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istock_000005241474xsmallInteresting article here that makes one very simple–but very important–point. Economic recovery is dependent on peoples’ attitudes as much or more than any amount off stimulus spending.

Congress could pass a law requiring more positive coverage of the economy by the news media.

OK, so that’s a tad unconstitutional. But the spirit of that plan does make an important point. Now that inflated asset values have been brought down to earth, many of our remaining problems are tied to a lack of confidence, fueled by what we read or see in the mainstream news.

Fact is that Keynesian fiscal policy will not work unless people spend the money they receive from the government. Without re-spending, the multiplier will drop to one and any increase in income is off-set equally by government debt. In that situation, the only justification for spending would be that government can spend more efficiently that the private sector, and few people would buy that argument.

What to do? Convince people that the economy is fine and that good investments will generate fair returns. Then people will spend their surplus cash and problem solved.

This is probably the thinking behind China’s apparent optimism, mirrored in Wen Jiabao’s speeches as he travels through Europe this week. The thing is, if no one believes you, the optimism is useless.

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