Earning more makes you more optimistic about the economy

Brian Wallheimer | Mar 07, 2018

Sections Economics

Money and education make people more optimistic about the economy, according to research based on a long-running survey of American consumers.

That’s because lower earners tend to base their decisions and thinking on their personal experiences with the economy, while higher earners think more about the broader economy, according to Cornell University postdoctoral scholar Sreyoshi Das, University of North Carolina’s Camelia M. Kuhnen, and Chicago Booth’s Stefan Nagel.

The researchers analyzed 36 years of data from the University of Michigan’s 71-year-old Surveys of Consumers. The survey asks people about their expectations for the national unemployment rate, stock market returns, and general business conditions, among other things.

During times of recession, nearly everyone is pessimistic about the future, regardless of their socioeconomic status, the researchers find. But when the economy is in positive territory, people with more education and income became far more optimistic.

According to the survey data, during a month when the economy wasn’t in a recession, a person in the top quintile of income, compared to someone in the bottom quintile, perceived a 13-percentage-points-higher chance that the stock market would have a positive return over the next 12 months. Someone with a college degree, compared to someone without one, perceived a 7-percentage-points-higher probability of a rise in the stock market.

People with the highest incomes, compared to those with the lowest, were also more likely to expect good financial times—lower unemployment, higher stock prices, and better business conditions in general—over the coming year and over the next five years. Similarly, a college degree increased positive expectations about the coming year and the next five years ahead.

The highest earners were also more likely to expect a lower unemployment rate for the US economy over the coming year. On a scale from –1 (which indicated an expected rate rise) to  +1 (indicating an expected rate fall), the response of the average person in the top income quintile was 0.11 higher than the response of someone in the bottom quintile. A colleague education was associated with an increase in the score by 0.02.

The researchers suggest that “local thinking”—focusing on personal experiences, in this case with the economy, when making decisions—can play a significant role in expectations for people on the lower end of the socioeconomic spectrum. By contrast, people with higher incomes and more education base their thinking on a more general understanding of the macroeconomy.

In some survey years, a subset of respondents was reinterviewed six months later. A person whose economic situation changed for the better tended to adopt a more optimistic view of the macroeconomy, according to the study.

Socioeconomic status also played a role in whether a person decided to invest in stocks or purchase durable goods such as homes and cars. Moving from the lowest income bracket to the highest increased by 56 percentage points the likelihood that someone would invest in stocks. The researchers estimate that about 10 percent of this large difference can be explained by the fact that higher-income people hold more optimistic expectations about future stock market returns. Having a college education increased the propensity to invest in stocks by 9 percentage points, and 30 percent of this difference can be attributed to what the researchers describe as an “expectations channel”—whereby college-educated people are more optimistic about the economy and future stock prices hence have a greater tendency to invest in the stock market. These findings suggest that in the United States, optimism about the macroeconomy could play a role in widening the wealth gap between the richest and poorest.

“By limiting their investment opportunity set,” write Das, Kuhnen, and Nagel, poorer people who are more pessimistic “may perpetuate their disadvantaged financial position.”