Are Politicians Talking Down the Economy?

A few months back, Sen. Chuck Schumer was criticized (and threatened) for correctly predicting a run on IndyMac. The event offered an interesting window into the psychology of credit spirals. The basic question, highlighted by newly minted Nobel laureate Paul Krugman in a slightly different context, is this: how easy is it for speculators to spark a credit crisis?

I don’t have a good answer to that question, though I imagine the data will be immensely richer after the events of the last 18 months. But if you are tempted to think that the credit circulatory system runs largely by encouraging confidence in confidence alone, you would be worried by the following statistic:

Since August 1, across the House, Senate, presidential races, there’s been more than 600 separate campaign ads portraying the economy in a negative light.

The ads have aired 214,000 times at a cost of $95 million.

$49.2M of those ads have been run by the presidential candidates.

So what that means, in essence, is that that $95 million has been spent confirming for Americans the precarious state of the economy.

Before speculating further, I will caution that quantitative content analysis is really quite tricky to pull off. These data come from a marketing study, and the underlying methodology isn’t clear. I don’t know how they coded for “negative” ads, nor how they dealt with mixed messages.

That said, it seems likely that talking about this problem is making it worse. True, politicians want to take credit for booming economies. But where the economy is marginally expanding or contracting, then it is in politicians’ interest to fear-monger. Such messages create self-reinforcing negative spirals. Indeed, the effect is probably most evident in Presidential election years, because the stakes of the contest suck up so much media oxygen.

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6 Responses

  1. Mike Guttentag says:

    I thought it was downright weird to see the Secretary of the Treasury telling everybody how awful things are in the economy just to get the bailout legislation passed.

  2. dave hoffman says:

    Well, Mike, it’s an interesting point, but from everything I understand about the context of Paulson’s statements, we really were (are?) on a precipice, and some kind of government intervention was an emergent necessity. Also, not sure what Paulson personally gains from talking down the economy (contra politicians facing election in 20 odd days).

  3. Richard Thomas says:

    Anyone looking for insight on the flaws and the solution (major overhaul) to the fix the system can find them on http://coinage.me

    It goes into detail how the summary information needed to actually manage a fiat currency system is not available and therefore cannot be properly managed.

    Furthermore our information system systems are not designed correctly to support such a system the data is all disparate.

    The is referenced by one of Obama’s advisors and can be read at the Obama link below.

    http://tinyurl.com/52bczy

  4. Richard Thomas says:

    Anyone looking for insight on the flaws and the solution (major overhaul) to the fix the system can find them on http://coinage.me

    It goes into detail how the summary information needed to actually manage a fiat currency system is not available and therefore cannot be properly managed.

    Furthermore our information system systems are not designed correctly to support such a system the data is all disparate.

    The is referenced by one of Obama’s advisors and can be read at the Obama link below.

    http://tinyurl.com/52bczy

  5. Nate Oman says:

    Dave: Your point is well-taken. Certainly, campaigning politicians have a set of perverse incentives when it comes to economic confidence. What is striking about this crisis is that office holders — who have a slightly different set of incentives — have also be remarkably glum. The Economist’s Buttonwood collumn from last week had nice discussion of the issue as well.

  6. Mike Guttentag says:

    Nate. Thanks. The article captured my sentiments to a tee.