Economic Uncertainty Feels Like The New Normal

The recession. The financial crisis. The housing crisis. The persistently high unemployment rate. And now, the debt debacle.

After nearly four years of unrelenting and largely negative economic news, it’s no surprise that Americans are feeling beaten down. The worrisome thing is that this very pessimism may be adding to the nation’s dour economic condition.

“It’s definitely a vicious cycle. There’s no doubt about that,” said Werner De Bondt, a finance professor with the Richard H. Driehaus Center for Behavioral Finance at DePaul University in Chicago. “The difficulty is to get out of the vicious cycle.”

De Bondt puts Americans feelings about the economy into three buckets:

* Anger about the financial crisis and bailout.
* Anxiety about the future.
* Simple resignation about the entire thing.

“People have had it, you know, they’ve had it with this whole thing in Washington, with Wall Street,” he said.

And yet even Americans who seem to have grown accustomed to the nation’s economic uncertainties appear to have been caught off guard by the most recent spate of news about the national debt.

The debate over the U.S. debt ceiling preoccupied Congress for weeks, roiling financial markets and angering Americans even after a compromise was found. S&P’s decision late Friday to cut the nation’s long-term debt rating, while not a complete surprise, added to a growing sense of panic and fueled a global stock market rout.

Of course it’s completely appropriate to be worried about the economy and especially our own personal financial situations. Over the past few years, millions of Americans have lost their jobs, and millions more are working part-time jobs when they’d really like to be working full-time.

Losing your job — or worrying that you might lose your job — is naturally going to cause people to do things like save more for a rainy day, or put off buying a new car or renovating a home.

That’s being reflected in the latest national data, which showed that Americans spent less and saved more in June .

“People are actually behaving pretty rationally given the economic circumstances,” said George Loewenstein, a professor of economics and psychology at Carnegie Mellon University.

In fact, he noted, one could argue that Americans reacted less appropriately during the boom years that preceded the recession, when consumer debt ballooned as the housing market soared.

“If anything, the irrationality was when people thought housing prices could rise forever,” he said.

Still, by hunkering down now Americans are making it even harder to get out of the difficult economic cycle, experts say. That’s because consumer spending is a major driver of the nation’s economy. When people aren’t spending, companies are hesitant to do other things that could improve the economy, like hire more workers.

Some experts question whether it’s realistic to assume that Americans will ever return to the type of spending that drove the economy in the last boom. Instead we may simply have adapted to the more uncertain economic conditions.

“When you’re just pummeled with, really, body blows of bad news over and over again, you do, I think, tend to see that as like the new normal,” said Kit Yarrow, a professor of psychology and marketing at Golden Gate University in San Francisco and an expert on consumer behavior.

When the economic crisis first hit, Yarrow said she saw truly irrational consumer behavior, with Americans refusing to buy anything and desperate retailers offering products at ridiculously deep discounts.

But now, she said, Americans seem to have settled into a new pattern where they want to feel more in control of their finances. That means they are focused on bargains and careful to spend money only when they need to and feel like they are getting a good deal.

The newfound frugality has even spawned some businesses, such as Groupon, the daily deal site that offers consumers steep discounts on products or services for a short window of time.

“It’s almost like the lack of predictability has become predictable,” she said.

In interviews over the weekend with consumers, Yarrow said she heard from many people who seemed shaken by how Congress handled the debt issue, and worried that they can’t trust the nation’s elected officials.

Loewenstein, the Carnegie Mellon professor, said people tend to overreact to big issues like negotiations over the national debt and are less likely to think rationally about the solutions. That can add to political gridlock as politicians try to appease their constituents’ fears, and can make it hard for politicians to take actions that might help the economy.

De Bondt, the DePaul professor, said such overreactions themselves are all part of a typical boom and bust cycle of capitalism.

Nevertheless, that kind of thinking can overshadow any positive economic news or momentum. De Bondt worries that it has become so common to be pessimistic, and even to question whether the current economic malaise spells the end of America as we know it.

“What is amazing is that I think we are slowly giving up on the idea that we ourselves — (and) definitely our children — will have it as good as we did. That is really amazing. It’s undermined the quote-unquote American way,” De Bondt said.


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