Psychology of Public Policy: Learning from the Stimulus

Introduction:

One of the great ironies of the Obama administration so for is that one of its greatest accomplishments, the stimulus bill, is widely viewed with apathy by the public (44% believe it had no impact, while only 9% more believe it made things better than made it worse, according to the New York Times) but actually was a success; economists agree that the stimulus bill created or saved 3-4 million jobs and added about 2.75% to GDP growth per year.

Understanding the divergence between economic reality and public perception is key to developing an economic policy for the future that both works on the ground and can maintain a majority coalition behind it in the polling place.

What Are the Lessons?

As I’ve discussed before, the mass psychology of public policy doesn’t always follow the expected straight lines of the rational self-interested homo economicus who appears in economics and many political science introductory courses. This was especially in the case of the stimulus bill.

Visibility:

For example, 90% of Americans don’t believe that they received a tax cut with the stimulus bill, even though 95% of working people received a $400 or $800 Making Work Pay rebate off their income taxes (50% thought no change happened, 30% thought they went up, and 10% were unsure). To be fair, this isn’t a matter of public ignorance or media competence (although some of that is no doubt involved) but rather a policy working as intended. The Obama Administration, hoped that by reducing the amount withheld each month, they could get recipients to spend their tax cuts as ordinary income by not noticing the difference.

This strategy followed the popular “Nudge” theory of public policy – that, given systematic errors in human thinking, we could more effectively affect outcomes through public policies that arrange the “architecture” of choices such that people will “freely” choose the option that will make them better off without their awareness. In this case, the problem that people tend to save tax cuts instead of spend them was solved by making people unaware that additional income was a tax rebate and not their own income.

However, there’s a basic flaw in the “Nudge” premise – if no one realizes what the government is doing, it’s hard to assemble a political majority in favor of the government’s policies. In this way, Nudge resembles the tendency among economists to argue in favor of targeted anti-poverty measures – it may appear more efficient on paper, but because it fatally compromises its own political viability by dividing the electorate into us vs. them.

So the first lesson we can learn is that policy interventions need to be maximally visible, while (in the case of tax cuts) avoiding the problem of the money being saved instead of spent. One example of that might be to distribute tax rebates as government-issued pre-paid debit cards – something that is both highly visible and tangible, but also influences people to spend rather than save.

Conventional Wisdom:

One of the Achilles heels of the Democratic Party is our tendency to bow to conventional wisdom – especially the perennial exhortation to moderate and compromise – even when that gets no actual results not once but repeatedly. In many ways, the stimulus bill set the pattern for this behavior over the next two years. Democrats cut down on useful forms of public spending such as salary supports for teachers and other public sector workers, larded up on inefficient tax cuts, and decreased the overall size of the bill below the level recommended by economists – at the detriment of the bill’s ability to pull the economy out of recession, as we can see below.

The gap in “bang for the buck” between tax cuts and spending stands in stark opposition to what conventional wisdom deems acceptable policy. Therefore, instead of trying to appeal to the preferences of Beltway opinion-makers, who tend to project their rather narrow ideological agenda (Social Security must be cut, taxes on the wealthy should never rise) onto a public that often is diametrically opposed, we should focus on generating maximal results both as an end to itself and a means of maintaining majority support.

On the stimulus bill for example, we adhered to traditional Keynesian methods of stimulus and then moderated ourselves further. The result was a limited economic success – 3-4 million jobs were saved or created (compared to a 11-million-strong “jobs gap”), and about 3% was added to GDP per year – but a political failure. Direct job creation would have been far beyond the bounds of conventional wisdom. However, it would have been much more effective – at $35 billion per million jobs created (compared to the $196 billion per million of a compromised stimulus) it could have produced 11 million new jobs for half the cost of the stimulus. And it would have been a political success.

And the reason for this divergence has a lot to do with how visibility intersects with the psychology of public policy. The stimulus was not made to be visible – much of the money flowed into the private bank accounts of individuals which made it hard for people to see themselves and other people benefiting, much of it went to keeping public sector workers employed which meant that people only saw the status quo as opposed to a sudden change. Instead, the stimulus bill asked the population to put their faith in Keynesian economics, and as Paul Krugman has noted, Keynesian economics is counter-intuitive. By contrast, direct job creation is incredibly visible and intuitive – people understand and support the idea of giving unemployed people jobs, in no small part because as in the case of the WPA, the visual of hundreds of people streaming towards a work site every day is undeniable.

Reasonableness:

Related to the Democratic Party’s tendency to bow to conventional wisdom is its tendency to believe that being “reasonable” will win bipartisan support from Republicans. Such was the case with the stimulus – and it won a grand total of two Republican votes, which became the peak of Republican cooperation for the next two years. In terms of public opinion, this might have well not have happened, because the storm of vituperation (on the “ironic” grounds that the bill didn’t include tax cuts) created the visual impression of partisanship.

The larger point here is that the public isn’t aware of or doesn’t care about procedural politics. They didn’t note that a few Republicans voted for the bill, they didn’t note that the stimulus bill (or any other piece of legislation) was filibustered. The electorate certainly doesn’t vote on the basis of procedural unfairness. The rebuke of the Gingrich Revolution from ’96-00, the landslide defeat of the Republicans in ’06-08 (and that of the Democrats in 2010) ultimately sprang from public discontent with the majority party’s priorities, the general state of their own economic welfare, and dislike with scandals.

If the Democratic Congress had rammed through a stimulus bill via budget reconciliation or had abolished the filibuster altogether, no one would really care as long as the underlying legislation was something effective that people liked. Terri Schiavo would be an example of the limits of this argument – people didn’t particularly care that procedural tactics were used to get around the filibuster, but they really disliked why such tactics were being used.

Conclusion:

Looking forward to 2012 and beyond, there will be tremendous pressure on the Democratic Party from the party’s center-right and their allies in the media to go small-bore, to be reasonable to get Republican support, and to moderate our policy proposals. We can see this already in how Obama’s State of the Union tried to triangulate off of Republican calls for austerity through “investments in the future.”

It won’t work. It didn’t work with the stimulus, it won’t work in the future. In policy as in life, nothing succeeds like success.