Lying Stimuli

In economic downturns, most economic activity arguably has a positive externality; when A buys services from B, not only do A and B benefit but the downturn is reduced a bit as well.  (In an upturn, extra activity arguably exasperates the boom-bust cycle.)  This fact can justify subsidizing economic activity a bit more (or taxing it a bit less) during a downturn.  But it turns out this isn't the main rationale for "economic stimuli" now being debated; those plans are largely based on the idea that people can be fooled because they are biased.  Tyler Cowen

Let's say government can spend $100 billion today or spend the present expected value of $100 billion, stretched out over time so it is a commitment in perpetuity.  Both spending programs are financed by bonds. … The Keynesian boost to aggregate demand arises because people consider the resulting bonds to be "net wealth" even when they are not. …  People are tricked by the government's fiscal policy, but of course the extent, timing, and nature of the trickery is hard to predict.  Is it easier to trick people "a lot all at once" or "a little bit by bit over time"?  It depends.  If you try to trick them slowly over time, temporal learning and adaptive expectations may work against the policymaker.  But if you try to trick people a lot all at once, the trick may rise over their threshold of attention, perhaps because of media coverage.

Wise taxpayers who get stimuli tax rebate checks should mostly save them, realizing that future taxes must rise to pay for those checks.  For similar reasons, wise taxpayers should also spend less upon hearing about government spending increases.  So with wise taxpayers it is not obvious that tax rebates or government spending increases would help much with the downturn. 

The consensus among macro-economists seems to be that people can in fact be fooled by such stimuli, but as Tyler indicates, it is not clear which policies most fool us.  In particular, the more public attention we give to the stimuli, the less they might work.  We might make people realize that they need to compensate via saving, and the more we scare folks into thinking we need huge stimuli, the more we might scare them away from normal economic activity levels.

So should we stop explaining macro-economics during this crisis, and stop saying how desperately we need stimuli?  After all, similar rationales were offered against allowing financial market short-sales.

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  • http://profile.typekey.com/sentience/ Eliezer Yudkowsky

    Oh my gosh! What if the general public suddenly starts understanding macroeconomics? Trade barriers would collapse, the Department of Agriculture would be abolished, citizens would demand Condorcet voting –

    Presumably the putative problem here is, “What if some aspects of macroeconomics are easier for the public to understand than others?”

  • http://profile.typekey.com/SoullessAutomaton/ a soulless automaton

    It is a truism in the field of software engineering that, faced with a systematic problem involving human/computer interface, the correct choice is NEVER “educate the user”. Too many people don’t want to learn anything more complicated than “tell me what I should do”. It’s been demonstrated, in fact, that the more information you give the user, the less they pay attention to it.

    So I don’t think the general public suddenly figuring out basic principles of macroeconomics is something we need to “worry” about. They won’t pay attention anyways, and the few who do will probably draw misguided conclusions.

    There is a strong case to be made that deliberate memetic engineering (that is to say, propaganda) to encourage spending during a downturn is a sound economic policy, if you can get the cooperation of enough people in the media and other instituions to maintain the illusion. Should the government be spending some of this “stimulus” money on hiring marketing and advertising firms toward this end?

  • http://knol.google.com/k/james-miller/james-miller/1j9f9ffxxeue5/1# James Miller

    So if economists don’t stop explaining macro-economics during this crisis then journalists and politicians would be preforming a public service if they mocked macro-economists.

  • billswift

    You wanted to say exacerbates not exasperates.

  • TGGP

    Eliezer, I think many of your examples would fall under micro. I never actually took macro in high-school, just the A.P test so I could be wrong.

  • http://silasx.blogspot.com Silas

    We might make people realize that they need to compensate via saving, and the more we scare folks into thinking we need a huge stimuli, the more we might scare them away from normal economic activity levels.

