The Washington Post has a good piece today on the role of consumer psychology in recessions. In particular, they focus on what they call "the could-spend-if-they-want-to consumers" -- the folks with $90,000 incomes and no real likelihood of unemployment who have nevertheless cut their consumption sharply. Recessions have what some economists call a "downward multiplier." The economy doesn't sag just because a higher-than-normal proportion of the workforce is unemployed or a larger-than-normal proportion of workers forgo raises. Rather, those events ripples outward to theoretically unaffected actors, and a financially stable family that was about to buy a car decides, due to the changes in the economic condition of people who aren't them, to delay the purchase. They begin spending like they're on the brink of unemployment, even though they're not. That, of course, deprives the car company of revenue which forces layoffs which increases unemployment which makes the situation worse and makes the unaffected even more skittish.
Psychologists explain that people fall prey to what is known as social proof. The most famous study pointing at the effect was done in the 1960s by psychologist Stanley Milgram. He had one or two people stand on a busy city block in New York and stare up at a sixth-floor building window. Most pedestrians ignored them. But when he had 15 people stand and stare at the window, nearly everyone walking down the street looked up at it, too.The phenomenon is at work now, said Robert Cialdini, an Arizona State University psychologist and expert on persuasion. "When people are uncertain, a funny thing happens: they don't look inside for answers anymore because all they see is confusion," he said. "They look to see what other people in this situation are doing. That's a way to reduce my uncertainty about what I should be doing."
When 15 people stare at a still building, though, eventually pedestrians conclude that the visual evidence suggests inaction and they move on. The problem is that there's less visual evidence here. A genuine change in economic fortunes will take time to manifest and more time to become visible. The economy can't change until consumers think it has changed. In that way, you sort of wonder whether the ubiquitous stock market ticker can't find some redemption: The green arrow and the happy graph are the sorts of things that can convey elite confidence long before consumers would notice changes in their own lives.
