The Reluctant Recovery
Samuelson, Robert J., Newsweek
Byline: Robert J. Samuelson
How gloom is hobbling the economy.
It's psychology, stupid. Not since World War II has an economic recovery been so hobbled by poor confidence. Every recession leaves a legacy of anxiety and uncertainty. But the present residue is exceptional, because the recession was savage and--more important--its origins (housing bubble, financial crisis) were unfamiliar. People are supersensitive to the latest news, for good or ill, because their vision of the future is blurred, and their bias is gloomy. Having underrated economic risk during the boom, Americans may be overrating it now. Unfortunately, perceptions can become self-fulfilling.
The Obama administration is grappling uneasily with this reality. It can rightly claim that its economic policies quelled the near-hysteria of late 2008 and early 2009. But the success was partial, and it isn't getting much credit even for that. Only 23 percent of the public say Obama's policies have improved the economy, reports a new Pew survey. By contrast, 29 percent believe his policies made matters worse and 38 percent think they made no difference. For or against, those policies haven't restored faith in the economy's underlying strength.
People's and companies' decisions to spend or hoard, hire or fire, reflect fickle hopes and fears. These fluctuate, but today's common starting point is pessimism. In May, 56 percent of American families expected flat or declining incomes over the next year, reports the University of Michigan's Surveys of Consumers. In early 2007, before the recession, 89 percent of families expected higher or level incomes in the year ahead. Economists aren't good at connecting popular moods with economic performance; that's one reason why most missed the bubble and are struggling to forecast the recovery.
The weak labor market is clearly psychological poison. Almost everyone knows someone who is or was unemployed--a jobless recent college grad, an idle construction worker, a fired manager. True, the unemployment rate (9.7 percent in May) is below the post-World War II high (10.8 percent in late 1982), but underemployment and prolonged joblessness hover near postwar peaks. Once lost, a new job is hard to find. Almost half (46 percent) of the 15 million unemployed have been jobless six months or more. …