The Blue Get Bluer

Over at Nate Silver's place, Andrew Gelman and John Sides write that one's perception of the state of the economy depends upon who's in power, and whether they're a member of your party. Democrats are more optimistic when Democrats are in power, and Republicans have a rosier outlook when the GOP is at the helm. In making their point, they write:

[I]n mid-September, John McCain notoriously said, "The fundamentals of our economy are still strong." But then in early March, he said that the American people "want to know how we got into this ditch--the worst economic crisis since the great Depression." Based on these two statements, the slide into the ditch apparently occurred sometime between September 16 and March 3.

Similarly, University of Chicago economist Casey Mulligan spent the end of 2008 arguing that the economy is just not that bad, but then changed course in March, writing that "the crash of 2008 did not bother me" but "the crash of 2009 is more worrisome . . . So far productivity has been good in this recession, but 2009's stock market could well see that changing."

It's no surprise that John McCain and Casey Mulligan's views on the economy differ from those of Rahm Emanuel and Paul Krugman, or for that matter Barack Obama, who just last week was beginning to see "glimmers of hope" in the economy.

In fairness to John McCain, the slide into the ditch did occur between September and March, though it's not like there wasn't plenty to worry about before the financial crisis kicked the economy off a cliff. But it's interesting to me that Gelman and Sides cite Paul Krugman. It seems to me that while many conservative pundits took the opportunity of the change in administration to revise their views about the state of the economy, a number of liberal intellectuals responded to the Democratic takeover by doubling down on pessimism. Krugman, along with voices like Joseph Stiglitz and Dean Baker, have been anything but positive since Obama came to Washington. Perhaps more remarkably, they've maintained or deepened their criticisms in the wake of major policy moves, including an $800 billion stimulus bill and dramatic monetary easing by the Federal Reserve.

Just two weeks ago, Krugman wrote, "So far, there's nothing pointing to a fundamental turnaround this year, or next, or for that matter as far as the eye can see," which is about as dire an outlook as it's possible to have -- no recovery, ever. And today, Krugman's latest column attempts to pour cold water on budding optimism:

The most you can say is that there are scattered signs that things are getting worse more slowly -- that the economy isn't plunging quite as fast as it was. And I do mean scattered: the latest edition of the Beige Book, the Fed's periodic survey of business conditions, reports that "five of the twelve Districts noted a moderation in the pace of decline." Whoopee.

Whoopee. Krugman greets a move away from the terrifying output contraction of December and January as worthy of little more than indifference. And what's most peculiar about all of this is that the pessimistic progressives were those arguing hardest for vigorous policy intervention. They were the most strenuous defenders of the New Deal. And their arguments won the day. The policy response this time around has been the polar opposite of that in the first few years of the depression. Believers in the efficacy of counter-cyclical policy should be expecting an imminent turnaround, not warning that a new depression looms.

How to explain this psychology? In discussing the Gelman-Sides piece, Matthew Yglesias notes that as Republicans become more informed about the economy, their perceptions of its state improve -- up to a point. Very high information Republicans, oddly enough, do worse at explaining how the economy is doing. Yglesias writes:

This is presumably because very high information Republicans were able to familiarize themselves with sophisticated arguments about why the apparent improvement wasn't real improvement.

I assume the way this works is akin to how I was slower than most Americans to recognize that violence in Iraq was dipping not despite being better-informed about the situation in Iraq than most people but precisely because I was well-informed. Well-informed and suspicious! So I was keenly aware of all kinds of problems in the data and its presentation that undermined the dominant--and, it turns out, correct--narrative about an improving security situation.

Stipulating my understanding that the economic situation is indeed fragile, I have to say I see this quite a bit in current economic writing. Among many commentators, the skeptical impulse has become so finely tuned that it immediately goes into overdrive when confronted by new data releases, or policy proposals, or political statements. Every bit of information is flawed, and that flawed-ness is yet another piece of evidence of the rot at the core of the system.

At some point, this outlook impedes one's understanding of reality; it obscures more than it reveals. High information economic observers have all taken sides, and all have trouble sorting out what part of the image they see is cognitive bias. Right now, the clearest view of the economy is probably the one from outside the economic and financial bubble. That appears to be one of cautious optimism, and for now, I'm inclined to accept that outlook.