Systematically Biased Beliefs about Economics:
Robust Evidence of Content-Dependent Judgmental Anomalies from
the Survey of Americans and Economists on the Economy
Bryan Caplan
Department of Economics
and Center for the Study of Public Choice
George Mason University
Fairfax, VA 22030
bcaplan@gmu.edu
703-993-2324
JEL Classifications: D84, A11, D72
Keywords: economic beliefs, systematic bias, cognitive anomalies, rational
irrationality
Abstract:
The differences between the general public's positive economic views and
economists' resemble other judgmental anomalies: Laypeople and experts
persistently and systematically disagree. The current paper analyzes this puzzle
using data from the Survey of Americans and Economists on the Economy. (Blendon
et al 1997) It first tests and decisively rejects the hypothesis that the differences
solely reflect economists' self-serving bias: controlling for income, job security, recent
and expected real income growth, age, gender, and race only marginally diminishes
their size. It then examines whether economists' political ideology and party loyalties
explain their disagreements with the general public; if anything, this slightly increases
their magnitude. The effect of economic training clearly falls if one controls for
education, but strong populist biases persist. These biases have wide-ranging
implications for political economy.
For discussion and useful suggestions I would like to thank Don Boudreaux, Tyler Cowen, Pete
Boettke, Jim Schneider, Geoffrey Brennan, Bill Dougan, Bill Dickens, Mitch Mitchell, Ed Lopez,
J.C. Bradbury, Todd Zywicki, David Bernstein, Robin Hanson, Dan Klein, Alex Tabarrok, Nicky
Tynan, Timur Kuran, Ron Heiner, Roger Congleton, Fab Rojas, seminar participants at George
Mason, participants at the Public Choice Outreach seminar and the Public Choice Society
meetings, and members of my Armchair Economists’ listserv. Gisele Silva provided excellent
research assistance. Particular thanks are owed to the Kaiser Family Foundation for creating and
sharing the data for the Survey of Americans and Economists on the Economy. The standard
disclaimer applies.
1
The Western economics profession has been spoiled rotten by rational expectations
thinking, by diverting our attention away from the profound misunderstandings that are
part of every deep crisis.
Jeffrey Sachs (1994, p.507)
1. Introduction
In standard economic models of belief formation, increasing the supply of information
reduces estimates' variance, but does not change their mean. (Sheffrin 1996; Pesaran
1987)
The implication is that lay opinion will be more dispersed than - but not
systematically different from - expert opinion.
For one particularly important case,
though, this prediction seems to fail: The positive economic beliefs of economists and
the public appear to be systematically different.
(Blendon et al 1997; Survey of
Americans and Economists on the Economy 1996; Walstad 1996; Rhoads 1985) For
example, economists are vastly more likely to see foreign trade and downsizing as
economically beneficial, to accept supply-and-demand rather than monopolistic
explanations of price changes, and to believe that real living standards have and will
continue to increase.
These findings resemble more familiar judgmental anomalies where the general public's
beliefs diverge from informed, expert opinion in predictable ways. (Rabin 1998; Camerer
1995; Thaler 1992; Kahneman, Slovic, and Tversky 1982) One might straightforwardly
presume that economists are on average correct and begin to analyze the sources of
economic misconceptions. As Kahneman and Tversky (1982) put it, "The presence of
an error of judgment is demonstrated by comparing people's responses either with an
established fact (e.g. that the two lines are equal in length) or with an accepted rule of
arithmetic, logic, or statistics." (p.493) But for economics, in contrast to logic, many are
inclined to attribute the bias to the experts rather than the public. (Wittman 1995; Lott
1997; Blendon et al 1997; Becker 1976) There are two main ways one might try to
2
vindicate the rationality of non-economists' economic beliefs. The first is to maintain that
the differences merely reflect economists' self-serving biases. (Dahl and Ransom 1998;
Babcock and Loewenstein 1997; Babcock, Wang, and Loewenstein 1996; Rabin 1995)
Economists are generally affluent white males, so perhaps they rationalize policies that
personally benefit them by imagining that they are socially optimal as well. (Brossard
and Pearlstein 1996; Chandler and Morin 1996; Blendon et al 1997) The second is that
economics attracts and/or molds individuals with specific ideological and political views.
