Pollyanna economics

8 May 2008 By Martin Hutchinson

Paulson, Bernanke and Lazear talk up the economy and play down its difficulties. When they are credible, such official boosters raise Keynesian animal spirits and boost shortterm output. But optimistic predictions that prove unfounded can backfire, causing a credibility gap.

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US Treasury secretary Hank Paulson said on May 7 that he believed the credit crunch was nearing its end. "I am feeling better about the markets", he said. On May 8 he said that the Bush administration's economic stimulus package was big enough to make a "real difference" in the economy.

Edward Lazear, chairman of president Bush's Council of Economic Advisors, told a meeting on May 7 that he was confident the US was not in a recession. "I would be very surprised if the National Bureau of Economic Research would date this period as a recession", he said.

The Federal Open Market Committee said on April 30: "The committee expects inflation to moderate in coming quarters, reflecting a projected levellingout of energy and other commodity prices and an easing of pressures on resource utilization".

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