I recently made a rather controversial tweet calling out a leading U.S. economist, Larry Summers. For those of you who do not know about Summers’s ideals, he is an economist on the left side of the political spectrum. In the case of a recession, like the one the country is currently undergoing, he generally prefers government intervention over allowing the market to settle its problems on its own.
I took issue in a statement that he made in something I read on the NY Times website. He asked the Harvard basketball team if a player could go on a hot streak, where he made every shot. After fielding the team’s thoughts, Summers denied that hot streaks actually occur, saying that “people apply patterns to random data.” This clearly carries over to his view of the economy; the current hot streaks of the market do not necessarily mean that the economy is improving. I found how matter-of-fact Summers was when he made that statement quite aggravating, since he clearly disregarded the impact that emotions have on how a player (or the market) performs.
While I believe that it is technically impossible to make every shot that you take, and it may be impossible for an economy to make an immediate full recovery, one’s emotions can have a major impact on the situation. For instance, if a player has just made multiple consecutive shots, he may feel like he is capable of making another. Even though theoretically the probability of him making each shot is the same, his confidence plays a large role in whether or not he will actually make the shot. Contrarily, if a player has just missed multiple shots in a row, he may feel nervous to take another shot, as he is afraid that he will miss yet again. Any chance of him coming back and making the next shot is erased, as his emotions get in the way of his ability to score. This is the same case as with the economy of a country I feel. The collective confidence of buyers and sellers in a market is what drives the economy. If people feel that their conditions are improving, they will be more likely to spend money, which suppliers can use to hire more people, and make sure that more money is spend in other areas of society. On the other hand, if people feel that their financial state is trending downwards, they will be more frugal with their money and not spend it in ways that will help the economy. I feel that Summers failed to recognize this and gave an opinion that was not very well thought out. He may believe in using government intervention to aid the economy, but it seems to be incorrect to just assume that the other side’s opinion has no role whatsoever. Even though it logically may not work out that the market can completely work out its problems, it is rather shortsighted to believe that emotions cannot at least partially stimulate the economy. If the Americans have an outlook that is on the positive side of the spectrum, the idea that the economy is improving will cause them to spend more money. Even if a basketball player is average, if he thinks he can make a shot, it is more likely that he will.
This situation reminds me of the last game of the high school basketball season this year, where one player who was not the star of the team led the team. It all started because he made his first two or three shots. It built his confidence, and by the end of the game it appeared that he could not miss. If the U.S. believes that it can do well, it is more likely that it will. It is for this reason that I disagree with Larry Summers. He does not consider all aspects of the situation in this case, and in such an important topic, I believe that he should.