June 17, 2009

Cockeyed Optimists or Self-Fulfilling Prophets?

by Jodie T. Allen, Senior Editor, Pew Research Center

Out here on the frontiers of American public opinion, a faint but discernible breath of optimism is dusting the plains. This, even as economic experts warn of a slow recovery from the current severe recession and a record number of Americans express dissatisfaction with their current financial situation. Are average Americans prescient predictors of the state of the economy? Incurable believers in a better tomorrow? Or carriers in an epidemic of Obama Optimism?

The question is brought into focus by findings from recent surveys that show modest but consistent improvement in expectations about the nation’s economy. One example: A May Pew Research survey found more than half of the public (53%) saying the government is on the right track in handling the nation’s economic problems, whereas as recently as mid-January, only 31% held that view. Also in May, only 31% of the public reported hearing mostly bad news about the economy; at the end of last year a massive 80% said so.

Pew Research’s latest poll shows slightly more than half (52%) still rate the nation’s economic conditions poor, but that is down from 68% in March and 71% in February, while 63% expect their own financial situation to improve at least some over the next year. Gallup’s June 16 weekly economic poll found its index of consumers mood remaining close to its highest level since January 2008, but noted that “the surge in optimism that began in March appears to have stabilized over the past month” as gas prices and interest rates have risen in recent weeks. Further corroboration of the brightening outlook — with similar caveats about higher prices at the pump — was provided by last week’s release of the Reuters/University of Michigan preliminary index of consumer sentiment that showed the index rising to its highest level in nine months, as had the Conference Board’s May consumer confidence report.

Other evidence of a more upbeat mood may be detected in public judgments about the overall fairness of the way in which the U.S. economy distributes its gains. True, public outrage has been stirred by well-publicized examples of CEOs and bank presidents pocketing big payouts even as their failing institutions turned to the taxpayer for bailouts. Yet the recent Pew Research values survey finds that the share of Americans viewing the country as divided between a relatively privileged set of “haves” and a presumably downtrodden set of “have-nots” has actually declined to 35%, the lowest level in four years. (True, a hefty 71% still endorse the view that the “rich get rich and the poor get poorer,” but that proportion was significantly higher in the late 1980s and early 1990s, peaking at 80% in 1991.)

The Pew Research Center’s president, Andrew Kohut, sees more than a hint of schadenfreude in this response. After all, the falling stock market — not to mention the collapse of some highly leveraged or outright fraudulent get-rich-quick ventures — hit most heavily upon the most affluent. A falling tide may ground a lot of dinghies and catboats, but it can put a few yachts on the rocks as well. And while well-off Americans remain considerably more satisfied with their financial lot in life than do their less fortunate countrymen, they are far less positive than they were two years ago.

Still, the vast majority of the 14.5 million Americans now swelling the unemployment rolls were far from affluent even before they were laid off. And while the occasional foreclosed mansion attracts attention, most displaced homeowners are now finding it hard to pay the rent on their downsized lodgings. So what gives? Are Americans simply out of touch with economic reality, at least as it far as it extends beyond their immediate doorstep?

This is not the first time in recent years that the question has arisen. The public was similarly out of sync with the experts just two years ago — though then the optimism/pessimism divide was reversed. Back in June 2007, most economists, Wall Street watchers and leading politicians were still celebrating the U.S. economy’s remarkable resilience — a weakening of the housing market notwithstanding. But, the average American, while still relatively oblivious to the housing hangover, viewed the overall economic outlook as bleak. A Pew Research poll at the time found that, by a two-to-one margin, Americans rated economic conditions as fair or poor rather than excellent or good, much as they had in the preceding few years.

That jaundiced view showed up again in the summer of 2007 in which — contrary to their normal upwardly mobile outlook — respondents in a Pew Research survey split evenly (48%-48%) on the question of whether the U.S. is a two-class society, the culmination of a trend that had been building and accelerating over the last two decades. In 1988, by contrast, 71% rejected the notion of a divided nation, while just 26% accepted it. Equally striking, the number of Americans who classified themselves among the “have-nots” of society had doubled over the past two decades, from 17% in 1988 to 34% in 2007 despite generally robust economic growth over the period.

Of course, as it turned out, ordinary people were right in 2007 about the worrisome state of the U.S. economy, even as they failed to perceive the ramifications of the housing bubble’s collapse. Nor were their perceptions of growing income inequality out of touch with the facts — analyses by respected economists have documented a substantial and growing concentration of income at the very top of the U.S. income distribution in recent decades.

But few Americans have typically been inclined to man the class-warfare barricades. As Northwestern University’s Benjamin Page and the University of Minnesota’s Lawrence Jacobs observe in a new book, “Class War? What Americans Really Think about Economic Inequality,” Americans are by nature “conservative egalitarians.” While they favor a somewhat more equal distribution of income and wealth, by and large they admire people who get rich through hard work (90% mostly or completely endorse this notion in the new Pew Research values survey), see American business as key to the strength of the country (76%), distrust the government and are generally accepting of the notion that income differentials are necessary to provide incentives for hard work and risk — attitudes consistently observed in Pew Research polls over the years.

If the facts are then of at least secondary importance, what does determine the public’s overall assessment of the economy’s prospects? And why has that assessment brightened in recent months? When I posed those questions to Prof. Page, he suggested that at least some of the improvement reflects “Obama-induced optimism” — a carryover of support for the new president among many of those who had been most pessimistic in the years before the 2008 election.

And indeed, our earlier analysis of the public’s relative pessimism found that partisan affiliation had an important independent influence on evaluations of the economic outlook. True, personal financial situation was at least an equally important determinant, but the link between personal finances and national outlook was strongest among Republicans who were also far more upbeat about the economic outlook than were either Democrats or independents at the time.

The 2009 values survey provides further support for the partisan halo effect. Declines in the share seeing the country as divided between “haves” and “have-nots” are larger among Democrats and independents than among Republicans as well as among those with less than $75,000 in annual income. The number of Republicans characterizing themselves as “haves” actually declined somewhat over the last year, while the ranks of Democratic and independent “haves” increased modestly.

And while African Americans are still considerably more likely than whites to see an economic divide (60% vs. 29%), the number of blacks expressing that view has declined sharply from the 75% who expressed it just last October. By the same token, the proportion of blacks endorsing the view that “success in life is pretty much determined by forces outside our control” has fallen from 47% in 2007 to 38%.

Still, many Wall Street watchers wonder whether an economic rally can be sustained with interest rates on the rise and the dollar on the downside. On the other hand, there is such a thing as a self-fulfilling prophecy. Until the mood soured, the average American’s eagerness to borrow and buy had kept the nation’s merchants, if not its manufacturers, humming for the better part of three decades. Whether a revival of consumer optimism will — or can — or should — put the U.S. economy back on a steady long-term footing is, of course, not the sort of question that can be settled by a public opinion survey.