    What about the problem with the entire premise, i.e. that engaging in pointless “economic activity” just to prop up GDP numbers, is a good thing? I’m not sure if you were endorsing the claim, Robin_Hanson, but it’s hard to make the case that “economic activity” during a downturn is necessarily throwing off some positive externality. What needs to happen is that production schedules improve their alignment with consumption schedules. Consuming what you don’t like, thereby encouraging (“incentivizing”) the poor use of resources, *does not* help with this!

    For the past few years, I would have rolled my eyes at someone who criticized GDP measures and lectured them that, “Geez, it’s just a rough approximation, lay off it.” But now it’s apparent that economists equate “GDP growth” with “good”, even and especially in those cases where an increase in the numbers sharply diverges from what normal people would consider “good”. (Simple example: Say, several of us save our money by purchasing services among ourselves and paying in trade, such as with a baby-sitting co-op. Money exchanged goes down, but all of us are significantly better off.)

    The real “deceptive stimulus” going on, I think, is the widespread myth that, “Oh, I gotta help the economy by pointlessly spending money!” Even economics skeptics have bought into that now!

  • http://profile.typekey.com/sentience/ Eliezer Yudkowsky

    TGGP: The Condorcet one is public choice theory, on reflection. The futility of subsidizing corn or taxing imported cheese seems to fall under macroeconomics, though.

  • Julian Morrison

    Lets suppose you trick them. They spend themselves silly on credit, the economy bubbles, they settle into a pattern of repaying debt from growth, some minor thing starts a downturn, and all the debt comes due. Didn’t we already do that?

    Irrational consumers should lose.

  • http://profile.typekey.com/hopefullyanonymous/ Hopefully Anonymous

    I’m no expert, but this is why suggestions that tax rebates actually be credits towards consumption mad sense to me.
    I don’t think lack of transparency or propaganda is the way to go in 2009 (it would be ironic anyways, right?) but that’s intuitive -it’s an empirical question.
    How about credits on consumption and tax on savings during a recession, and the reverse during periods of economic growth? Wouldn’t this function the same way as propaganda?
    Also, has anyone considered expiration dates cash to prevent cash hoarding?
    I’m not sure if that would skew the incentive towards commodity hoarding, or barter economy, but cash expiration dates seems worth exploring to me, too.

  • Urizen

    has anyone considered expiration dates cash to prevent cash hoarding?

    Presumably you could just use the expiration date cash to buy gold or euros or something, which wouldn’t have the desired effect. You could do a “bed and breakfast” transaction if it was terribly important to you to hold dollars.

  • frelkins

    @Robin

    those plans are largely based on the idea that people can be fooled because they are biased
    From your other writing, you seem to be saying that near/far bias will help people spend. Considering the unemployment rate and general financial distress, most people will in fact probably spend their rebates to buy groceries, clothes, etc. because they have much less of a cash cushion than last year.

    But this is good now, right? Different conditions require different responses – we have to avoid the paradox of thrift here, don’t we? Knowing the paradox of thrift, isn’t spending the wise thing to do right now? So actually, I am leaning towards the idea that people aren’t being “fooled;” they are being good actors in the crisis. Our economy is a consumer-driven economy, this is just reality. So doesn’t that make this purely a question of stimulus/policy design now?

    The previous Bush stimulus was saved by 60% of recipients, apparently, because it didn’t go to enough of the right people, people who were truly short of cash – and this was due to the way it was given, as an income tax rebate. This is an argument against having the stimulus depend significantly on tax rebates. It was a poor policy design, and we should have a good policy design now instead.

    Wise taxpayers who get stimuli tax rebate checks should mostly save them
    Again, only an argument against doing the stimulus as rebates. When faced with no money in the bank, massive layoffs, gas to buy & li’l Bobby needing new shoes, Americans are not going to stop and think “Omigod I have to save this money because taxes might rise on my grandkids!” No, they think, “I need to fill up my gas tank to get to work, Bobby’s outgrown his sneakers, and it will be great to have hamburgers instead of Hamburger Helper.”

    it is not clear which policies most fool us
    Again I am perplexed about this, this is far from the first time different American administrations have given out stimulus packages. It’s not as if this is completely unknown territory here, is it, as Tyler seems to act? We have some idea from the past what works and what doesn’t. Tax rebates don’t seem to work.

    the more public attention we give to the stimuli, the less they might work.

