Psychology of Public Policy: Learning from the Stimulus

In Budget Politics, Democratic Governance, Economic Planning, Economics, Financial Crisis, Full Employment, Political Ideology, Politics, Politics of Policy, Public Policy, Public Sector, Social Democracy, Taxes, Welfare State on March 9, 2011 at 6:12 pm

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.

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  1. Where exactly do you find these mythical “3-4 million jobs” supposedly created by the stimulus? Employment totals went from 133 million at the beginning of the stimulus down to 131 million at the end of the projection period of the fourth quarter of 2010. NO net jobs were created – 2 million jobs were lost! (And this does not account for 150,000 new job seekers added each month which makes the net underachievement for the market at over five million jobs just to break even!)

    There were NO tax cuts! Let me repeat that – there were NO tax cuts! They were all temporary tax credits and rebates. If you don’t know the difference you have no business discussing these issues as if you are some sort of expert.

    The GDP rise was based on the same sort of computer models used for the supposed “3.6 million jobs saved or created”. It was just like the models used for the global warming hockey sticks – self-fulfilling. Even random data would produce the same desired results – how convenient! And how completely at odds with reality.

    And this is not Keynesian economics. Keynes called for private sector stimulation ONLY, not government sector. And he also insisted that any deficits be planned beforehand to be surplused away after the recession was over. Where do you see that happening – on Pluto?

    You have some gall, lecturing the public on how stupid they are for not drawing your talking point conclusions. Maybe you should just stick to claiming that FDR was some sort of god for taking a two year recession and turning it into a ten year long depression.

    • As for the jobs: the Congressional Budget Office estimates about 3-4 million jobs, as do Zandi/Blinder, the CEA, J.P Morgan, and the EPI.

      As for the tax cuts: the stimulus bill consisted of $258 billion in tax cuts, compared to only $56 billion in infrastructure. Take it up with economists Alan Blinder and Mark Zandi if you don’t believe me.

      As for the GDP rise: the transition from economic recession to growth is a fact, and the CBO, CEA, and other analysts agree with me.

      As for Keynes: you really need to know more Keynes. Keynes had been calling for public sector spending since the 1920s, when he argued that the government should use public works deficit spending to directly reduce unemployment (see: Keynes, “Can Lloyd George do it?”), and the General Theory explicitly calls for the government to use public works to directly reduce unemployment (his famous “bottles with pound notes in mineshafts” example). Moreover, Keynes believed that deficit spending should be surplused away when the economy is fully recovered, and was critical of FDR for prematurely trying to balance the budget in 1937-8.

      I’m not lecturing the public on stupidity; I don’t think they are stupid. I do think that research has shown that we all tend towards certain shortcuts in thinking about the government and politics in general, and that it would be a good thing if we compensated for that in our politics.

      As for FDR, he reduced unemployment from 25% to 9% (and hit 6% in 1941) and increased GDP growth to an average of 9% a year. He wasn’t perfect, he made some horrendous mistakes, but the New Deal was broadly successful.

  2. […] our efforts solely on the very poorest is a good approach. I’ve written in the past that structuring public policy to synch with popular psychology is vital to success, and the same is true here. As the Fabian Society’s research […]

  3. […] Infrastructure investment and public/private partnerships, while good and worthy in itself and a superior form of stimulus to tax cuts, are less efficient at producing jobs than direct job creation. As the legendary economic John […]

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