David Cameron says Ed Miliband is "determined to talk the economy down." In one sense, this is daft. But in another sense, it draws attention to something I'd have scoffed at a few years ago - that it is possible to do such a thing.
The daftness is obvious. Are you holding off from making a big purchase because you're awaiting Ed Miliband's analysis of our economic prospects?
On the other hand, though, talk matters.I say so for three reasons.
1. Confidence is contagious - literally. Christopher Carroll has shown that expectations for unemployment spread in the same way that diseases do.
2. There are peer effects in spending, as in much else. If our neighbours buy a flash car or convert the garage, we are more inclined to do so. A natural experiment from the Dutch postcode lottery has shown this.
3. There can be what Akerlof and Shiller have called a "confidence multiplier":
Changes in confidence will result in changes in income and confidence in the next round, and each of these changes will in turn affect income and confidence in yet further rounds.
Put together, these three facts have an important implication - that idiosyncratic fluctuations in economic sentiment which are unrelated to the "fundamentals" can be positively correlated across agents. The law of large numbers does not necessarily cause them to cancel out. The upshot is that "confidence" - for good or bad - can contribute to macroeconomic fluctuations. And because changes in confidence are (at least partly) unpredictable, so economic growth is partly unpredictable.
For this reason - among others - I don't think reports of the OBR's new forecasts have placed enough emphasis upon Robert Chote's statement that "There is of course considerable uncertainty around any set of economic and fiscal forecasts." The OBR reckons that the standard deviation of the errors in GDP forecasts at this time of year is 1.7 percentage points (p155 here). One interpretation of this is that their forecast for 2.1% growth next year in fact means there is a two-thirds chance of growth being in the range 0.4-3.8%.I'm not sure we should say anything stronger than this.