    We need to encourage people to avoid the paradox of thrift here, isn’t that right? Thus we don’t need to talk less about the stimulus; in fact, we need to encourage spending and talk about spending more, don’t we? I’m just not following this argument here.

    We need to give cash-hurting people some money to spend and we need the government to spend some money as a last resort. Again, it seems to me that the issue here isn’t the need for a stimulus, but over its mechanism?

    Further many of the government plans are “good borrowing” for capital investments that should have been made long ago, in areas such as comprehensive broadband (some third world countries have better broadband, cell service, and wireless than our rural states! I speak from personal experience!), a smart electrical grid, and our tattered bridges are not only a dangerous embarrassment, but also hamper the economy. These are all good ideas that only increase America’s future growth.

    I have been politely critical of Tyler’s discussion of the crisis, as I have understood it. Because of this, I remain skeptical of Tyler here as well, altho’ I am not an expert and Tyler is. I read both Tyler and Krugman every day. I understand Tyler has an ideological point of view on this and this also feeds into my skepticism. I am trying to keep an open mind, but even so, I am leaning towards Krugman here. Why do you disagree? I would like to agree with you because this is very important.

  • http://silasx.blogspot.com Silas

    Hopefully_Anonymous: Also, has anyone considered expiration dates cash to prevent cash hoarding?

    Yes, but debasing the currency quicky has basically the same effect. But it just makes people loan it out (buy bonds) which appreciate, in theory, as fast as the debasement. Expiration dates are just a less efficient way of accomplishing the same thing. Japan tried this all throughout its “Lost Decade”, and never resulted in emergence from stagnation. Supposedly, Silvio Gesell had more success with a currency he and his followers started, which did have expiration dates. I’d have to look it up though. Anyone got a quick, no-BS summary of that experiment?

    I believe that is what has been happening since ’03, it’s just that most buyers of bonds are too stupid to demand an interest rate that compensates for the debasement. Jerks.

  • http://profile.typekey.com/hopefullyanonymous/ Hopefully Anonymous

    Silas, I intuit there can be behavioral economics differences in putting expiration dates on cash as opposed to debasing currency. But I’d need someone more economically literate and perhaps with more time than me to suss out and explain why that intuition may be solid or faulty. (Also, if the first move would be to spend the expiring cash on bonds or something else rather than what the government would be attempting to incentivize, couldn’t that could be taxed too, to the level that the incentive vanishes.)

  • Urizen

    Also, if the first move would be to spend the expiring cash on bonds or something else rather than what the government would be attempting to incentivize, couldn’t that could be taxed too, to the level that the incentive vanishes.)

    Undoubtedly, and then you get into the familiar avoidance/antiavoidance legal arms race i.e. basically the better-advised (i.e. roughly speaking the richer) you are the more likely you are to be able to do stuff economically equivalent to hoarding cash. Whether you mind this probably depends how much equality matters to you..

  • brannigan

    lol, trying to fool all the people all of the time, fail moar…

  • http://t-a-w.blogspot.com/ Tomasz Wegrzanowski

    cash expiration dates seems worth exploring to me, too.

    It’s called inflation, and it used to be the mainstream prescription for dealing with economic crises, I’d say between 1940s and 1970s.

  • mitchell porter

    Eliezer: “Oh my gosh! What if the general public *suddenly starts understanding macroeconomics*? Trade barriers would collapse, the Department of Agriculture would be abolished, citizens would demand Condorcet voting -”

    In the real world, judicious protectionism has helped national economies to develop, and unsustainable levels of debt were lately defended on the basis of economic theory. Despite Robin’s occasional protestations that economists do actually know stuff, it seems clear that what professionals know about macroeconomics is seriously incomplete and overlaid by competing ideologies. So it is rather hard to see how laypeople could suddenly start “understanding macroeconomics” in a new and superior way.