(Soros 1998; Greider 1997; Kuttner 1996; Lazonick 1991)
The evidence on belief
perseverance and confirmatory bias (Rabin 1998) shows that intensive study of
economics might reinforce - rather than erode - ideological priors.1
The present paper uses the Survey of Americans and Economists on the Economy
(1996; henceforth SAEE) to empirically test these competing hypotheses in a rigorous
way. It finds that controlling for self-serving bias only marginally reduces the systematic
differences between economists and the public; materially advantaged non-economists
generally think like the rest of the public, not like economists. In fact, examining the
pattern of coefficients on the control variables casts doubt on the idea that self-serving
bias is more common than its opposite.
Controlling for ideological factors tends if
anything to make the effect of economic training appear larger; the positive economic
beliefs of Democratic and liberal economists are quite similar to those of Republican and
conservative economists, even though ideological differences correlate with marked
differences in the broader population.
The naive theory that economists are right and the public is wrong can most plausibly
1
Furthermore, Kuran's (1995) work on preference falsification shows that social pressure can
make mistaken belief equilibria stable and persistent.
3
explain the facts.2 It is particularly notable that controlling for both self-interested and
ideological variables, education tends to make people think more like economists,
suggesting that education - both economic and general - makes people more rational,
not just more informed.3 Fully explaining the origin of the public's systematic biases is
beyond the scope of this paper, but it is difficult for content-independent heuristics to
account for the pattern of mistakes. (Gigerenzer and Murray 1987, esp. pp.155-7)
Rather, there seem to be four clusters of content-dependent "populist" biases: antiforeign bias, anti-business bias, make-work bias, and pessimistic bias. The magnitude
and nature of these biases is consistent with Caplan's (1999a) analysis of "rational
irrationality," and suggests that the efforts of political economists to model severe
political failure in a rational expectations framework is misguided. (Wittman 1995, 1989;
Rodrik 1996) Simple voting models combined with strong populist bias in the electorate
provide a more plausible and parsimonious explanation for inefficient and counterproductive policies. (Caplan 1999b)
The paper is organized as follows. Section two discusses the Survey of Americans and
Economists on the Economy and the large raw differences between economists and the
public that it manifests. Section three tests for the presence of self-serving bias on the
part of economists. Section four examines the evidence for ideological bias. Section
five shows that controlling for both self-interest and ideology, both economic training and
education typically have large systematic effects in same direction. Section six analyzes
2
This is of course not to say that economists are themselves immune to random error or even
systematic bias, but merely that economists should not update their priors conditional on the fact
that the public disagrees with them.
3
Throughout this paper, "rational" is treated as synonymous with "has rational expectations" and
"irrational" is treated as synonymous with "does not have rational expectations."
4
the results, maintaining that they confirm the existence of four large populist biases; it
then considers the broader implications of the findings for political economy. Section
seven concludes the paper.
2. The Data and Previous Findings
Estimation throughout this paper uses the Survey of Americans and Economists on the
Economy data set.4 The structure of this data set is unique: while a number of other
surveys on the economic beliefs of the public (Walstad 1997, 1996; Walstad and Larsen
1992; Shiller, Boycko, and Korobov 1991; + others) and economists (Fuchs, Krueger,
and Poterba 1998; Wessel 1997; Alston, Kearl, and Vaughan 1992) have been
performed, to my knowledge this is the only data set that deliberately asks both groups
the same questions.5 The respondents were 1510 members of the public and 250 Ph.D.
economists; the former were randomly selected nationwide from the general population,
while the latter were randomly selected members of the AEA with a Ph.D. in economics,
employed full-time as an economist, and specializing in domestic economic policy.
