In today’s economy, the theory of cognitive dissonance is itself dissonant.
Social psychologist Leon Festinger believed that humans strive for internal consistency, and that two or more contradictory beliefs cause mental stress. Yet in today’s world, it seems that every policy, every vote, every executive order is designed to contradict rationality and add to our collective mental stress.
We’ve given a few examples of economic dissonance in the past:
The stock market. During six years of quantitative easing (QE), bad economic news caused the stock market to rise and good economic news caused the stock market to fall. That’s because bad news meant more Fed bond buying and good news made bond buying unnecessary.
Higher inflation. Lower oil prices have done more to give the economy a boost than trillions of dollars in bond buying – yet the Federal Reserve Board has fretted that the U.S. is headed toward deflation. Its policies were designed to increase inflation to the magic rate of 2%. Why 2%? No one seems to know.
The unemployment rate. The widely used U-3 unemployment rate drops when people give up looking for work and leave the workforce. As a result, we have absurdities such as this latest report from The Boston Globe:
“U.S. employers hired at a stellar pace last month, wages rose by the most in six years, and Americans responded by streaming into the job market to find work.
“The Labor Department says the economy gained a seasonally adjusted 257,000 jobs in January. The unemployment rate rose slightly to 5.7 percent from 5.6 percent.”
So Americans are “streaming into the job market” – causing an increase in the unemployment rate!