  • Rob Spear

    Take the bailout money, then leave the country before the tax hits. Obviously.

  • frelkins

    Another take on Tyler:

    My frustration isn’t so much the schoolyard silliness, but the demonstrated inability of prominent economists to talk to one another in the same language with words meaning the same thing and not freighted with a metric ton (or ten) of political baggage. . . .If nothing else, however, one benefit of the current depression is that whatever meager value macroeconomics was thought to have as a prescriptive discipline is thoroughly shot.

    — the ever ironic Paul Kedrosky

  • http://rhollerith.com/blog Richard Hollerith

    What Mitchell Porter and Kedrosky said about macroeconomics.

  • Ian C.

    GDP is the sum total of all work done in a year (I think). So to increase it, you need policies that make people want to work harder. Giving them handouts will make them want to work less. Why work when someone is giving you money for sitting on your buttocks? I am sorry to avoid the big argument and concretize it down to the individual but I am not an economist.

  • http://profile.typekey.com/sentience/ Eliezer Yudkowsky

    What if Keynesianism itself is a vast, organized lie, perpetrated by macroeconomists for the purpose of making us believe that the government can cause recoveries through debt-financed spending, when actually, there is no known way to cause a recovery – except by making people believe in one?

  • frelkins

    @Eliezer

    except by making people believe in one

    In that case, the bailout & stimulus would be an economic placebo. Tyler should back them wholeheartedly, as he has argued for greater use of the placebo effect elsewhere.

  • Daniel Radetsky

    @Eliezer

    Oh, I wouldn’t worry about the public understanding macroeconomics. Anyway, if it looks like they’re beginning to, you just add more math. And what area of economics can’t we add more math to? As I recall, Robert Frank showed that decision theory doesn’t have to stop adding more math at the level of the individual actor. You can conceive decisions as competitions between multiple aspects of the actor’s mind. If the public thinks they understand macroeconomics and that this understanding tells them that Keynesianism is false, we tell them that they have to look at it at the Quantum Level. If they do, we tell them that it involves Goedel’s Theorem. We can play this game forever.

  • http://entitledtoanopinion.wordpress.com TGGP

    Eliezer, I know Krugman has written a lot about trade and protectionism. Contrary to (perhaps) popular belief, Krugman is a microeconomist and the work he won his prize for was micro. That’s why Robert Barro thinks you should discount Krugman’s recent writings compared to his own.

    I understand Tyler has an ideological point of view on this
    Is he the only one?

  • frelkins

    @TGGP

    why Robert Barro thinks you should discount Krugman

    But having read some Barro lately, and having seen Krugman’s response, I have to say I am more persuaded by Krugman! I do think Krugman is winning the question honestly with his arguments. Overall my impression is that Paul Kedrosky actually has the most interesting and useful understanding of the situation.

    Is he the only one?

    Of course not. The person with the most amusing ideological view, hands down, is of course Wilkinson. That’s because he’s one of the most hilarious people I know.

    But seriously, this question is too important to leave to ideology, which is why we’re all here at OB. Whatever happens now could probably shape the planet for the next 7-10 years, as this is an international problem. The irony in this case is that truth-seeking will require most OB folks – the ones who could be the most helpful in forming views – to refrain from having an opinion. Sigh.

  • Craig

    You are missing a key ingredient. The money supply. If people were rational there would be no boom bust cycles. The existance of some irrationality is part of the system. What the macroeconomists are saying is that our irrationality is somewhat predictable when it is aggregated and can be manipulated to increase prosperity. This isn’t just an argument for stimulus its an argument for having a Fed which adjucsts interest rates. Why shouldn’t we try to understand aggregate irrationality and use it to our benefit?