The a priori use of the consumer confidence argument

Posted by Langvardt, Kyle
Langvardt, Kyle
Professor Langvardt joined the UDM faculty in Fall 2012. Before UDM Law, he was
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on Tuesday, 12 March 2013
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I was listening to yesterday's Diane Rehm show and heard the following exchange between a caller named Tina and an economist named Ed Conard.  I've attached Tina's question and Conard's response below so that you can check my characterization of what was said.

Basically, Tina's family is well-to-do but frugal.  Tina asked whether her family's low level of consumer spending is the sort of thing that affects the economy in one way or another.  (Answer:  it slows it down.)

Conard then took the response as anecdotal support for the proposition that the US budget deficit should come down.  He got there by means of what I'll call the US Consumer Confidence argument, which enjoys a good bit of currency among the small-government crowd:

1.  Low US Consumer Confidence is the primary cause of low consumer spending.

2.  High deficits are the primary cause of low consumer confidence.

3.  Therefore, high deficits are the primary cause of low consumer spending.

Perhaps premises 1. and 2. can be proved empirically.  But perhaps they can't, and importantly, the argument is equally logically valid no matter what you assume to be the "primary cause of low consumer confidence" (my language, not his).  For instance, one could substitute "divorce" for "high deficits" and reach the absurd conclusion that divorce is mostly responsible for low consumer spending.  The soundness  of the argument therefore depends on empirical support for proposition 2.

I've generally suspected - perhaps unfairly - that the consumer confidence argument's proponents - let's call them "Republicans" - support premise 2 by consulting their own personal stance on deficit reduction.  That is, "I'm a reasonable person concerned about deficit reduction; therefore other reasonable people must be concerned about deficit reduction, and since most people are reasonable, that means most people must feel a lack of confidence due to the deficit."  Let's refer to this as "projection."

I'm not saying that Republicans are the only ones who project.  After all, I'm not a Republican, and I project, which must mean that every other reasonable person does too.  

The thing is that if you prove the consumer confidence argument by means of projection, then you verge awfully close to assuming your conclusion.  You see that deficits are bad for the economy; therefore everyone sees deficits are bad for the economy; therefore everyone stops spending at the sight of deficits; therefore deficits are bad for the economy.  

In the process, a conclusion about the dangers of deficits is exploded into an apparent causal explanation for how a budget deficit might depress spending.  (Which, of course, is intended as a counterpoint to the conventional macro argument that some or most of the money not spent closing deficits is - you guessed it - spent by consumers.)

Of course, the US Consumer Confidence argument's only tautological if the Republicans who make it are projecting rather than consulting polls and what-not on consumers' feelings.  If the empirical support is there, then, well, perhaps I'm the one who's assuming his conclusion.  

But what's so striking in the exchange below is that you actually see Conard projecting.  Tina says nothing - nothing! - about why her family isn't spending money.  Conrad the budget hawk knows, though.  Tina, after all, is governed by rational expectations.  And "as the deficit grows bigger and bigger, she dials back more and more."

TINA

10:47:03
All of my friends, all of our little group -- and maybe we're too small to count -- even though we do have money to go spend, even though we are doing quite well, we just don't spend a lot of money. I mean, we don't have a really large house payment. We've decided to stay in a smaller home. We don't have car payments. We don't go out and just go shopping and spending and stuff like that. And I'm wondering, does that have any impact on the economy at all? Or are we just a small portion of the population?

REHM

10:47:38
Ed Conard.

CONARD

10:47:39
Yes. It's funny because she's personifying the very school of economics which I come from, which is called rational expectations. She looks forward in the future, and she sees a high degree of uncertainty. And so she is more cautious today immediately. And I think that when you -- advocates of stimulus, they all point to the seven, $800 billion one-time stimulus. But in truth, we have run about $1.2 trillion a year deficits for the last four years. We're going to run an $850 billion deficit this year. That doesn't count the $500 billion of interest that we're not paying because the interest rates are zero.

CONARD

10:48:14
So the school of stimulus spending never agrees that the amount of stimulus that we have pumped into the economy has been enormous, and it just had almost no effect at all because the other school from the Keynesian school of rational expectation says that the private sector looks forward into the future. They see enormous interest expenses coming and enormous tax increases or spending cuts.

CONARD

10:48:38
And as this woman described, they dial back their economic activity today to compensate for that. And you can get not into the virtuous circle, you know, but the vicious circle, which is she holds back, more money sits idle, the government steps in and tries to borrow that money and do more stimulus spending. As the deficit grows bigger and bigger, she dials back more and more, and you never get any benefit from it. So I think it is very difficult.  [My emphasis]

About the author

Langvardt, Kyle

Professor Langvardt joined the UDM faculty in Fall 2012. Before UDM Law, he was a Lecturer in Business Law and Ethics at Indiana University, Bloomington. Prior to that he was an Associate with Locke, Lord, Bissell & Liddell in Chicago. Professor Langvardt's research interests include free speech and election law.