Thursday, March 1, 2007

Weapons of Economic Warefare III

Consumer confidence is one of the better predictors of economic performance over the short run. Consumer confidence is essentially the expectations held by consumers about the future. It is also one of the more difficult things to predict and control. There a few ways in which consumer confidence might be manipulated into a weapon of economic warfare. When consumer confidence falls, consumer spending typically falls as well. A dramatic fall in consumer confidence, and thus consumer spending, can cause a recession or even a depression. A great deal of modern economic policy is centred on limiting the impact of a such a drop in consumer confidence. The most common and direct approach is to increase government expenditures to offset the impact. By decreasing consumer confidence an unfriendly power may be able cause a recession in a target country. During a recession the prices of real assets tend to fall making the acquisition of fundamental resources and assets less costly for the attacking power.

Consumers’ expectations of the future are the true target here. Economics has a less than ideal understanding of how expectations are formed, but there are a few simple ideas that might be exploited to this end. Continued bad news, or uncertainty is one way in which consumers expectations of the future may be manipulated. News stories covering closing of factories and failing businesses would be one method of decreasing consumer confidence. Proximity and accessibility are two keys in an individual’s assessment of risk. Proximity basically means did it happen to someone close to you or like you. If news stories or other methods of relating the unfortunate events relating to an “every man” are circulated, this will likely have a strong negative impact on consumer confidence. Accessibility refers to how easily an event like the one being assessed can be called to mind. Recently experienced events tend to receive higher assessed likelihoods than events further in the past. Thus increasing the frequency of these stories would increase the perceived likelihood of such an event. The result would again be a loss of consumer confidence.

There is another, more devious method of attacking consumer confidence. Very little shakes a person like disappointment. Thus, consumer confidence could be attacked not by trying to convince the populace of a country the future is going to be bleak, but by convincing them things were going to go phenomenally well.. By creating unrealistic expectations you set the populace up for a disappointment. The reaction to this disappointment would be a substantial contraction in consumer confidence and spending resulting in the desired economic hardship. The advantage of this approach is that people are more likely to believe what they want to hear, and good news is what most people want to hear.

Punch line: Beware of good news. It may not be what you think it is. J


Anonymous said...

hi there, dr. childs - "the centre of the universe says a mighy hello" - i am glad you're doing this, and if you're wondering, i am doing fantastic and yes i have switched to economics full-time and looking forward to going to the US - vanderbilt or american university specifically, so I hope you're proud, you and your twin had A LOT to do with that:

i agree with your comment; this is why today we had the american treasury secretary say that the recent stock market dips don't reflect how strong the economy is. alrighty then, enough with his spin, reality is that the majority of the public is in fact not better off today then they were before bush 2 came to power. recent statistics have proved that the upper tier have seen massive real income gains while the middle and lower class have struggled to keep up. those income tiers have supplemented their incomes by increasing debt loads (ie: home equity loans and the like specifically). the real $64,000 question is: when we land, are going to suffer two broken legs or one?

i will comment on productivity in a future commentary. some really interesting stuff has come out recently about canada and it doesn't look good. let's just say that canada on it's own cannot continue in the future, simply because it's such a darn expensive place to live and work. i am advocating continentalism, and since we do have a good test subject to learn from (the EU), we can improve upon that model and do LESS mistakes (i'm sure some will happen).

i would love to hear what you have to say about it.

snailman said...

Economist At Large,

With news being news, and people's actions resulting from such news, why doesn't the economic community use these methods of consumer confidence manipulation to counter such declines? Why wouldn't the economist's make these tendencies extremely public?

Perhaps you’re going to say that the economic community does in fact try to make it public that the consumers doom themselves, and that ignorance is to blame.

Well let me ask you this. If human expectations generally drive actual occurrences, then why don't you use the Economic knowledge as one of your "Weapons of Economic Warefare"? If economists were to make these public, not just tell some of your friends/colleagues or the arms reach of your economic community, but actually make this dooming self prophecy well known in the community as a whole, by launching Economic campaigns to educate the public, wouldn't this combat these tendencies.

Or is it that the Economic Community needs these "Weapons of Economic Warefare" in their back pocket so they can stun the economy if need be, to prevent an economy from growing out of control. Is this the reason, economists make these "Back Pocket" tools, largely unknown and not widely advertised?

Anonymous said...


you give economists too much credit.

economistatlarge said...

Anonymous -

I'll get to your idea shortly. Drop me an email at work if you want to catch up.