The Economy Gets No Respect

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The economy is reaccelerating after a bit of a soft patch, unemployment is low, and the stock market is near record highs. Yet poll after poll shows people are sour on the economy. An American Research Group survey last week found that 55 percent of respondents say the economy is "getting worse" vs. 16 percent who say it's "getting better." And the recent Conference Board numbers on consumer confidence fell to a 10-month low. To help figure out what is going on here, I dropped an E-mail to Bryan Caplan, an economist at George Mason University, coauthor of the EconLog blog and author of a new book, The Myth of the Rational Voter: Why Democracies Choose Bad Policies. Is it Iraq? Is it gas prices? Caplan gives me his two cents:

"Key starting point: It's 'normal' for people to think the economy is doing worse than it really is. The puzzle is why people are 'especially' pessimistic about the economy when it's doing pretty well. I haven't studied recent trends enough to say with any confidence, but I suspect that your Iraq and gas price stories are the main reasons. Pessimism about Iraq is spilling over to other areas, and people greatly exaggerate the importance of gas prices because they're so visible."

And why, I followed up, are people normally pessimistic about the economy?

"It's a strong general pattern. For the most part, I just document that this is so. Why is it a general pattern? This isn't my focus, but I present a couple explanations: 1. Basic human psychology. 2. Tendency to focus on short-run setbacks, while ignoring long-run trends. 3. Media coverage, combined with the public's failure to mentally adjust for the fact that the media focus on negative stories."

More on Caplan's analysis is available here.