Inactionable

In the Concise Guide to Macro Economics, David Moss points out that, along with output and money, expectations are a key driver of economic activity. While governments have been explicitly managing production and money supply for centuries, Keynes was really the first guy to dive deeply into how governments could “cultivate favorable expectations.” By spending to a deficit in a contracting economy, a government could replace private demand, but more importantly, it could send a signal to the private sector that things were getting better. As with nearly all economic policies, its efficacy is debatable, but deficit spending is certainly the favored prescription of the Bush and Obama economic teams.

But what’s the line between cultivating favorable expectations and lying? Expectations clearly have an impact on economic activity, but lowered expectations are more of a symptom rather than a cause of economic problems. You can easily imagine the danger if a government gets this backwards. If expectations are so critical, should a government that fears recession put out intentional misinformation and economic propaganda? It may be putting its own credibility and some of society’s important institutions on the line, but is that worth the trade-off?

Keep in mind that official statistics like GDP, inflation and unemployment stats are compiled and published by government agencies. People and companies have enormous trust that the government will give them truthful information, and their economic activity depends on that information. Is official misinformation OK for a better end? Can you even ensure a better end, or do you just postpone an inevitable recession?

“Economic propaganda” seems like an alarming term, but it’s something we all need to watch for. The bank stress tests from last May (which every bank passed!) and the rather frequent GDP restatements in many countries (typically downward) come to mind. Bill Gross, the PIMCO luminary, has stated that the US government understates inflation, and that investors should not pay attention to the official numbers.

Call me crazy, but cultivating expectations is an uncomfortable trend. While there may be a short-term boost to spending and asset prices, people and companies need accurate information if they are going to make productive economic decisions in the long term.