Thursday, January 01, 2009

Are economic woes as much perception as reality?

On CNBC and other stations I have watched lately, the news is typically that the economy in 2009 will begin to improve. This, after months prior to the election of harping on the horrible economic situation. Now, most Americans under 70 apparently think that 2008 was the worst year they have ever seen economically.

Yet, whenever I talk to people, they always tell me that they, themselves are doing fine. I realize this is anecdotal but it left me wondering if at least a portion of the economic doom and gloom is caused by perception, not reality. For example, in a "Wealth survey" conducted by CNBC on why people were spending less at the holidays--many of the reasons struck me as perception as opposed to current reality. Here are the findings:

Very few consumers cite lack of access to credit as a reason for why they plan to spend less this holiday season:

Will spend less due to inflation: 26%

Will spend less to save more: 20%

Will spend less due all the talk about the economy: 19%

Will spend less due to uncertainty about the future: 17%

Will spend less due to loss / risk of loss of jobs: 16%

Will spend less due to having trouble paying current bills: 15%

Will spend less due to lack of access to credit: 1%


Okay, the inflation argument doesn't hold up too well currently-- lots of prices have fallen, not risen, such as gas and home prices. The Consumer Price Index fell in November by 1.7% so that would mean that deflation may be the problem, not inflation. Yes, prices were up in the summer but they seem to have come down and deflation is the issue for the moment. In addition, a full 19% of people are spending less due to talk about the economy, no doubt coming from the media and 17% are spending less due to uncertainty about the future, again driven most likely by the negative media talk prior to, and after the election.

Note that only 15% are spending less because they are having trouble paying bills and only 1% due to lack of credit so the credit crisis doesn't seem to have much to do with it--despite all the talk about it.

Has the media produced a self-fulfilling prophecy by going so negative? I think that partly, yes. I see news shows now trying to talk up the turnaround in 2009 (maybe because the election is over?) but they have scared people to the point that they don't want to spend, even if things are looking up. Will this change? Maybe, but sometimes, fear and panic can cause the very situation the government is now trying to prevent. I hope people figure this out.

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24 Comments:

Blogger BobH said...

Economic woes are ALL about perception. If everybody spends less because they're worried about losing their jobs due to an economic downturn, guess what, they can cause an economic downturn caused by insufficient demand.

However, I don't understand the people who are spending less due to inflation. Rationally, if they expect prices to rise, they should buy the goods and/or services sooner rather than later, when their money is worth less. The increased demand is a big cause of inflation.

Like they said in Econ 101, what is an economically rational individual action becomes catastrophic when everybody does it.

For me, the more interesting issue is that the mass media seems to talk down the economy during Republican administrations and talks it up during Democratic administrations. I'm quite sure that the mass media vehemently denies this, even when presented with anecdotal and/or solid statistical data. I don't think that they're doing it deliberately but their bias is so pronounced that it has reached the point of bigotry. (Perhaps slightly OT - Robert Wright, in The Moral Animal, commented that the world would be a better place if we were all as ruthlessly cynical about our own motives and behaviors as we are about the motives and behaviors of our enemies.)

11:40 AM, January 01, 2009  
Blogger Jenifer & Richard said...

Why do you insist on blaming "the media" for "all the talk" about economic problems. How can you flatly and shamelessly ignore the reality of President Bush, Paulson, Cheney and so many other REPUBLICANS talking about a deep, deep economic crisis, the need for massive government infusion to stave off disaster, Cheney warning Republicans they'd be remembered as Herbert Hoover if they didn't bail out the auto industry immediately, and on and on. Please, Dr. Helen, are you just purposely ignoring reality for some cheap shots at the media?

11:49 AM, January 01, 2009  
Blogger RAMZPAUL said...

People are worried because American jobs are being outsourced to foreign countries. Why should a business hire American workers when a business can hire people who work for pennies on the dollar overseas? And this outsourcing is affecting manufacturing, engineering and high tech – all traditionally good paying jobs.

The Starbucks I visit is staffed with young people who have computer and engineering degrees. There are simply NO jobs available due to outsourcing. American kids avoid technical and engineering degrees because there is no future demand for those degrees in America. Globalization is killing the middle class.

