JIM LEHRER: Next, the fear that’s driving down consumer confidence. One of the Fed’s goals in lowering interest rates today is to increase borrowing and spending. But as our economics correspondent, Paul Solman, reports, restoring consumer confidence is not an easy thing to do.
LYNN FRANCO, the Conference Board: This is about as bad as it gets.
PAUL SOLMAN, NewsHour economics correspondent: Lynn Franco runs the widely reported consumer confidence index from the business group, the Conference Board.
LYNN FRANCO: Over the last two months, we hit an all-time low, and we’ve been doing this for 41 years.
PAUL SOLMAN: The key survey questions business conditions, how are they now, the blue line, and expectations, how will they be in six months, the purple. A score of 80 indicates a so-so economy.
Well, here, expectations have dipped below 40, right? And that’s never happened before.
LYNN FRANCO: Correct. October marked an all-time low for both consumer confidence and the expectations index.
PAUL SOLMAN: The Conference Board’s doleful data were borne out on the ground. At New York’s upscale ABC Carpet & Home, for example, where those who could still afford to, we figured, would be shopping. Gene Miranda runs a horse farm on the West Coast and loves the shopping there.
CUSTOMER: But this is the most fabulous store I have ever been in, in my life.
PAUL SOLMAN: You’re cheery.
CUSTOMER: I am.
PAUL SOLMAN: You don’t look pessimistic. But…
Shoppers spending less this season
PAUL SOLMAN: So how much is she spending compared to last year?
CUSTOMER: Percentage, I'd say 50 percent.
PAUL SOLMAN: Fifty percent less?
PAUL SOLMAN: What do you got?
The same for Travis Ogden.
CUSTOMER: Last Christmas, I probably spent like $500 to $600. And this Christmas, maybe like $300, $200 to $300.
PAUL SOLMAN: Even though he thinks it may now be patriotic to spend, as does Sarah Flack.
CUSTOMER: I definitely feel like I'm doing my duty by shopping, in as much as I can.
PAUL SOLMAN: Are you spending as much as you were, I don't know, last year?
CUSTOMER: No, I'm not.
PAUL SOLMAN: Indeed, according to a recent Pew poll, 73 percent of Americans intend to spend less on the holidays this year.
PACO UNDERHILL, author, "Why We Buy": We cannot continue to spend at the rate that we were.
PAUL SOLMAN: Paco Underhill is the author of a worldwide bestseller, "Why We Buy." So why aren't we buying now?
PACO UNDERHILL: We have a third of us that are immediate risk of being downwardly mobile, and that's across the social classes.
The second third of us isn't at immediate risk, but we know somebody who is. It may be a parent, a child, a friend, a neighbor. And for those people, they are taking pride in how little they're spending for something.
And the third group is a group that's paid off their mortgages. They basically have no real concerns. What they do know is that conspicuous consumption is now verboten.
Consumers across the board shocked
PAUL SOLMAN: Bottom line: Not everyone's hurting, but almost no one is shopping. In a sense, we're shocked.
DAN ARIELY, behavioral economist: So here's how this experiment worked.
PAUL SOLMAN: And our response, says behavioral economist Dan Ariely, reminds him of dog experiments from the 1960s, too grim to do anything but gently recreate here.
DAN ARIELY: There are two dogs. The first dog is in a room, and this dog hears a bell. Then, it gets a shock. And it has a little switch that it can turn off. And the moment it touches the switch, the shock turns off.
PAUL SOLMAN: The shock turns off for both dogs, but only the one with the switch is in control.
DAN ARIELY: So for this dog, the way life looks like, it's a bell, a shock, turning it off.
PAUL SOLMAN: For the second dog, however, there's no bell, no switch, the shock is random. It stops just as randomly.
DAN ARIELY: Now, after this first task, we take the dogs and put them in a new task. From time to time, there's a bell, and then electrical shock starts.
Now, if the dog jumps to the other side of the room, the shock stops. And very quickly the bell comes and the dog jumps. The bell comes, and the dog jumps.
PAUL SOLMAN: The first dog, that is.
DAN ARIELY: But here is the interesting thing. When we do the same thing with the other dog, the dog that did not understand the cause and effect, the bell comes. And instead of jumping, the dog lays down on the ground whimpering. They become what we call learned helplessness.
PAUL SOLMAN: Even though they're getting shocked?
