News & Events

Are Politics Affecting Consumer Confidence?

Deep divides with little progress create sense of hopelessness, economist says

by: Donnelle Eller

Avolyn Fisher, pausing from a book about the rise and fall of the U.S. dollar, says politics could be hurting the U.S. economy.

“But it could also be the solution, depending on the decisions politicians make,” says the Drake University junior, working on a double major and her third internship so she has a better shot at getting a job after graduating.

Across Iowa, business leaders, academics, and Iowans are grappling with a rarely seen mix of politics and the economy. And alarm is being sounded from Principal Financial CEO Larry Zimpleman to Iowans contemplating joining a Wall Street sit-in.

“Politics and the economy are irrevocably intertwined” and have been for decades, says Steffen Schmidt, an Iowa State University political scientist.

But this time in history may be different, given deep political divides over economic and social issues, he said. The differences, bubbling under the surface, have heated up with a crushing recession, slow recovery, and exploding presidential election rhetoric. “I see a lot of real bitterness, almost hatred, out there,” Schmidt said. “It’s pretty daunting.”

In Iowa, the massive Wall Street drop that began with political gridlock over lifting the U.S. debt ceiling in late July and deepened over concerns about the European debt crisis has trimmed as much as $6 billion in value from the state’s largest publicly traded companies.

And Iowa still struggles with persistently high unemployment, stagnant income for workers who have jobs, and rising prices for consumer goods. Politics’ biggest hit to the economy is confidence, both for consumers and corporations, say experts.

“Washington has really made a hash of things,” said Peter Orazem, an Iowa State University economist. “We’re supposed to be able to rely on government to do a few things, like make things right for flood victims in Vermont.

“But they seem to have no interest other than their re-election and playing games,” said Orazen. “That creates a real sense of hopelessness. And it screws up consumer confidence in a big way.”

Bart van Ark, chief economist for the Conference Board, a nonprofit group that tracks consumer confidence, wrote the “risk of recession in the U.S. has increased to almost 50 percent, due primarily to the sharp deterioration in consumer confidence and the steep downward adjustment in the equity market.”

Van Ark points to a weak labor market, soft consumer spending—it’s about about 70 percent of the U.S. gross domestic product—and a still struggling housing market as “major headwinds facing the U.S. economy” in the fourth quarter and next year.

Charles Whiteman, a University of Iowa economist, said heightened uncertainty is making businesses and families “reticent about making long-term investments,” whether it’s consumers who refrain from buying refrigerators and cars or companies that decline to invest in plants and equipment or hire new workers.

“We can’t say X percent of the problem is due to politics or we’re growing Y percent slower than we otherwise would be, but it’s there,” he said. And it “feels worse to me now than it has been in recent years.”

As an example, Whiteman said it was extraordinary for some Republican leaders to send a letter to Federal Reserve Chairman Ben Bernanke before the reserve’s last meeting, telling the group to take no more action to improve the economy through monetary stimulus. “Such a message was unprecedented,” said Whiteman. “My reaction was, ‘Wow, this is new territory.’

“It opens up a degree of uncertainty about how the Fed will be able to conduct its policy in the future, and that’s not a positive thing,” he said.

“Firms, with heightened uncertainty about future profitability, could put off expansion plans, put off construction plans, put off acquisitions,” he said.

Zimpleman, Principal’s CEO, wrote in a Register editorial in July that government needed to “act with a healthy dose of reality” to find solutions for long-term financial stability, from reducing spending to increasing revenue. “If Washington will ... act in the best interest not of party but of citizens and businesses, both of which drive the economy, then it’s not too late.”

Timothy Hagle, political science professor at the University of Iowa, said the political rhetoric has roots in voter dissatisfaction.

“The debt ceiling may have been raised several times before, but voters feel like we’ve reached a limit, the credit card is maxed out,” Hagle said. “And it’s resonating more now than in the past, because people see what’s happening in Europe.”

ISU’s Schmidt worries that growing world political unrest will spark upheaval in the United States.

“I don’t know if we’re headed in that direction, but there’s certainly an unprecedented decline in confidence in major institutions such as Congress, and even a decline in confidence in private-sector companies. That’s alarming.

“People are really furious that the Republicans and Democrats can’t get together and work things out in a reasonable way,” he said. “Voters want politicians to cooperate and get two things done: one, bring government spending spending under control, and at the same time, do it so it will not give a second shock to the economy.”

Whiteman hopes the “supercommittee” formed to find bipartisan solutions to the nation’s spending challenges makes recommendations that can set the country on a firm economic recovery. Otherwise, he said, the economy will continue to take hits from “continued and repeated arguments.”

“I’m definitely concerned about the future,” said Fisher, the Drake University student, who attended a recent Greater Des Moines Partnership panel discussion, featuring young professionals, about issues affecting voters.

Still, Fisher is hopeful the downturn and resulting debate over the best path forward moves the nation to a stronger place.

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