12:31 PM, January 01, 2009  
Blogger Cham said...

I was in a restaurant recently and our waiter was one of those engineer types whose job was eliminated. Our waitstaff experience wasn't the best. I don't think these people are made for the service industry.

1:01 PM, January 01, 2009  
Blogger mrobert said...

The media has been harping on the economy pretty bad, and there may some truth to what you said Dr. Helen. But with the stock market down 40%, and people's 401Ks worth 40% less as a result (and let's not get into home values), I think it is perfectly understandable for people to say that 2008 was the worst year economically for them.

1:52 PM, January 01, 2009  
Blogger GawainsGhost said...

I could care less about perception. I only care about reality.

Yeah, 2008 was a bad year economically, but 2009 will be even worse. There will be bankruptcies, especially in the retail sector, bank failures, and foreclosures. The financial sector and real estate are nowhere near the bottom.

Of course, once Obama gets into office, the mediots will harp about how rosy things are all of the sudden. That will not change the reality. And most people will see it for the hypocrisy it is.

That said, am I better off than I was last year? Well, I won't make as much money as I did in 2007, but then I don't have any debt, other than one student loan, and I have cash in the bank. So I really don't care what my income is; I only care about being financially independent.

People make a mistake when they think of inflation in terms of prices. Inflation has nothing to do with prices. Prices go up and prices go down. Inflation, properly understood, has to do with an expansion of the money supply and credit. Deflation has to do with a contraction of the money supply and credit.

The entire globe is in a deflationary cycle. And the effects of this cycle will be severe if one is not prepared to deal with it.

2:25 PM, January 01, 2009  
Blogger russelllindsey said...

You know what angers me the most? The effect that this fear mongering is having on people who are looking to get their careers going. Employers are simply trying to figure out what is going on, and are holding off on hiring.

That is truly having an impact where I live in northern Michigan. It is truly discouraging.

Lindsey

2:59 PM, January 01, 2009  
Blogger pst314 said...

Jenifer &amp: Before you get all in-your-face you ought to get your facts straight--such as the huge role that Democrats played in causing the mess. Then maybe you wouldn't feel so self-righteous.

4:50 PM, January 01, 2009  
Blogger pst314 said...

One more thing, Jenifer & amp: Economists have long studied how public perceptions can fuel an economic crisis--or a boom. How about you take a pill and pay attention to the points that Dr. Helen made? If you cannot do that then you will not be able to make a useful contribution.

4:52 PM, January 01, 2009  
Blogger JokersWild said...

Republicans can do no wrong and Democrats can do no right, no pun intended.

However in 2005 Bush and Republican Congress ignored warnings about the impending mortgage crash. You can even find this story on Fox News.

When an economy is driven forward based on how much "stuff" one acquires and how it helps keep people in business selling them said stuff it's only a matter of time before the house of cards starts to come down. Especially when these acquisitions are financed and fueled with credit and money yet to be earned (living beyond your means).

So pst314, how's that glass house of yours looking with those stones in your hand?

8:36 AM, January 02, 2009  
Blogger Trust said...

@Undertow said... "Republicans can do no wrong and Democrats can do no right, no pun intended."

I don't think anyone things Republicans did no wrong. If anyone thinks that, please speak up.

I think their point, and I agree with it, is that the press is laying 100% of the blame squarely on President Bush's back. Now, Bush did little to prevent this and for that is he culpable. But he did not start this problem, it started largely under a Democratic presidency and was exacerbated by democratic "help the poor get loans" policies. Is Bush and many republicans culpable? Yes. Are many democrats culpable? Yes too.

This is inversely reminiscient of the Clinton years. Everything good that happened was given full credit to Clinton, because the press liked him (some credit was deserved). With Bush, everything is his fault because the press hates him (some blame is deserved). We should have more journalistic integrity than this. Few mention that the two worst years of the last two 8 year presidencies occured during the only two years the Democrats had legislative majorities.

Maybe we should apply the fairness doctrine to the press. *sarcasm*

9:42 AM, January 02, 2009  
Blogger Brett Rogers said...

