Most economists believe that while the recovery remains fragile, it is likely to accelerate over the next year. As recently as a month ago, the American people agreed. But they don’t anymore. And there is a threat that these suddenly gloomy expectations could turn out to be perversely self-fulfilling—causing Americans to stop spending and investing, and thus hobbling the pace of economic growth to slow the already subpar job rebound.
Two recent surveys highlight the shift in popular sentiment. Drawing on data collected between February 24 and February 28, the latest NBC/Wall Street Journal poll documents a startling collapse of economic confidence. As recently as last month, 40 percent of American thought the economy would get better during the next year—the highest level of optimism since the spring of 2010—while only 17 percent expected it to get worse. Now, only 29 percent expect improvement; an equal share—29 percent—fear deterioration. And Gallup measures economic confidence on a weekly basis, using an index that combines perceptions of current conditions with assessments of economic trends. Two weeks ago, it had reached its highest level since January of 2008. Since then, the index has fallen by twelve percentage points, and nearly all the change comes from a plunge in expectations. Two weeks ago, 43 percent saw the economy as getting better; by last week, only 33 percent did.
There is a danger that, if households hunker down in response, the economy and job market would shift into lower gear. President Obama has a huge stake in avoiding this, from the perspectives of both policy and politics. It would be uncomfortable enough for Obama to run for reelection with unemployment around 8 percent, down from its peak but still higher than when he took office. But it would be much worse—possibly fatal—for him to wage that battle with unemployment anywhere near today’s level.
Only recent events could account for such an abrupt shift, which Gallup attributes to rapidly increasing gas prices and growing public concern about government finances at every level. If Gallup is right, Obama should try to reach an ironclad agreement with major oil-producing countries to increase production and compensate for any fallout from the Libyan civil war, so that market psychology might shift in a favorable direction and push crude oil prices down. Whether the Saudis, who are still seething at what they see as his abandonment of Hosni Mubarak, would be willing to help out, is another question altogether.
On the fiscal front, Obama has a growing incentive to strike a multi-year deal that shifts the focus away from short-term budget cuts and instead brings long-term deficits down to a sustainable level. Here again, public opinion is flashing warning signs: According to the NBC/Wall Street Journal survey, 62 percent of people are concerned that the president won’t go far enough in cutting programs and reducing spending to deal with the budget deficit; only 26 percent fear that he’ll go too far. Unless he gets more involved, the public predisposition to see him as fiscally fainted-hearted could harden into the judgment that he’s part of the problem, not the solution.
This approach would be more popular than the Republican alternative. The American people favor cuts in programs such as energy subsidies and unnecessary weapons systems as well as an outright five-year freeze in domestic spending. They strongly support imposing an income surtax on millionaires and phasing out the Bush tax cuts for families earning more than $250,000 a year. They even profess themselves willing to reduce Medicare and Social Security benefits for wealthier retirees and to gradually raise the retirement age. But more drastic changes, such as turning Medicare into a voucher system, which House Budget Committee Chair Paul Ryan proposed last year, would run into a buzz-saw of public opposition.
It’s hard to say how all this will sort itself out. But one thing seems clear: The longer the uncertainty persists about the course of gas prices, state and local finances, and the federal budget, the harder it will become for the economy to get up a head of steam. If a president who prides himself on his ability to take the long view actually does so now, he will get himself off the ropes and into the center of the ring.
William Galston is a former policy advisor to Bill Clinton and current senior fellow at the Brookings Institution.