Wednesday, May 27, 2009

Politicians Influence Consumer Confidence

Consumer confidence is crucial to the economy, as the more confidence people have, the more consumption they are willing to do or risk they are willing to take, which means the more investments they are willing to make. Conversely, the less confidence people have, the less investment is made. Politicians can significantly effect the economy by influencing consumer confidence, for better or worse.

The always-optimistic President Ronald Reagan inspired confidence in the American people that the obvious-distressed economy would recover, despite the challenges his recovery plan encountered. His tax cuts allowed people to keep more of their earnings and to work more without the fear of losing their increased earnings to greater taxation, but Americans needed the confidence to spend their greater disposable income, which the cheerful Reagan amply supplied. In this sense, even his liberal critics gave him a left-handed compliment when claiming that all he did was to make people feel better; they are admitting that at least his encouragement caused some benefit to the economy.

After the prosperity of 1982-1990, the economy entered into a mild, brief recession. However, the recovery took longer than usual. By 1992, Bill Clinton adopted the economy as his main presidential campaign issue, exaggerating its condition as "the worst economy in fifty years." There was no criticism of him for reducing consumer confidence with his pessimism. The recovering economy was growing robustly by the final quarter of the administration of President George H.W. Bush, but Clinton took the credit soon after taking office for the increased prosperity, by which point Clinton had switched sharply to being optimistic about the economy. He then boasted about the state of the economy during his time in office, despite some of his harmful policies, like tax increases, and the contribution made by Congress in blocking his worst proposals, and once Republicans gained the majority, of forcing Clinton to acquiesce to better policies. Clinton bragged as if it were the greatest economy ever, even though the economic statistics were similar to those of the 1980s, which Democrats and liberals had mostly dismissed.

By the end of the Clinton Administration, economic growth began to slow. As a candidate for the office of president, George W. Bush cited the "warning signs" of an economic slow-down as a need for his proposed tax cuts, which represented a refund of the budget surplus. Liberal Democrats accused him of "talking down" the economy, the danger of which they suddenly recognized now that they were in power at a time of economic stress. No one seemed to notice the contradiction that these liberal defenders of Clinton were making, that the economy supposedly was still strong, but yet vulnerable to being undone by a few carefully-chosen words by one man. But in a sense they were admitting that Bill Clinton had done the same thing in 1992. The difference was that Bush had done so far more responsibly, and necessarily, than Clinton had. Moreover, Bush did so in order to propose policies to improve the economy (tax cuts), instead of ones Clinton proposed (tax increases) that worsened it. The liberals were right that even presidential candidates can effect the economy, but their inconsistency about it is noteworthy.

Like Clinton, Barak Obama also campaigned on the economy, making the "worst financial crisis," meaning the worst banking crisis, "since the Great Depression" sound like the economy was in even worse distress than it was. And like Clinton, Obama talked the economy down irresponsibly in order to win election. Although Obama proposed some tax cuts, he also proposed some tax increases, along with massive borrowing and spending. Unlike Clinton, however, Obama continued to sound pessimistic during the first few months of his administration, even though the overwhelming majority of ecnomists predicted the economy would recover on its own, in order to gain approval for his radical policies, blaming Bush for the bad economy all the while. When Obama's pessimism became too much for the market to bear, he made a belated sudden sharp turn toward optimism, attributing the early signs of the expected recovery to his own policies. Just as his pessimism was harmful to the economy, his optimism was probably beneficial. The recent jump in consumer confidence suggests that consumers will begin to increase spending, and investors their investing, although how much of their optimism is attributable to recent better economic news or to Obama's change in attitude remains to be seen.

One noteworthy difference between Ronald Reagan as a candidate, and Bill Clinton and Barak Obama, is that Reagan's strong criticisms of the economy were not exaggerations, as the economy during the Carter Administration was obviously in poor condition. Indeed, President Jimmy Carter adopted pessimism as his official policy, notably in his infamous "Malaise" speech, in which he urged Americans to accept economic decline, which precluded any criticism of Reagan for talking the economy down. Like Reagan, Clinton and Obama deserve credit that their expressions of optimism benefited the economy. The more important difference between Reagan and the two Democratic presidents who took office after him is that he proposed, and later implemented, economically beneficial policies, which he could boast had benefited the economy, whereas Clinton and Obama's proposals were more more mixed, at best. George W. Bush was different from all of these presidential candidates in offering only tempered criticism of the economy, and yet was the only one who received criticism for his comments about the economy as a candidate.

Obama should continue to sound optimistic about the American economy, but, like Reagan and Bush and unlike Clinton, this optimism should be based upon confidence in American resilience more so than in specific policies. He should resist the temptation to attribute all economic improvements to government, and give the American people any credit they might deserve for economic recovery. Obama's optimism would be more effective in inspiring consumer confidence if he adopted more economically beneficial policies.

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