Bad vibes about the economy can be protective, but there's a downside

Special to Financial Post | Scott Schieman, Alexander Wilson and Jiarui Liang
Sun, February 18, 2024 

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The debate about perceptions of the economy has reached a fever pitch lately.

Some argue that perceptions don’t align with reality, that pessimism about the economy is disconnected from objective conditions. United States Treasury Secretary Janet Yellen labelled these negative sentiments “unwarranted.” Likewise, Claudia Sahm, a former U.S. Federal Reserve economist, described “a toxic brew of bad events” that has fuelled “amped-up pessimism.”

Others push back against the “vibecession,” arguing the negativity is justified because many people are struggling.

Either way, the bad vibes are creating headwinds for U.S. President Joe Biden — and fodder for his opponents. Some strategists warn that doubling down on the “you’re better off than you think” message is politically unwise. The advice: Negative sentiments are real — even if they might be softening — so don’t try to vanquish them with counter evidence. The customer is always right. If they say the coffee is too cold, it’s too cold even if you’ve served it at a perfect 52 C.

Why have the bad vibes been so sticky? Could pessimism about the economy be psychologically protective when personal finances feel strained? To find out, we fielded a national survey of 2,500 Americans in November 2023 with the help of research firm YouGov PLC. We call it the MESSI study: Measuring Employment Sentiments and Social Inequality.

First, to measure personal financial strain, our survey asked Americans how often they struggle to pay their bills, how often they don’t have enough money to buy basic necessities and whether their finances come up short each month in a chronic struggle to make ends meet.

Research has consistently shown there is a strong link between personal financial strain and an important dimension of alienation: the sense of powerlessness. Our study replicates that pattern. People who experience economic hardship tend to feel a low sense of personal control, feel helpless in dealing with problems and generally feel pushed around in life.

But there’s a twist. The strength of that link between personal financial strain and powerlessness depends on people’ perceptions of the economy, although not in the way you might think.

To measure perceptions of the economy, we adopted the question from the U.S. Federal Reserve’s 2022 Survey of Household Economics and Decisionmaking: “In this country, how would you rate economic conditions today?” We compared people who reported “poor” or “fair” (a bad economy) to those who reported “good” or “excellent” (a good economy).

Common sense suggests that perceiving a bad economy would exacerbate the powerlessness that comes with personal financial woes, perhaps because it tarnishes the U.S.’s image as the “land of opportunity,” thereby undermining the hope that better days lie ahead.

But we found the exact opposite. Perceiving a bad economy diminishes the powerlessness that is typically associated with personal financial stress. That is, the bad vibes appear to be protective.

One interpretation of this counterintuitive pattern is that pessimism about the economy functions as a stress buffer because it’s a proxy for the “we’re all in the same boat” idea, or that personal financial turbulence isn’t your fault, but the result of choppy air in the broader economy.

Here’s another surprise: This isn’t just an American phenomenon. We found almost identical patterns in Canada. Partnering with research firm Angus Reid Group, we fielded a national survey of 2,500 Canadians in October 2023 that asked the same questions in the MESSI. We call this the Canadian Quality of Work and Economic Life Study (C-QWELS).

Replicating our American findings, the relationship between personal financial strain and powerlessness is weaker among Canadians who perceive a bad economy. In other words, the benefit of bad vibes generalizes beyond Uncle Sam’s borders to the Great White North.

These mirror patterns imply a general social-psychological dynamic could be at work. People cope with the powerlessness of financial strain when they frame it as part of an external problem.

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Sure, you might find some comfort in the belief that the economy’s performance is lacklustre, especially if your own personal financial health isn’t great. But is there any downside to thinking things are worse than they really are? Probably. Acting on these negative sentiments might lead to unnecessarily jettisoned policies, leaders and cups of coffee that were otherwise, well, relatively fine.

Scott Schieman is a Canada Research Chair and professor in the Sociology Department at the University of Toronto. Alexander Wilson and Jiarui Liang are graduate students in the Sociology Department at the University of Toronto.