In a similar way, stable expectations are said imply economic stability, so many economists strongly recommend that government and central bank policies must be transparent. If policies are made known in advance surprises will be avoided and volatility will be reduced. Let us assume that the government presents a plan to raise personal taxes. Even if politicians could succeed in convincing people that the tax increase is good for them, they cannot alter the fact that individuals after tax incomes will be reduced. Or let s say that the central bank makes it public knowledge that it will dramatically increase the money supply.
Stable expectations can t undo the damage caused by loose monetary policies or by higher taxes.
Moreover, irrespective of whether individuals are successful in identifying the facts of reality, opinions about facts do not change the facts themselves. If we have identified that people s real incomes are declining, this is a fact of reality. Regardless of people's views and their confidence it is this fact that will force the decline in consumer outlays. The fall in consumer outlays is not caused by the fall in consumer confidence, as the popular thinking appears to have it, but by the fact that consumers can no longer afford the previous level of outlays. Consumer expectations do not emerge in a vacuum but are part and parcel of every individual s evaluation process, which is based on his views regarding the real world.