Wednesday, July 6, 2011

Gauging the (Pessimistic) National Mood

Over the last few years there has been a considerable debate in economics circles as to the best way to measure a country's economic health.

The conventional way, of course, is the method that we all learned in Economics 101*:


Put another way: the economic health of a nation can be defined by what it produces and consumes.

And yet some economists are arguing that this textbook definition of economic well-being misses the very important measure of the emotional state of a nation.

It is axiomatic in my business, for example, that money does not buy happiness, yet our various measures of our economy have no way of being able to answer the very simple question of whether we are happy or not.

By many measures, the United States economy has clearly improved from 2008. True, the recovery has been a tepid one, with unemployment rates still unacceptably high and real wages stagnant, yet the official data would suggest a clear rebound from the recession.

Meanwhile, the stock market has nearly doubled from the lows in mid-2009, suggesting that investors at least feel much cheerier.

At the same time, many observers believe that the national mood is in a deep funk. Several polls suggest that many of our citizens see the country headed in the wrong direction. A large percentage of us seem to believe that the best days our country are behind us - a view, by the way, encouraged by numerous politicians hoping to score political points.

There was an article discussing this phenomena in last Sunday's London Telegraph. Entitled "Down on the Fourth of July: The United States of Gloom", the author wrote in part:

Frank Luntz, perhaps America’s pre-eminent pollster, argues that his countrymen are much more downbeat now than in 1980. “The assumption with the Carter years was that it was a failure of the elites, not the system. We thought the people in charge screwed up. We didn’t blame ourselves.” Remarkably, many Americans think things will only get worse and the good times will never return.

A recent New York Times/CBS poll found that 39 per cent think that “the current economic downturn is part of a long-term permanent decline and the economy will never fully recover”. That was up from 28 per cent last October. Last month, a CNN poll found that 48 per cent of Americans believe another Great Depression is somewhat or very likely.

Luntz has found that 44 per cent of Americans believe their country’s best days are in the past, 57 per cent that their children will not achieve the same quality of life, and 53 per cent that they are less free than five years ago. So what is going on? How did the land of the free, the home of the brave, and a country that less than three years ago elected a young, untested black man as president on a platform of hope and change, get into this funk?

Down on the Fourth of July: the United States of gloom – Telegraph Blogs

I don't know if I agree with this pessimistic view - after all, the late 1970's were hardly periods of hilarity in the U.S. - but it is an interesting point.

And perhaps it helps to explain why investors think that investing in 2-year Treasury notes yielding 0.41% is better than any other alternative.

*In case you've forgotten: GDP = Consumption + Investment + Government Spending + Net Exports