Optimism, anxiety and the state of the economy

Yesterday US President Obama gave an annual speech that US Presidents give, called the State of the Union address. Conservative thinkers here think that David Cameron should initiate a similar thing, but that’s by the by. The BBC reports that Obama’s final SOTU (everything it seems gets an acronym in the US) conveyed a message regarding optimism and anxiety.

You may think trivial emotions like optimism and anxiety are utterly irrelevant when it comes to how economic outcomes are determined, but you’d probably be wrong. Indeed, one of the early Keynesian business cycle theories that we’ll cover later in term suggests that co-ordination failures occur because some people are less optimistic and hence don’t do particular things (e.g. produce less thinking they won’t sell all that much), leading others to do the same – the pessimism of some is contagious.

The antidote to such failures of co-ordination might be more co-ordinated positive speak – such as Obama encouraging everyone to be optimistic. It sounds almost silly, but what is the empirical evidence? Here’s some bedtime reading¬†on the matter, work by an economist called Sylvain Leduc who considers business confidence and economic fluctuations. Work I’ve been doing myself suggests that the Bank of England’s Monetary Policy Committee, which determines monetary policy (the setting of interest rates to achieve an inflation target), pays a lot of attention to business confidence when considering the state of the economy.