Let the Good Times Roll: The Economic Expectations of U.S. Voters

Abstract

Increasingly the concept of expectation is utilized to explain political choices, with voters being depicted as prospective rather than retrospective in their orientations. This paper tests competing theories of economic expectations (forecasts) with data from consumer surveys (1960-91). Forecasts of inflation confirm the hypothesis of adaptive expectations, but forecasts of general economic conditions do not; nor do those forecasts conform to rational expectations. Instead, voter forecasts of economic conditions are prone to a significant asymmetry. While good economic times tend to foster optimism in an adaptive fashion, bad times do not similarly feed pessimism. Instead, they trigger a reverse forecast. We explore this remarkable behavior in the light of psychological economics.