Macro expectations

About Obama’s deficit spending plan, Posner says:

There is a legitimate concern that many of the projects undertaken by the federal government will yield costs in excess of benefits. But the concern is exaggerated, because it ignores the benefits that such projects confer on fighting the depression as distinct from simply improving the nation’s transportation system or reducing carbon emissions or buying military equipment to replace what has been lost in the Iraqi and Afghan wars.

Personally, I keep ignoring this criticism of the criticism of fiscal policy. I think this is because its right. Fiscal stimulus — or at least this fiscal stimulus — is all about expectations.

To take off from the Posner quote, this policy’s effect on expectations has two channels. It will directly support wages, by “creating or saving” jobs, thus discouraging precautionary savings. In light of my last post, policy won’t be implemented fast enough to have an impact through this direct channel. The second, indirect, channel is cheerleading.

As economic statistics get worse and the reporting of them gets more dire, fear rises and expectations get grimmer and grimmer. As Krugman points out, coordinated low expectations cause economic conditions to worsen. Now, because the unemployment rate and GDP are national statistics and headlines announce the state of the nation, people look to great national leaders to cheer them. Obama’s bold, optimistic speeches and policy announcements are the macroeconomic equivalent of “Go team!” at a football game.

The irony of this is plain. If nobody paid attention to national coverage of economic conditions, their low expectations wouldn’t be so correlated and we wouldn’t need great national leaders to cheer us on.

In any case, for that cheerleading to be credible it has to backed by an actual implementation of fiscal policy. It doesn’t matter if its direct effect happens too late and a dollar short.