I was talking with my brother yesterday about how one of the biggest problems confronting the economy is the sheer lack of consumer confidence. It’s palpable everywhere. Even people whose situations have not objectively changed — and are thus better off, at least in a relative sense — have curbed spending and are looking for areas to save. Obviously, such behavior is not without cause; with lay offs seemingly entering freefall, job security is a legitimate concern. I’m not entirely sure what can be done about it, but I suspect that calls for Obama to strike a more optimistic tone will be media meme du jour or du week.
However, I’m at least a little ambivalent about this notion. That is, while there seems to be no causal relationship between confidence (perception) and reality, I feel quite comfortable venturing that there is at least a very strong correlation between the two. This crisis is more than an amorphous sense of insecurity — a discovery of a wrinkle on your forehead — it’s about discovering that vast quantities of wealth simply did not exist as we perceived them. And because perception played such a role in fueling our economy before, it’s tempting to believe we can jump start recovery with the same delusory energy (I think “fixing the housing market” fits in this category). Maybe we can, but I think we’re far more likely to see confidence restored when there’s reason to believe it. Accordingly, efforts should be guided towards addressing problems underlying the confidence loss: shoring up unemployment and positiong the country for long term growth through infrastructure overhaul and by adopting a long term outlook toward fiscal responsibility.