There’s plenty of gloomy thinking in the world today not least because of the ongoing war, as this piece in The Economist published much before the war began, suggests. And this has ramifications for the global economy as people’s thinking tend to be self-fulfilling. “In the late 1970s, as America grappled with an energy crisis and stagflation, President Jimmy Carter warned that the gravest danger was a “crisis of confidence” corroding public institutions and private enterprise. Decades later Abe Shinzo, Japan’s longest-serving leader, argued that stagnation was sustained by a “deflationary mindset”, and tried to jolt households and firms out of it. Xi Jinping, China’s paramount ruler, has made promoting “positive energy” a national priority.”
But the reality today is the opposite: “A new poll by FGS Global, a consultancy, of 20,000 voters and business leaders across America, Britain, Canada, the EU and Japan finds a bleak consensus: in all 27 countries, majorities believe life will be harder for the next generation and that the system is rigged in favour of the rich. In all but Denmark, majorities judge public institutions ineffective and wasteful.”
Economists have known to be pessimists as the famous quip attributed to Paul Samuelson goes that economists have rightly predicted 9 of the last 5 recessions. “In a Gallup International survey of nearly 60,000 adults, economic pessimists outnumber optimists by about two to one in Britain and Japan. In Germany they are nearly 12 times more numerous.”
Dangers of pessimistic thinking has been expressed in the past: “When expectations sour, economies can behave in ways that blunt the effects of otherwise sensible policy and distort politics. John Maynard Keynes captured this with the idea of “animal spirits”, which put confidence and expectations at the heart of economic outcomes. Robert Shiller, a Nobel-prizewinning economist, has since described how glum narratives can spread, shaping behaviour in ways not predicted by economic models. As gloom becomes entrenched across rich economies, it risks turning into a self-reinforcing drag on growth. The consequences are less investment in the future, a drift towards zero-sum protection and a politics that makes fiscal restraint harder to sustain.”
The article elaborates on each of these consequences: “Households and firms postpone decisions that are costly to reverse. Short-term effects are already visible. In America, hiring and worker quits are a third or so below their post-pandemic peaks despite solid GDP growth. Such slow labour-market churn weighs on efficiency. The euro zone’s household savings rate of 15% in 2025 was well above its pre-pandemic norm. Low confidence may also contribute to other social changes, from low fertility rates to falling college enrolments.”
Second, zero sum thinking: “When people assume that gains for one group come only at another’s expense, they support policy that shifts the focus from growth to redistribution and protection…. Stefanie Stantcheva of Harvard University shows that zero-sum thinkers favour protectionism and tighter borders…The same logic applies to technological change. In Harvard’s latest youth poll, young Americans were more than three times as likely to say artificial intelligence will destroy opportunities as create them; in the FGS Global survey, seven in ten respondents backed strict regulation and heavy taxation of AI firms.”
Finally, lack of fiscal restraint: “When voters think the future is bleak, their tolerance for short-term pain drops. Sweden’s belt-tightening in the mid-1990s worked because Swedes felt sacrifice would be rewarded. Where such a belief is absent, belts unbuckle. Across southern Europe after 2010 consolidation imposed amid stagnation met fierce resistance. When electorates feel down, they reward politicians for cushioning rather than restraint. This keeps deficits wide and inflation harder to tame.”
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