DAN ARIELY: Even though they get shocked. And the basic lesson is that, when we don't understand the relationship between cause and effect, we develop this learned helplessness. We develop this depression that is quite deep. And I think we're all kind of like this dog right now.
Spenders drawn into their shells
PAUL SOLMAN: Now, Ariely is hardly the first economist to liken us humans to animals or even stress the importance of mood in economic behavior.
John Maynard Keynes, the foremost economist of the Great Depression, blamed it on a loss of confidence, the dampening of the animal spirits that stir us to spend and invest.
In his words, though another's voice...
NARRATOR: "Our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits of a spontaneous urge to action, rather than inaction. If the animal spirits are dimmed and the spontaneous optimism falters, enterprise will fade and die."
PAUL SOLMAN: More than 70 years later, economists still agree.
DAVID WYSS, senior economist, Standard & Poor's: It is animal spirits.
PAUL SOLMAN: David Wyss met us at New York's Central Park Zoo to make the point.
DAVID WYSS: When people are scared, they pull into their shells, they stop spending or, like the polar bears, they just sit there and go in circles and don't do anything.
And right now, people are scared. They're seeing unemployment go up. They're seeing their stock portfolios go down. They're seeing the value of their houses go down. And right now, all the animals are turning into bears.
PAUL SOLMAN: Or into some species with an even less rosy future.
But, wait, the economy isn't going to expire. Even if pessimism is warranted, we're bound to be back in the swim before too long though. Yes, says David Wyss, but, in the meantime, pessimism is perilous.
DAVID WYSS: People stop spending, so they don't go out to restaurants, so the waiters lose their jobs, so they can't spend any money. That means the guy at the gas station doesn't have a job, and it goes all the way down the scale.
PAUL SOLMAN: Plus, for many people, of course, their actual circumstances are already depressing.
DAVID WYSS: They get depressed because they're losing jobs. They get depressed because their wealth is going down. And that's what's happening now.
PAUL SOLMAN: Might it be the case that we just flew too high, have to fall this far, and it's going to take a very long time for us to legitimately feel confident again?
DAVID WYSS: What you want to make sure is it doesn't get to be too big an overcorrection, that we don't end up in a downward spiral just because we got a little too close to the sun.
PAUL SOLMAN: But that may be just what's happening.
LYNN FRANCO: If you look at the yellow line, the percent of consumers expecting their incomes to decrease for the first time ever has surpassed those expecting their income to increase. Never in 41 years have those lines crossed. And now I think there's just a much more dismal perspective on where their earnings are headed.
Tuning out bad news
PAUL SOLMAN: One last question. If psychology is so important, can we prevent fear and overreaction? Yes, to some extent, says Dan Ariely, by avoiding sources of fear. He does this, for example, with his retirement balance.
DAN ARIELY: I don't look. And, in fact, what I did was I did a trick, which is, I use the wrong password three times in my account, and now I'm locked out.
PAUL SOLMAN: Really? You did that on purpose?
DAN ARIELY: Yes. So now -- you know, I can go back, and I can ask them to reinstate my password.
PAUL SOLMAN: You're blushing. You're blushing now.
DAN ARIELY: I'm blushing because it's a crazy solution, right?
PAUL SOLMAN: As the author of "Predictably Irrational," Ariely knows crazy solutions.
TV PUNDIT: We round out our show today with what you need to know...
PAUL SOLMAN: But he also knows some sane ones, like tuning out the purveyors of financial news.
TV PUNDIT: I think it's a bad, bad bet.
TV PUNDIT: The Chinese consumer is rolling over, and it's going to be bad.
DAN ARIELY: They basically said the same thing over and over, but they don't explain anything. The moment we had more explanation, a different media, an understanding of where things are going, I think that would actually help to rebuild confidence.
PAUL SOLMAN: So our doing an explanatory story like this on the NewsHour, even if it has a rather gloomy conclusion, should be good for people?
DAN ARIELY: It depends how much you cut me. If you cut me a lot, then it doesn't help.
PAUL SOLMAN: Happily, we've just heard Dan Ariely for longer than most whole news stories on TV.
The explanation might even help restore your confidence. And, let's face it, the stores sure could use you this holiday season.
Editor's Note: An earlier version of this report contained an incorrect date for the start of the behaviorial dog experiments. The correct date is the 1960s.