Wednesday, May 4, 2011

David Leonhardt understands classical conditioning

- by New Deal democrat

On Monday I said:

I have argued . . . that [last summer’s slowdown] was a classic case of classic psychological conditioning. Dog hears bell, dog receives shock. The next time the dog hears the bell, it cringes, anticipating a shock. Last spring the Euro crisis recapitulated the early stages of the 2008 financial crisis. LIBOR rates surged. Businesses and consumers froze, fearing a repeat of 2008. (It also didn't help that Americans could see live video, 24/7, of a potentially cataclysmic Oil volcano erupting on the bottom of the Gulf of Mexico). The economy stalled. When the Euro crisis abated (and the well was capped), the economy unfroze.
Via Prof. Brad Delong, today we learn that David Leonhardt of the NY Times says:

Crises do so much damage that they leave businesses and households predisposed to believe the worst and to pull back at the first hint of economic weakness. Households are slow to resume spending. Banks are slow to lend, especially to small businesses. Companies are slow to hire.
Ding! Ding! Ding!

Economics really needs to understand, in dynamic fashion, classical and operant conditioning.