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Peter Atwater: The Great Underconfidence-Driven Backlash


Nouriel Roubini is correct that nationalism is rising. If only he and his policymaker clients understood why.


Over the weekend, NYU economist Nouriel Roubini in a column for Project Syndicate wrote that "the backlash against globalization -- and the freer movement of goods, services, capital, labor, and technology that came with it -- has arrived."

As long time Minyanville readers know, I have been writing about the challenges transnational corporations and organizations face in an era of mounting nationalism for years (see Pledging Allegiance: Multinationals in an Increasingly Nationalist World).

I have also been warning of income and wealth inequality -- another topic addressed by Roubini -- for some time (see Our Increasingly Dangerous Asymmetric Economy).

My concern with Roubini's column is not its tardy and reactive focus on today's clear global challenges, but rather his argument as to why the backlash to globalization is occurring in the first place.  
Roubini writes: 

This new nationalism takes different economic forms: trade barriers, asset protection, reaction against foreign direct investment, policies favoring domestic workers and firms, anti-immigration measures, state capitalism, and resource nationalism. In the political realm, populist, anti-globalization, anti-immigration, and in some cases outright racist and anti-Semitic parties are on the rise.
The main causes of these trends, he says, "are clear": 

Anemic economic recovery has provided an opening for populist parties, promoting protectionist policies, to blame foreign trade and foreign workers for the prolonged malaise. Add to this the rise in income and wealth inequality in most countries, and it is no wonder that the perception of a winner-take-all economy that benefits only elites and distorts the political system has become widespread. Nowadays, both advanced economies (like the United States, where unlimited financing of elected officials by financially powerful business interests is simply legalized corruption) and emerging markets (where oligarchs often dominate the economy and the political system) seem to be run for the few.

What I am afraid Roubini as well as many other economists and policymakers fail to appreciate is that the supposed causes of all of the nationalistic behaviors described above -- anemic economic growth and heightened perceptions of income and wealth inequality -- are themselves just two more significant and serious consequences of weak social mood and underconfidence.

When we are underconfident, it is all about "me, here, now."  We crave small, simple, local like-mindedness, and for lack of a better term, like-ethnicity.  Just as we routinely underestimate risk when we are overconfident, when we are underconfident, we overestimate risk.  As a result, we take deliberate actions to improve our safety, security, and understanding of the world around us. 

Because of our underconfidence we also see limited opportunity, if not outright scarcity -- in jobs, wealth, income, etc.  We perceive others benefitting at our expense. Not surprisingly, we then take steps to address this. (See: In Our Zero Sum Economy, Are You Winning or Losing?)

That economists fail to see anemic economic growth as well as a long list of nationalistic behaviors as natural consequences of underconfidence is very worrisome to me.  So, too, is their failure to understand the current popularity of Thomas Piketty's Capitalism.  As I wrote for the World Policy Institute recently, it is not the absolute level of inequality that matters, but rather it is society's perception of that gap. When our confidence falls sharply -- as it did just before Occupy Wall Street in the fall of 2011 and then again last fall -- we become more aware and sensitive to economic differences.

My concern with most economists and policymakers today is that they are trying to address an urgent global problem without a clear understanding of its real cause.  Rather than getting to the root of the issue -- weak social mood and underconfidence -- they are trying to cure its numerous symptoms believing that this in turn will make the problem go away.

It won't.

Earlier this year I delivered a TEDx talk called America's Chronic Case of Underconfidence.

During the talk I discuss not only the symptoms of underconfidence, but I offer real steps to address them. As I also offer in my talk, if we want strong economic growth, we need to boost confidence first.  During a period of profound, long-term underconfidence, higher corporate profits and higher nominal asset values aren't sufficient -- especially when they come at the expense of Main Street confidence.

Roubini is correct that there is a "Great Backlash" to globalization.  If he and his policymaker clients want to get ahead of it, they need to stop thinking like economists and start thinking like socionomists. Mood matters. How we feel affects what we believe to be true, and in turn, our decisions and our actions.

Today, we live in world awash in underconfidence. The sooner policymakers understand this, the sooner they can work to address it.

Peter Atwater's groundbreaking book "Moods and Markets" is now available on Amazon and Barnes & Noble.
"Peter Atwater brilliantly provides a framework for understanding both the socioeconomic hubris that led to the great credit bubble of the past decade and the dark social-psychological hangover that has resulted from its collapse. In so doing, he offers an invaluable guide to what promises to be a very difficult and turbulent period ahead as we experience what he calls the 'me, here, and now' behavioral tendencies of the post-crash world."  -Sherle R. Schwenninger, Director, Economic Growth Program, New America Foundation

Twitter: @Peter_Atwater
Position in SH and JPM
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