What predicts economic optimism?

by Jackson Lubke

The Tufts Equity Research Group investigates forms of equity and inequity in the US. Americans vary in whether they are optimistic or pessimistic about their economic and financial futures. Being optimistic can be a sign of favorable circumstances. It may also affect people’s decisions, such as whether to save and invest.

The Tufts equity survey asked several questions about economic optimism. In the spring 2020 version of the survey:

• 88% said that they will be just as well off or better off a year from when the survey was conducted, while 12% thought they would be worse off.
• 78% said that their children will be just as well off or better off financially than they are right now. The remaining 22% believed that their children will be worse off.
• 86% said that their own financial situation was better than that of their parents, while 14 % said it was worse.

These predictions may not be accurate forecasts. Instead, they reflect self-reported optimism or pessimism, which is important psychologically.

I created statistical models to see which variables were associated with optimism about oneself and one’s children. I used linear probability models, which are linear regressions with binary (yes/no) outcomes or dependent variables. In this case, the dependent variable has a value of 1 when the respondent expects the situation to be better or the same in the future, and 0 when they think it will be worse. The models incorporated race, age, employment, state of residence, and economic factors like employment status, income, and savings level.

According to the models:

• People expected to be worse off in a year if they had low income, if their income varied from month to month, and if they were currently caretakers for children. These are economic challenges that seem to reduce people’s optimism.
• People expected to be better off if they grew up in the United States versus than those who did not. This result may reflect the challenges of immigration.
• People expected to be better off after one year if they had low savings. This is a counterintuitive result that merits further study. It would be valuable to repeat the question after the COVID-19 pandemic, when savings rates were probably atypical.
• Republicans (to a small extent) expected to be better off in a year. The survey was conducted while a Republican was president, and that may explain this association. Being a Democrat was not associated with pessimism.

• People were more likely to think that their children will be better off if they felt that they were better off than their parents and if they expected to be better off in a year. In short, people who have been upwardly mobile (or at least view themselves as upwardly mobile) are optimistic about their family’s future mobility.
• People were less likely to think their children will be better off if their own savings were high and if they were currently caretakers for children. It is surprising that high savings would dampen optimism, since those with higher savings would be able to afford better opportunities for their children. However, it could be that those with high wealth do not expect their children be able to replicate their financial success, especially if their children are still young enough to be in the household.
• Variables that had no significant statistical effect included race, age, and employment, among other economic variables.

We can make some observations about what we have found in these statistical models.

First, people expected to be worse off in a year if they had low income. On its face, this is not particularly surprising. Those who have low income are more likely to be in a financially insecure time of their life and are thus less optimistic for the future. However, the inverse is not actually shown in the data, i.e., having high income is not associated with being more optimistic about the next year. Perhaps those with higher incomes base their financial optimism/pessimism on other factors in the short run, or being low income having a unique psychological effect that is not the opposite of having a high income.

Second, people were more likely to think that their children will be better off if they felt that they were better off than their parents and if they expected to be better off in a year. The former implies some level of persistent intergenerational optimism. This is also not particularly surprising (wealth and positive economic outcomes have been shown to be persistent across generations) but is still an interesting observation.

Third, people were less likely to think their children will be better off if their own savings were high. At first, this is surprising, given that we would typically expect those with higher savings to be able to afford greater opportunities for their children, which would likely grant them better financial outcomes. However, those with high amounts of wealth may also have higher standards for what would constitute better financial outcomes for their children. In a version of a regression-to-the-mean effect, wealthy individuals may realize that their children may not be able to replicate their own financial success.