The Self-fulfilling Prophecy of the Fiscal Cliff

Now that we have temporarily postponed our dive off the fiscal cliff and into economic uncertainty, I wanted to write up a quick commentary on the cliff and why it has potential to harm the U.S. economy.

It seems to me that one of the primary ways in which the fiscal cliff could cause trouble is simply through the fear it instills in Americans, as much as it might be the result of  actual changes to taxes and spending.   Now, this is not to deny that 1.1 billion dollars in cuts the defense budget would surely influence our large defense industry potentially resulting in the loss of jobs and hampering growth in that sector.  Nor do I want to suggest that changes to the tax code will have no consequences.  However, the media hype and economist projections surrounding the cliff strike me as equally harmful.

One of the most important elements for economic growth and investment is confidence in the market.   Despite the fact that the social sciences have never quite proven themselves to be effective soothsayers of the future, economist confidently “predict” the detrimental results of expiring tax cuts and enforced spending cuts.   In part, such predictions only create fear and a loss of confidence in the market, further hindering investment and potential growth.   To borrow a term from sociologist Robert K. Merton, such predictions become self-fulfilling prophecies.   If we define the situation as an economic crisis, we will treat it as such.  Rather than investing in growth and creating jobs, everyone will batten down the hatches.  New projects and additional hires will be postponed for fear dire economic consequences.  As a result, people will continue to be out of work, growth will stagger, and economic recession will return.

Is there a way for the media and economist to address the current situation without instilling fear?  I wish the media recognized the incredible power that it wields to shape our economic future, opting instead for less sensationalized coverage of—and perhaps a less sensationalized name for—the fiscal cliff.   But knowing that headlines which tout impending financial doom attract more attention than balanced views, we can expect continued media coverage which foretells economic disaster well into March.  And the tone of that coverage will likely be a good predictor of the tone of our economy in coming months.

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3 thoughts on “The Self-fulfilling Prophecy of the Fiscal Cliff

  1. I don’t know if it is so much a self-fulfilling media-made prophecy or the result of a world made by economists. Mitchell argues (The work of Economics: How a discipline makes its world) that the discipline of economics creates a model of the economic world and then because it’s explanations become the most acceptable way to understand that world they hold tremendous sway. In other words, according to Callon (1998, The Laws of Markets), economics is a performative activity. If economists didn’t have models predicting the dire economic consequences of going over the “fiscal cliff” would there really be any consequences?

  2. Yes–I agree! I’m glad that you are more familiar with the research on this issue and able to provide some references. Essentially, I agree that the discipline of economics is somewhat performative and greatly contributes to making the economic world. However, I still think that the media plays an important role in conveying a particular understanding of the market and economy to the general public and shaping the public’s response to economic events.

    • I just had vague recollections from Economic Sociology 🙂 I agree that the media shapes the general public’s response to economic events. But in order for the media to share responsibility in the self-fulfilling prophecy, the general public must be considered an economic player. I like to think the masses can affect Wall Street but I am a pessimist and tend to think that it only matters if Wall Street loses faith in Wall Street.

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