Belfast Telegraph

How fear impedes us from turning economic corner

By Brendan Keenan

Animal spirits we can all understand, but what do you call their opposite? Whatever it is, we seem to be suffering from it.

A cynical nudge and wink is the most common reaction to suggestions the economy is at a turning point, or turning a corner, or whatever expression you prefer.

People just don't believe that sort of thing. They kindly dismiss it as wishful thinking, whereas the unkind say it is just an attempt to drum up business.

Yet a turning point must come sooner or later.

The news that car sales for the first five months of 2010 were better than the whole of 2009 is the latest bit of evidence that it may have already occurred and that we merely await official data.

If the Central Statistics Office conclusion turns out to be that there was in fact another decline in the first quarter, then doubtless it will add to the encircling gloom.

‘Negative animal spirits' doesn't sound quite right — but then economics has trouble dealing with minus signs.

There was, for instance, much confusion between falling inflation and falling prices, |which properly ought to be called deflation.

But ‘deflation' is usually seen as referring to pernicious, embedded price contraction, so those analysts who think that Ireland is not suffering from that affliction prefer the rather ugly term ‘negative inflation'.

I had a bit of trouble myself trying to work out the relationship between Britain's 3.5% rise in prices and Ireland's 2.5% fall. How much faster did prices rise in the one than the other?

Upon asking, I found that mathematicians struggle with it too, and come up with infinity as the answer, which surely can't be right.

The fact is that negative animal spirits are just as real — and perhaps just as important — as positive ones.

The whole phrase had fallen out of use until the publication last year of Animal Spirits: How Human Psychology Drives The Economy And Why It Matters For Global Capitalism, by George Akerlof and Robert Shiller, which re-examines John Maynard Keynes' use of the term to explain the odd behaviour of economies.

It has been replaced with ‘confidence', which will probably always be with us, because of its simplicity.

But, as a word, it hardly seems strong enough to explain why otherwise sane people would pay the same for an artisan cottage in Inchicore, as for an apartment in Paris's 14th arrondissement.

The authors of the book also make a convincing case that the inability of economic models to include animal spirits — a failing identified by Keynes in the 1930s — was still around to contribute to the 2000’s crash.

Alan Greenspan (former chairman of the United States Federal Reserve Board) himself as good as said so. His mistake, he opined, was to assume that bankers and suchlike would not do things which put their businesses at risk. When the animal spirits are up, however, they clearly will.

It seems safe to assume that the banking crisis has left the Irish in an even more intense state of fear and depression than most.

Any evidence of growth might come as such a surprise that it |provokes a bigger jump in confidence. Or it might prove impossible to shrug off the feelings of hopelessness.

Much may depend on how sharp any recovery proves to be. If the forecasts of a quick catch-up period of growth should prove right — with annualised rates of perhaps 4% a year — then the psychological impact could indeed be significant.

It would start to make the Government's budgetary target look attainable, which might persuade people to try harder to attain them. Banks or no banks, in the end the country will stand or fall on the resolution of the fiscal crisis. Most helpful of all would be if better news, combined with a peak in unemployment (albeit a high one), persuaded consumers to spend a bit more.

There will, of course, be no return to anything which could be called ‘animal spirits' in the Irish economy. It would be going much too far to say we have nothing to fear but fear itself — but fear does not help.

Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism — Princeton University Press

Belfast Telegraph