Does Negative News Contribute to the Downturn?

BY busadmin  March 6, 2009 at 5:08 PM EDT

Going out of business; file photo

Question: I would love to see you do a story on the impact of media coverage on the recession. Over the last two years, there has been a steady drumbeat of “the recession is coming, the recession is coming!” Is it any wonder that the savings rate is up and Americans are not spending?

While I do not believe the media has CAUSED the downturn in the economy by any stretch of the imagination, I do believe the steady diet of negative stories about the economy has contributed to panic and a cutback in spending — even by those who can afford it and who have not been affected directly.

Paul Solman: Yes, quite plausibly. But what would you have us do? Lie?

I don’t mean to be flip. I think you raise a difficult question, which I discussed publicly after a lecture I gave not long ago. I said then that I just couldn’t bring myself to report what I considered to be falsely good news. I don’t consider it the deal I’ve made with the people – you – who pay my way (albeit indirectly).

Allow me to share this exchange with the Cornell economist Robert Frank, recorded recently at New York’s La Guardia airport at the end of an interview about infrastructure spending.

PS: Do you think it’s your patriotic duty, and mine, and our viewers to spend at this point?

RF: If there’s something you want anyway and you’d like…you’ve been looking for an excuse to buy it… Ah, that’s a great excuse to shake loose a few extra dollars from your account and buy it, yeah. You can say to yourself that if I and others do that the economy will get back on its feet a little more quickly.

PS: Are you avoiding saying negative things about the economy even in this discussion because you think it would have a dampening effect?

RF: No, although maybe people should think strategically along those lines. I think, you know, pessimism does have a negative effect on the economy but, yeah, I’ve been straight up saying to you that I think we have a huge demand shortfall. I don’t think whether you or I spend extra money is going to make much difference. I think the only way really to bridge the shortfall is if the government gets moving very quickly and spends a bundle. So no, I think that it’s very important to focus on that as the big ticket item right now.

PS: But would you lie now if you thought strategically it would help the economy?

RF: Yeah, I’d think about lying in those terms. Yeah, I think if there’s a compelling enough reason to lie you’ve got to think about lying, so I might.

PS: So we can’t really tell the extent to which you’re telling the truth now!

RF: You might want to discount everything I say on the grounds that I’m a consequentialist. Never trust a consequentialist!

(Frank’s book of 20 years ago, Passions within Reason, has had a huge influence on my thinking about economics, and life in general.)