A changing psychology of economics
Jan 28, 2012

A changing psychology of economics

My 96 year old grandmother, after selling the old family farm late in her life, doesn't need to worry about money. Yet, she worries about it constantly going to great lengths to save every possible penny. She is a child of the depression - which she speaks of whenever she explains her penny pinching - and this experience has inculcated in her a deep sense of the need to save and the need for frugality. Over the stretches of her long life she personally, and the economy in general, have gone through many ups and downs. But the experience of the depression was the one that really determined her future behavior and relationship with money and consumerism. 

Today, people often myopically focus on the perceived key indicator of consumer confidence. If that goes up (as it has recently, see chart) then consumer spending, so the theory goes, and all the associated increase in demand, will also go up. There is an appropriate recognition that aggregate psychological factors such as public perception of the economy and their confidence about their place in it do make legitimate economic differences. 

What is underrepresented is an acknowledgement that since the recession of 2008 there has been a fundamental shift in the psychology of economics. Our relationship with money has changed. The way we perceive the importance of savings or debt has changed. The value of crass consumerism and symbols of affluence has changed. Even what is considered desirable has changed. 

Imagine the worker who has run out of their 99 weeks of unemployment benefits in the US. They have foreclosed on their home, which is now worth less than when they bought it. So too may have many of their friends, family and colleagues. They may now get a job in an improving economy, and they may now tell a pollster that they believe the economy is improving. But I would submit that there is a reasonable chance that this experience has fundamentally changed such a person's entire relationship towards money and they may simply not behave in the future as they would have in the past even as their prosperity comes back to the same levels. 

Of course, it is more than likely that fundamental shifts in the economy itself have also taken place and that we ought not to expect a return to the same kinds of economic status quo that used to exist on measures such as unemployment or annual GDP growth. The FED has recently announced to extend its near zero interest rate policy until near the end of 2014 at minimum (thus over a half decade since it started). This continuation of a Japan like extreme policy demonstrates just how clear the shifts in the economy are. 

On top of the many economic changes that have occured and are occurring today, we can add the economic effects of a fundamental shift in the economic psychology of our society. With time, and should we experience prosperity in the future, some of these effects will dwindle. Our collective faith in the economy, in the sources of our prosperity such as jobs and houses, and in a political system able to protect us may rise. But not fully, I suspect; not to the levels it once was. There will be those, such as our hapless archetype described above, who will end up penny pinching as my grandmother does and rationalizing it based on the experiences of the recession of the last several years. 

Thoughts on this post? Comment below!

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