The self fullfilling Prophecy of Economics (employment, wages, Obama, parties)

[Indentured Servant]

I want to talk about self fulfilling prophecy and how this phenomenon is one of the greatest influences on economics and what that portends for our near term economic future. Economics is as much, if not more, a behavioral science as it is a mathematical and statistical science, in a consumption based capitalistic economic system such as ours. A self fulfilling or self reinforcing prophecy is a prophecy that comes true by virtue of a change in behavior predicated upon a prediction or belief.

Let me provide two examples of self fulfilling prophecy, one social and one economic, the latter of which will likely spur controversy and resentment, but is true nonetheless. Socially, if one meets someone and for some reason assume or have the belief that they are an a-hole, one may change their behavior towards this person commiserate with the assumption. In other words, because one assumes that another is an a-hole, they may treat that person like they are indeed an a-hole, then the person, responding to being negatively treated, responds negatively, like an a-hole, thus fulfilling the prediction or assumption. However, had one not changed their behavior as a result of the prophecy (assumption/prediction) the person may never have responded negatively.

Economically, a good example or case study would be the historical belief that blacks moving into white communities would drive down property values. What drove down property values when blacks moved in, as a general rule, was the prediction and belief by whites that it would have that impact. The belief in turn changed white behavior in that it inspired them to move before their property values fell. When blacks moved in, the demand for these areas fell from whites, who have historically had higher disposable incomes. Hence, when the demand fell, prices fell, which made the homes more affordable for lower income blacks, which increased the percentage of blacks which in turn made the communities even less desirable by whites, thus lowering property values even more. Again, people changed their behavior to the degree that it self fulfilled the prediction.

Consumer confidence is an economic barometer or indicator because it’s the metric that measures the influence of self fulfilling prophecy. In other words, if consumers are not confident in the direction of the nation and economy, they change their consumer behavior buy not purchasing as much as they are attempting save for potential hard times. However, in a consumption debt based economy, such as ours, such behavior actually makes the economy worse as GDP growth is tied to debt (borrowing) and consumption (consuming). So when consumption falls, production falls and when production fall, employment falls in turn which self fulfills the prediction. The opposite is also true. When people are optimistic about the direction of the nation and economy, they take more risk and hence borrow and spend more feeling that their income will grow enough in the future to absorb the consumption. In such a case production increases which then leads to employment increases.

That having been established, the future does not look bright based upon the confidence index alone. I don’t want to talk about the technical or mathematical economic realties, like the level of debt, the impact of oil prices and the like, at least not directly. Those things impact consumer confidence as well, but they are also REAL constraints represents where we SHOULD theoretically be, if not for the psychological impact of a change in consumer behavior. The reason that the future does not look bright from a confidence index alone is born from the fact that we have a highly partisan nation and partly due to the fact that we have an African American president. In regards to the latter, race still matters in this country, whether people admit it or not, especially in regards to the 40 and over demographic.

What I mean by the above is this. The people who are likely most confident these days are democrats and African Americans. They are more confident in the direction of the nation because Bush and the Republicans are out of power and Obama and the Democrats are in power. However, the demographics of democrats are generally poorer than the demographic of those who are Republicans. The confidence of poor people really matters very little because whether they are pessimistic or optimistic will not change their consumptive behavior because they have little discretionary income. These are not the people who are forgoing buying a new car, because many don’t have the money to do so anyway. I am not saying that all democrats are poor by any means, but it’s simply a fact that the Democratic Party’s base is much poorer than the Republican base, notwithstanding well paid Hollywood entertainers.

On the other hand, the demographic of the middle and upper class, as well as the business class, are the ones who need to be feeling confident to self fulfill better economic times. This demographic, however, is primarily Republican/Conservatives. It is this demographic that feels that the nation is going to hell in a hand basket, under the Obama administration. Now, that is partly due to politics and that is partly due to race. There are some people who believe that when blacks run things go to hell (as in the case of Detroit…for example). Others believe that the nation is being moved toward socialism. Regardless, the confidence level of the people with the most discretionary income and wealth is very low. Consequently, this belief or pessimism will make the economy sink lower, as they hold onto what they have and shift their investment to the degree that it undercuts the US economy. That said, however, their behavior may indeed be prudent and wise based upon the mathematically insolvency of the REAL economy, which is being masked.

I guess I am a demonstration of what I am talking about, in that my pessimism about the economy, which is not based upon parties or personalities, but rather, the math, has led to a big change in my consumer behavior. There are a lot of things that I would be buying and that I can afford to buy, if I was more confident in the future. Instead, I am doing the opposite.

FYI....I usually post on the Michigan forum....but since this is not specific to Michigan....I posted it here. I had more to say...but I tried to keep it short.

[geofra]

Consumer confidence is an economic barometer or indicator because it’s the metric that measures the influence of self fulfilling prophecy. In other words, if consumers are not confident in the direction of the nation and economy, they change their consumer behavior buy not purchasing as much as they are attempting save for potential hard times. However, in a consumption debt based economy, such as ours, such behavior actually makes the economy worse as GDP growth is tied to debt (borrowing) and consumption (consuming). So when consumption falls, production falls and when production fall, employment falls in turn which self fulfills the prediction. The opposite is also true. When people are optimistic about the direction of the nation and economy, they take more risk and hence borrow and spend more feeling that their income will grow enough in the future to absorb the consumption. In such a case production increases which then leads to employment increases.

Over-confidence may have been exhibited by people over the last thirty years by an increase in household debt. That wages remained flat over that time should have been an indication that people should have been conservative in their spending. However, the availability of easy credit masked or pushed into the future any of the pay worries. Our wealth was established on a very shaky foundation.

If people decide to become responsible and pay down their debt instead of making a purchase, does that skew the consumer confidence index? I don't know, but it has to be a good thing to pay down on our debt. Even if it means a short term dip in the overall economy.

[Eastern Roamer]

Dude, if you want a discussion you've got to shorten it up. I'm obviously not busy, I'm on City-Data. But I'm not trying to read all that. Sorry.