The mystery of consumer confidence

1st October 2012

That's disappointing to economists as well as the rest of us, but according to national polls people are feeling more secure. How could that be?

"The economic data has grown so dismal that the Federal Reserve this month announced a major new bond-buying effort to resuscitate the recovery once more," wrote The New York Times. Lawrence Mishel, president of the liberal Economic Policy Institute, notes: "There is a recovery. There are jobs. There is more income. There is some improvement. But the improvement is obviously disappointing." (See, "United States Economy Still Weak, but More Feel Secure.")

Economists are speculating that the surprising surge in confidence is attributable to the election, but that is implausible. What could it possibly be about the loud and repetitive accusations and charges of incompetence and deception that the candidates are hurling at each other that would make voters want to buy more goods? This looks like another example of economists' grasping for psychological explanations when they don't actually understand human behavior.

The fact is that people tire of pessimism. They want to feel optimistic, especially in the U.S. where positive thinking is easily mistaken for signs of mental health and good citizenship. And if the economic trends are not clearly down, that may be enough for them to justify believing what they would prefer to believe. Moreover, when the trends are relatively stable, that, in itself, offers a certain amount of relief. If things are unlikely to get worse, people can continue to adjust to how they are. The reality may be "disappointing," as the economists say, but that is not the same as insecurity and further threats to economic stability.

Perhaps the key point here is that the worst is over. The underwater mortgages have been foreclosed. The jobs have been lost. The retirement accounts, college funds and nest eggs have already lost much of their value. The recovery is slow, uneven and unequally distributed, but now there is nowhere to go but up. We had gotten used to faster recoveries in previous recessions, but a recovery is, after all, a recovery.

Continue reading…


More from Ken Eisold:

Good robots, bad robots, and us

Financial fraud – Crime without criminals?

HFT: The Sorcerer’s New Apprentice

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