On Monday, the National Bureau of Economic Research announced that the United States has been in a recession that began last March. This was generally known, but the economists’ declaration made it quasi-official.
And on Tuesday, the Conference Board said that its index of consumer confidence fell for the fifth consecutive month. Pundits quickly weighed in as to when the U.S. economy would return to growth.
All this measuring and opining is fine, but it raises a broader question: In this age of the Internet, do modern measurements of economic performance create a feedback loop that could make the business cycle more exaggerated?
I’ve done no research or theorizing, but it certainly seems possible.
We’ve had business cycles for a couple of millennia. But until the past century nobody tried to measure economic activity by such indicators as gross domestic product, unemployment or price indexes. These tools were largely instituted in the Great Depression or after World War II.
Our great-grandparents and their forebears were familiar with terms such as “prosperity,” “panic” and “inflation,” but they didn’t know a thing about the CPI, new claims for unemployment or Michigan surveys on consumer sentiment.
Before WWII, people formed their opinions about the economy based on their economic situation, their community’s and what they read in the newspapers about other parts of the country.
When a lot of people were out of work and business was slow they said “Times are bad.” But there were no economists or statisticians telling them that with numerical precision.
Now, economic activity is monitored on a near-continuous basis, like some poor soul in an intensive care unit. Every week, another two, three or five announcements of economic data are made
With modern media, the reports receive much wider dissemination than a generation ago. The multiplicity of television channels and the emergence of all news and business programs have added to the din.
More households have become interested in financial news with the growing ownership of mutual funds and the widespread offering of 401(k) plans. Their stakes, and resulting interest, expose people to all sorts of economic information.
The media can exaggerate the magnitude of the news.
One commonly hears of the Fed “slashing” interest rates when some target is dropped by half a percent. Stock indices are described as “plummeting” when there is a one-day drop of 2 percent. Unemployment claims are “burgeoning” when they rise by one-tenth of 1 percent of the labor force.
Does this more extensive exposure to economic news change how people view the overall economy and their specific prospects? Does it change their behavior compared to what it might be if they only had the information available to their grandparents?
Economists have generally avoided this issue for at least reasons:
First, a significant number already assume that people are generally well informed and have pretty clear expectations of how government policies will affect things. If information was already near perfect, economists believe, why would widely disseminated economic indicators make any difference?
Second, many economists have clung to a model of human behavior that assumes people’s preferences—including taking on or avoiding risk—are inherent and not swayed by advertising or propaganda. Economists cling to the idea that advertising doesn’t really change what people like or do not like.
Politicians rush in where economists fear to tread. FDR’s “we have nothing to fear except fear itself” speech clearly recognized the factor that pessimism plays in a recession. It may have had few practical results in reducing such pessimism, but it was an attempt.
Some 20 years ago, a Brazilian Finance Minister was accused of cooking the books when compiling that country’s consumer price index. He responded that he was only trying to reduce inflation. If people were told that inflation was lower than it actually was, they would be less inclined to raise prices themselves or to press for higher wage increases.
People laughed at his explanation as self-serving, which it probably was, but he still may have had a point. Public perceptions about the economy that are more pessimistic or optimistic than reality may influence people’s behavior.
What can we conclude from all of this?
Only that there is a lot of human behavior that economists still haven’t explained well. But the very interesting times that we live in right now certainly will produce much information for future study.
© 2001 Edward Lotterman
Chanarambie Consulting, Inc.