Hysteria and Economic Blogs: Why They're Best Friends

Reading blogs that in any way write about economics has generally become an exercise in utter futility. According to most good news is either propagated by corporate whores who are blind to the realities around them or presented without considering "all" the facts. All government statistics and all economists are wrong -- unless they support or present a bearish viewpoint. Then the facts are treated as irrefutable truths presented by intellectual gods. And Goldman Sachs or the Federal Reserve manipulated everything to further some plot. In other words, ridiculous conspiracy theories are far more common than simple factually based analysis. How did things get so out of line?

There are several reasons. The first and most obvious is, "if it bleeds it leads." This is a saying from the days when newspapers were the predominant form of presenting and communicating information. Bloody pictures and sensationalistic headlines simply sold more newspapers. Translate that to the blogsphere and proclamations that the economy is going to hell will probably attract more readers. For reasons that I still don't understand, train wrecks are fun to watch. I'm reminded here of the album by Megadeath titled Peace Sells ... But Who's Buying?

Then there is the issue that many people in the blogsphere were right about the economy. Over the last three or so years, the only people who issued any warnings about the US' economic trajectory were blogs. At first they were the lunatic fringe, the voice in the wilderness. But after the crash happened more people tuned into blogs to get their financial information. Readership increased. But as the facts changed -- as we saw economic indicators start to bottom and then turn positive -- blogs did not change their opinions. The reasons here are two fold. First, many people made a name for themselves by being bearish. Changing their perception would mean giving up the quality that made them famous in the first place and thereby threaten their readership. The second is many people have a preconceived perspective -- that is, some people are fundamentally bearish regardless of the economic environment. Just as importantly, there are some who want things to be bad in order to create an environment where fundamental change is more likely. In other words, these people have a clear political agenda; they simply use economics to accomplish these ends. There is nothing wrong with this. But their bias should be understood and clearly made.

Third, there is the simple fact that people who write about the economy don't understand the economy. Here is a classic example. The unemployment rate is a lagging economic indicator. This means it goes down after the economy starts growing. The intuitive reason for this is simple. During a recession businesses cut production and lay people off. As the economy starts to grow, businesses first increase production and the hours that their existing work force works. Then, as demand picks up more and more, businesses start to hire again. However, reading the economic blogsphere it becomes very obvious that people writing about the economy don't know about this relationship. I'd love to tell you that unemployment will suddenly drop to 5% next quarter. But that's just not going to happen because that's not the way the economy works. Certain things happen at certain times in economic cycles.

And finally there are the conspiracy theories floating around the Internet. According to some the entire crash was orchestrated by Goldman Sachs. According to others, the Federal Reserve is part of a secret plot to do ... something. The reality is the economic meltdown was caused by numerous, inter-related events coming together in what is literally a once-in-a-lifetime perfect economic storm. It's going to take a long time to sort through the mess to figure out what went wrong and how all of those pieces fit together. In difficult times it's easy to scapegoat parties and institutions. The reality is it's a lot more complicated.

So, here's the reality of where we are. The economy is back from the brink; we're no longer falling off a cliff. Last quarter the economy grew by 2.8%. Yes, that was the result of the stimulus -- which is exactly what is supposed to happen at the end of a recession. However, we have a lot of work to do. The unemployment rate is still over 10.2%. Unemployment benefits must be increased and extended. And plans to get the unemployment rate down should be initiated.