What We Know vs. What We Think

In psychology, confirmation bias is a tendency to search for or interpret new information in a way that confirms one’s preconceptions.  It’s a trap into which we are all vulnerable to fall.  Because our beliefs comfort us in our uncertainties, we tend to avoid information and interpretations that contradict our beliefs.

I suspect that I encountered confirmation bias in another person recently while discussing the current line-up of political candidates.  I was talking with a conservative teacher friend of mine.  Yes, folks, I do have some conservative friends, those who are still open to discussing things without getting red-in-the-face mad and calling me names.

My friend must have felt challenged by my assertion that a Democrat would most likely occupy the White House after next year’s elections, this owing to current economic conditions in our country.  History tells us that Americans always vote for the other party’s candidate when the economy is on the ropes.  Mind you, I didn’t say that I thought the Bush-Cheney tax cuts and run-away spending by a Congress dominated until recently by Republicans was entirely to blame, but I’m pretty sure this is what he thought I was implying.  In defense of the tax cuts, my friend made a claim that I had not heard before.  He said that a recession prevailed during the last three quarters of Bill Clinton’s second term. 

As a teacher of economics, I had not heard this claim before, a belief that I now understand to be widely-held by conservatives.  It challenged me, a “glass-is-half-empty” type of more liberal thinker, so I decided to check it out for myself.  I researched economic data for that period, which is available at the Bureau of Economic Analysis (BEA) website.  What I found was interesting –to me anyway.  While it is true, based on the data I found, that the U.S. economy shrank in three non-consecutive quarters in the early 2000s (the third quarter of 2000, the first quarter of 2001, and the third quarter of 2001), this did not constitute a recession –the official definition of recession being “a fall of a country’s real GDP in two or more successive quarters.”   A minor technicality that the declining quarters were not consecutive?  Perhaps.

My friend was right though; the economy was on shaky ground back then with relatively high unemployment following the burst of the dot-com bubble.  The unemployment was structural, caused by a series of layoffs by companies shifting manufacturing jobs overseas.  Spending was down because many took early retire- ment or adjusted their household budgets from what they had brought home from high-paying, assembly line jobs to what they could make with temporary, part time jobs in the services sector.  All of which validates the point that I was making in the first place.  And that is:  voters go for candidates representing the “other” party whenever the economy is in a slump.  But was this economic downturn Clinton’s fault for having increased taxes on the most wealthy of Americans in 1993 to generate budget surpluses in order to reduce the national debt?  No, I don’t think so.  The stock market had just become over expanded owing to investor enthusiasm for anything with a dot-com in its name.  Impounding the surpluses and buying back treasuries with the surplus generated by higher taxes and lower spending was the right thing to do, in my opinion, to keep inflation under control during those years of rapid economic growth.

Future historians will no doubt recall these shaky economic conditions in the final year of Bush-Cheney administration, conditions caused largely by the second-tier mortgage finance problem, which begat a decline in home values, which begat a decline in the entire housing sector (a huge part of the total economy), which begat a major fall in consumer confidence.  Also factoring into this mess is the dollar’s decline against foreign currencies resulting in large part from the Fed’s expansion of the money supply to cover deficit spending.  And don’t forget the inflation that everyone anticipates owing to the recent increase in the price per barrel of oil.  Why the high price for oil?  Oil prices are pegged to the U.S. dollar world-wide, which is now worth about forty percent less than before 911.  Also, world-wide demand for oil has rapidly increased in recent years as millions of people in China and India step up to their turns behind the wheel of automobiles.

With the national debt now more than $10 Trillion dollars (it was only $5.7 Trillion when Bush was first elected), this neophyte economist believes that we’re in for a long hard pull to dig our- selves out of the hole that we are now in.  If we are already in a recession and don’t know it yet, no matter what this or the next administration attempts to do (whether fiscal or monetary), other matters will be made worse.  If the Fed expands the money supply any more, the dollar will lose more value even quicker and foreign investors will look elsewhere for places to invest.  China has already announced that she is looking toward European countries for safer places to invest.  Oil, ever increasing in price as demand grows and OPEC refuses to produce more, will cost us dispro- portionately more than it costs other countries. With respect to the fiscal policy alternative government has with which to boost the economy, if more is spent ala FDR’s new deal, the national debt could soon rival the 120 percent of the GDP we had during WWII.

