The Political Origins of Consumer Confidence

The economy doesn’t exist in a vacuum. It’s closely connected to the nation’s politics. Ezra Klein:

During the summer’s debt-ceiling debate, the consumer confidence numbers gathered by Reuters and the University of Michigan plummeted. In an effort to figure out what was going on, Goldman Sachs tried to plug the data into a model that looked at the index’s historical relationship to the jobless rate, the change in the rate, real average hourly earnings, the S&P 500-stock index, home prices and consumer lending measures. They found that the economic factors explained “only about half” of the drop. Then they tried the same exercise with data gathered from the periods in 1995 and 1996 when the federal government was shut down. Again, consumer confidence “posted poorer readings than economic data alone would have suggested.”

He is arguing that the the uncertainty caused by negotiations over the debt ceiling and government shutdowns is depressing consumer confidence.  In short, the argument is: politics affects how people view the economy.

This is right.  And we can do even better than this Goldman study.  Consider “The Political (and Economic) Origins of Consumer Confidence” (gated pdf; older ungated version) by political scientists Suzanna De Boef (now Linn) and Paul Kellstedt.

Looking at 20 years of consumer confidence data, they find, unsurprisingly, that economic conditions matter: higher unemployment and inflation equal lower consumer confidence.  These relationships explain long-term trends in consumer confidence.  De Boef and Kellstedt:

Long-run relationships are reassuring; they confirm accepted wisdom that consumer sentiment will not stray too high or low for any given economic conditions for any length of time.

But politics matters too.  The more people approve of the job the president is doing with regard to the economy, the more confident they are in the economy.  The higher the federal funds rate, the less confident people are in the economy.  When Iraq invaded Kuwait, confidence dropped; when the U.S. defeated Iraq, confidence rebounded.

Given the importance of economic approval of the president, De Boef and Kellstedt then investigate its origins.  Here, the same story emerges: approval does depend on objective indicators, like unemployment, but also on things like media coverage.  The more positive the media coverage, the higher the president’s approval ratings—even once controlling for objective indicators.

What’s more, different media messages about the economy matter in different ways.  Often the media report the views of political actors, and these matter…but only in the short-run.  In the long run, what matters is the views of non-political actors.  De Boef and Kellstedt:

What politicians are doing and saying, as reported in the news, produces short-run changes in economic approval, but does not affect long-run levels of economic approval. In other words, politicians cannot successfully affect their long run economic approval ratings by talking up the economy more than is warranted by economic conditions. This is reassuring.

Put even more starkly:

Presidents who have presided over an economy that is weak cannot use the power of the press to maintain high approval ratings over the long haul; presidents cannot use rhetoric to consistently dupe the public.

Of course, this study is not focused on the threat of a government shutdown.  But you can see how these threats might matter: they tend to generate a host of negative messages in the news media, particularly from non-political actors who fear the economic consequences of a shutdown.  This drives down the president’s approval rating on the economy, which dropped roughly 5 points just in the last few weeks of the debt ceiling negotiations:

In turn, these declining assessments of the president help to drive down consumer confidence, which, as Klein notes, fell 30 points during the debt ceiling debate.  That’s a hypothetical story, but a plausible one.  The lesson for politicians is simple: you can do more to change how the public views the economy than sit around and wait for firms to start hiring.  Just run the government.

Of course, that’s easier said than done.  But this leads to a concluding irony: declining consumer confidence is bad for incumbents of all stripes—President Obama and Boehner alike.  Their electoral interests should align with what the economy needs: confident consumers and therefore greater aggregate demand.  Continued brinksmanship is not just bad policy-making.  It’s bad politics too.

[Cross-posted at The Monkey Cage]

John Sides

John Sides is an associate professor of political science at George Washington University.