U.S.News & World Report Tumblelog

Can you psychologically “trick” the economy into doing better?

Mitt Romney’s Secret Economic Plan Revealed—Win Then Don’t Do Anything

[Mitt Romney’s statement that the economy will improve without him having to do anything] starts with the accurate observation that a recession largely consists of a drought in investment spending. It continues with the accurate observation that investment decisions are heavily dependent on expectations. If you think there’s going to be a boom, then you as a private individual want to invest a lot and if a lot of people want to invest a lot then there’s going to be a boom. But it goes awry in thinking of this as a psychological phenomenon—confidence—that can either be instilled by signing a bipartisan budget deal (Obama’s version) or by booting any sign of Kenyan Anticolonialism from the White House (Romney’s version). But that’s not how the world works. Given 2 percent inflation rate targeting, an incipient investment boom would lead to price increases which would lead to higher interest rates which would cut off the boom which is why there won’t be an investment boom.