Yep, I really am a “glass-is-half-empty” kind of guy.  So I hope that I’m all wet in my assessment of where we are after eight years of reduced national income, this owing to tax cuts that favored households with a lower marginal propensity to consume (MPC), and unconstrained national spending on congressional district pork and a war that could go on forever.

But all this is just what I think; it’s not what I know.  So, please correct me, whoever you are, wherever you think my thinking is wrong.  I hope to never become so closed-minded in my beliefs that I’m not open to fully hearing opposing arguments.

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Published in: on December 8, 2007 at 11:18 am  Comments (2)  

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2 CommentsLeave a comment

  1. A question rather than a comment because I don’t know diddley about Gov’t economics. I do good to balance my own budget. How much has the WAR cost so far and is that a contributing factor for our sluggish economy? I suppose it is being paid for with borrowed money then you have to figure the interest. I trust you to give me an educated answer. I think you are a fair minded person even tho your feathers can be ruffled.

  2. Thank you for your question, John, and for posting it as a comment on The World According to Opa.

    A good, unbiased source of government spending on the Internet is, I think, http://www.nationalpriorities.org/. The National Priorities Project (NPP) is a 501(c)(3) research organization that analyzes and clarifies federal data so that people like you and me can understand how their tax dollars have been spent. The NPP is located in Northampton, MA and has been serving the public interest since 1983. It focuses on the impact of federal spending and other policies at the national, state, congressional district and local levels. Although it claims not to be in support of any political party or candidate(s) for public office, I sense from their web presence a subliminal message… an informed citizenry can influence spending priorities, and the current administration has it’s priorities all wrong. So throw the bums out!

    According to NPP, The Wars in Iraq and Afghanistan have already cost over 500 billion dollars. At the current level of spending, in current dollars alone (not counting downstream costs associated with pensions, medical care for the wounded, replacement costs for lost/destroyed equipment, and the like), the cost is nearing, by some estimates, to be 12 billion dollars per month. Dollars already spent came partly from budgeted defense spending, but also from separate, unappropriated, war emergency funding. For FY 2008, unappropriated funding available to the President for spending on the War is 70 billion dollars http://www.usgloballeadership.org/index.php?option=com_content&task=view&id=61&Itemid=51.

    Yes, John, separate appropriation funds are borrowed dollars. This means that today’s taxpayers are not paying much of the cost of the war. We will, however, continue to pay interest (currently about 10 percent of our total annual budget) on the debt that we are piling up until long after we get our tax and spending priorities straightened out.

    How much the war, coupled with the Bush tax cuts, have contributed to our current economic woes is a more difficult question to answer. But most serious economists would agree that they have. Owing to nearly a doubling of our national debt since President Bush first took office, the world has begun to question the “Full Faith and Credit” of our government and, by association, our economy http://www.foxbusiness.com/article/cassandra-says-economic-woes-eroding-confidence-tbills_493732_55.html. This partly explains why our dollar has lost much of its value against foreign currencies like the Euro and the Canadian dollar. Other reasons include the fact that our goods and services are not in as much demand as they have been in the past. Countries like Japan, Taiwan, China and Korea are making better “stuff” or stuff that we no longer make and making it with cheaper labor. This means that those of us who are still employed can enjoy lower prices, while our nation’s wealthiest, the corporate elite, can enjoy record profits even as more and more Americans are laid off. Accordingly, there has been less demand for American dollars by foreign businesses and private interests.

    Let’s not forget the rising global demand for oil as a major factor contributing to our economic woes. As the price per barrel of oil increases and our dollar weakens, increased production prices for petroleum products are being passed on to consumers. Inflation, according to the Federal Reserve, hasn’t been a problem in recent years, but just you wait, Ben Bernanke.

    Finally, I think our “sluggish” economy, as you call it, is headed for a correction of historic proportions because government, under the current administration, has allowed financial institutions, among others, to “run amok.” This lack of oversight and regulation against predatory lending practices has encouraged a huge increase in negative saving on the part of citizens who have been most vulnerable to job loss.

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