeyore was really just an independent thinker?

I’m Peter Dekom, and while the majority of the developed world seems to outsource their opinions to their chosen political factions, there is much to be said for independent but realistic analysis.