Helen,

You and Glenn did a podcast interview a while back with Troy Dunn. It seems to me that rather than waiting for others to offer a job, some people could instead try to figure out what needs people have and how to meet them. Troy's book, which is written for parents teaching children, could instead be read as a primer on how to become self-reliant and self-starting.

It's harder to be fearful when you feel like you're rowing your own boat.

1:56 PM, January 02, 2009  
Blogger Helen said...

Brett Rogers,

Troy Dunn, author of "Young Bucks: How to Raise a Future Millionare" has some good examples of how to make money on your own instead of asking for a job. For those who are interested, here is a link to the show:

http://pajamasmedia.com/instapundit/015506/

2:09 PM, January 02, 2009  
Blogger Unknown said...

"Yet, whenever I talk to people, they always tell me that they, themselves are doing fine."

Let me guess--you don't speak to anyone who makes less than 100K a year?

12:02 AM, January 03, 2009  
Blogger JokersWild said...

Pope, you bring up a very valid point that will likely either be a)glossed over or b)get you called a troll or idiot.

Our friends and those people around us tend to be like us. Having come from a working class background I still see the concerns and problems most of "middle America" are worried with when I talk with family and friends back home.

6:33 PM, January 04, 2009  
Blogger ColinLaney said...

Right. That iceberg the Titanic hit was a media concoction, too.

The things you have to believe to be a 21st Century American conservative get dumber and dumber. And dumber.

10:16 AM, January 05, 2009  
Blogger Unknown said...

Yes, Paulson asked for $700 Billion to stave off an economic collapse because everything is *fine*. And a significant recession is the *perfect* time to start a small business.

11:40 PM, January 06, 2009  
Blogger Unknown said...

Thanks, I'll be sure to tell my friends to stop "perceiving" their individual layoffs and get back to work at their nonexistent job. I need to stop perceiving the unemployment numbers, people upside down in their mortgages, and the underemployed. Can I borrow a xanax and a valium from your prescription to repair my perception?

12:17 PM, January 07, 2009  
Blogger Maritzia said...

Well, you obviously haven't been talking to me. I've been laid off twice in two years. I'm currently working as an independent contractor (meaning I have no benefits...no medical insurance, no vacation pay, no sick leave, no holiday pay...and I have to pay the employer part of social security and medicare taxes). I'm spending less because I *expletive deleted* have less. I have less credit because I couldn't pay my bills after the 2nd lay off. I spend less because of inflation because food costs so much more than 2 years ago, that money I would have spent propping up the economy has to go to food. Housing my cost less if you have the cash to buy a house, but for us renters, there's certainly been no decrease in the cost of housing.

So, go ahead and talk to your rich friends about how they're doing fine. Then pull your head out of wherever you have it stuck and come talk to the many of us who aren't rich and have been seriously affected by this economy, and not just in the last few months.

12:57 PM, January 08, 2009  
Blogger joshua said...

Thats funny Helen because everyone I talk to says things pretty much suck. And a lot of my friends have lost their jobs. And several other people can't find a job. And several others are currently in this "waiting for news" limbo (which is where I was just recently).

Guess what Helen, it sucks out there. And there are plenty of statistics to prove it. But you know what is funny, too? For most Americans, it has sucked the past 8 years. The crises of 2008 have hit the people that got it good the past 8 years, so now everyone is sharing in the pain.

For me, the more interesting issue is that the mass media seems to talk down the economy during Republican administrations and talks it up during Democratic administrations.

That's because the economy performs better under Democratic administrations than Republican ones. That's just a simple fact, by the way.

But even then this is an important point. As I said above, the past 8 years have sucked pretty hard for most Americans. Because whatever increases in GDP or whatever were going to the richest Americans. Income stayed stagnant throughout Bush's term and health care, gas prices, and food prices commanded a greater share of that stagnant income than ever before. So even when the stats say things are hunky-dory if Americans don't feel like they are getting a slice of that success then things aren't going to feel as great as the stats say they are. That is what happened the past 8 years.

2:10 PM, January 08, 2009  
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