Thinking Pitfalls

I was reading an excellent post by John Mauldin which has some great insights into the future of the economy (scroll down if you link there). I found the prediction that we can expect persistently high unemployment as a result of “rescuing” the economy most insightful.

Nevertheless, this post can lead you astray if you don’t keep things in perspective. Two notions concern me:

While macroeconomics can offer insight into aggregate behavior, we do not live aggregate lives. While macroeconomic conditions are interesting, most people care more about their personal microeconomy. Consumers were carrying far too much debt, but that doesn’t mean that all consumers, or even most consumers, were too heavily indebted. Aggregate numbers can be driven by the margins and the aggregate effects can have little or no effect on most individuals. So, while unemployment may lock in at 10%, it’s likely that this will be concentrated in certain job categories and industries. A prudent person can avoid the damage. For example, I’d think twice before considering a career in manufacturing.

Mauldin makes much of our economy settling into a “new normal”. I understand the thinking, but remember that every “normal” of the past proved unsustainable. There really is no “normal”. A better way of thinking about the economy is that it lurches from change to change as Schumpeter described: “creative destruction”. Thinking of a “new normal” might lull one into complacency.

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