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The Psychology of the Situation

I have noticed in the past week or so that Senator McCain, and now President Bush, are putting a priority on speaking to the psychological aspects of the current economic woes. Just this morning in a press conference, President Bush said the following about his decision to lift an executive ban on off-shore oil drilling in the United States:

…I readily concede that, you know, it’s not going to produce a barrel of oil tomorrow, but it is going to change the psychology that demand will constantly outstrip supply. As I said in my remarks, it’s going to take a while to get these reserves on line. But it won’t take a while to send a signal to the world that we’re willing to use new technologies to find oil reserves here at home.

Last week former Senator Phil Gramm, Senator McCain’s chief economic advisor, said that Americans were suffering a “mental recession” and the United States has become “a nation of whiners”. This post at DailyKos documents several instances in which Senator McCain specifically used the word “psychological” in discussing economic issues, such as

…a lot of our problems today, as you know, are psychological…

I am not so naive as to make the argument that psychology plays no role in economics. But I do find it interesting that first Senator McCain, and now President Bush, seem to believe the crux of their economic discussions should be to convince people that things are better than people think. On one hand, that makes perfect sense. If you’re the incumbent party, you naturally want people to think things are going swimmingly. But when almost every fundamental metric indicates otherwise, it seems to be a very risky card to play.

What’s psychological about the Fed having to bail out Bear Stearns? Or the FDIC having to take over IndyMac? Or government plans already being drawn up on how to rescue Fannie Mae and Freddie Mac? What’s psychological about paying four and a half dollars for a gallon of gasoline? Or General Motors cutting its dividend for the first time since 1922?

I appreciate that politics dictates that President Bush and Senator McCain must try to mitigate the negative perceptions people have of the economy as much as possible. But when as many problems are as visible as they are right now, I am not sure telling Americans they’re just imagining things is a terribly compelling argument.