President Bush is playing a dangerous economic game. He has taken on the unusual presidential role of being the cheerleader for economic doom to justify his tax cut.
A president should certainly talk honestly with the public if hard times are on the horizon. However, the one thing he should never do is inject more fear and anxiety into the minds of consumers than is warranted by the evidence. The danger in doing so is that a president risks creating a negative self-fulfilling prophecy.
Today, the evidence suggests that this is exactly what Bush is doing by harping on economic warning signs to try to provide a substantive rationale for his tax cut. To be sure, the recent drop in consumer confidence is extremely worrisome to our future economic prospects. But the detailed consumer confidence statistics provide the most damning case against Bush. The evidence suggests that he has successfully talked down the economy and has helped expedite a disconcerting drop in consumer expectations about future economic prospects.
Consumer confidence combines how people feel about the economy at present and how strong people think the economy will be six months from now. The fact is that consumers remain confident about the economy’s current status: The index for confidence is at a very high 164 (with a 1985 benchmark of 100). This is consistent with other recent statistics: Retail sales in January were solid; the percentage of people planning to make major investments in autos and homes has risen recently, and while housing starts may have dropped sharply last month, it was still at one of its highest levels ever.
The drop in consumer confidence has been primarily driven by a large (and significant) decline in expectations about the future. That is, consumer expectations about the future have gone very negative very fast. Why is this so relevant—and possibly attributable, in part, to Bush? Because every family is the world’s leading expert as to how they are doing at any particular moment.
A family in Ohio knows better than any economic forecaster how they feel right now. But when you ask that family how the economy will be doing six months from now, it relies on experts and on what it hears from neighbors, friends, television, and the president.
Some of the anxiety has certainly been caused by the often exaggerated reports of layoffs, volatility of the NASDAQ, and the tendency of the press to over-report small negative ticks in economic reports. Yet, people look to the president to help interpret all of the other data they are hearing.
When he chooses to put the worst spin on the economy, instead of providing a calming balanced perspective, he confirms the public’s worst fears—even if they are exaggerated.
Therefore, there is reason to fear that it is more than coincidental that since Vice President Cheney made headlines in early December by claiming we were on the front edge of a recession, expectations about the future have fallen a whopping 32 percent, even though confidence about present circumstances are high and have fallen only 8 percent. Indeed, the difference between overall consumer confidence and expectations for the future is the largest since 1973.
Since Cheney’s initial warning bell, President Bush has repeatedly sought to send out the same dark message. He continually used the bully pulpit to describe his tax cut as needed to make sure our economy does not go into a tailspin. In his State of the Union address, while he mentioned that two pictures could be painted of the United States, he led his address speaking about warning signs, increasing layoffs, and rising energy prices without a single reassuring word about the current economy.
Even in January, when most economists were encouraged by the retail sales report, Bush seemed desperate to spin the news, claiming that it was one good statistic among a sea of dismal statistics.
Many economists have warned the administration about the potential negative consequences of such negative talk on the economy. Goldman Sachs economist Edward Mckevey said, “When national figures keep highlighting problems with the economy, it tends to become a self-fulfilling prophecy.” Roger Brinner of Parthenon Consulting said that “the consumer’s mood is not wholly driven by facts, it is also driven by cheerleading by the president and other public figures.”
But perhaps University of Texas economist Daniel Hammermesh said it best in early January when he stated, “I’ve seen presidents try to talk the economy out of a recession and presidents try to talk the economy out of inflation, but I’ve never seen any president try to talk the economy into a recession. Whether or not doom-and-gloom makes good tax-cut politics, a message strategy that unnecessarily exacerbates consumer fears is hardly the right way for our nation’s leader to provide a new dialogue in Washington.”