(SAEE, p.18) Blendon et al (1997) summarizes the studies' basic findings, noting the
large and systematic differences between the economic beliefs of economists and the
general public. Table 1 lists the questions that the current paper focuses on and shows
the two groups' mean responses.6 The surveyors also collected detailed information
about the personal characteristics of all respondents: their family income, education
level, race, gender, political party, political ideology, and numerous other variables.
Table 2 lists the control variables the current paper uses.
4
Note the availability of a webbed summary of the results at:
http://www.kff.org/kff/library.html?document_key=72&data_type_key=86.
5
Fuchs (1996) asks the same set of questions to health economists, economic theorists, and
practicing physicians, but not the general public.
6
For clarity, I have modified many of SAEE codebook's coding conventions; see Tables 1 and 2
for details.
5
Blendon et al (1997) emphasize the stark contrast between the beliefs of economists
and the public.
They also put forward several possible hypotheses to explain the
differences:
1. The experiences of individuals may not mirror official data.
2. When people evaluate the performance of the economy, government statistics
are only one of several sources of information they use.
3. A large number of Americans do not believe government economic statistics
are accurate.
4. The media tend to portray the condition of the economy as being worse than it
actually is, leaving the public overly pessimistic about the nation's economic
situation.
5. Economists are more optimistic about the economic future because they are
part of an occupational segment, made up of professionals and scientists, that
may have been sheltered to some degree from the negative consequences of
economic change reported in the survey by much of the public.
6. Americans do not have a very good foundation of knowledge about how the
economy operates, and therefore they may be having a difficult time making
accurate assessments of how the economy is performing. (pp.115-6)
While intuitively appealing, this set of explanations has some underlying conceptual
difficulties. Blendon et al make no sharp distinction between inaccurate beliefs (low
information, hence high variance) and systematically biased beliefs. It is not clear that
(2), (3), and (6) have any logical connection to systematic differences between
economists' beliefs and the public's. Furthermore, (4) leaves people's failure to optimally
compensate for biased information unexplained. (Wittman 1995, 1989) Blendon et al do
not test any of their six hypotheses, and seem to hint that additional data collection
would be necessary to do so.7
Actually, though, the Survey of Americans and
Economists already contains most or all of the information necessary for empirical
testing - at least for (1) and (5), the hypotheses relevant to systematic bias.
7
E.g. Commenting on (5), they write "One question that could not be addressed in the survey
was whether or not Ph.D.'s in different fields, M.B.A.'s, M.D.'s and lawyers would share views
similar to those of economists. Are economists' views related primarily to their being highly
educated and part of the professional class, or are their views primarily the product of unique
advanced training in economics?" (1997, p.116)
6
Thirty-four of the questions about economic beliefs in the SAEE permit three answers
which can be straightforwardly placed along a single dimension. One question permits
five responses which can also be similarly ranked. The two remaining questions have
two possible responses. Subsequent sections analyze all questions using logits with the
appropriate number of orderings (3, 5, or 2).
To establish a benchmark for comparison, I begin by estimating ordered logits with the
Econ dummy as the only independent variable (Econ=1 for economists and 0 for the
general public). Table 3 reports the coefficient on Econ, its z-stat, and the implied belief
distributions for economists and the general public.8 Consistent with other analyses of
the SAEE, the coefficient on Econ is almost always highly significant in both statistical
and economic terms. As a rule, the public is more pessimistic than economists, but the
degree of extra pessimism varies greatly from question to question.
For the first 18 items, which ask respondents to classify different factors as major, minor,
or non-reasons for sub-par economic performance, the coefficient is highly negative in
15 instances, indicating that economists discount economic concerns of the general
public. There are several factors that a majority of the public sees as "major" problems
that most economists deny are problems at all: excessive foreign aid, jobs going
overseas, and downsizing.9 Similarly, more than 50% of economists see immigration,
affirmative action, excessive profits, and technologically-induced unemployment as non-
8
Table 3 and subsequent tables mark the median beliefs of each group with a *.
9
Variable identifiers FORAID, OVERSEAS, and DOWNSIZE.
7
problems, while a majority of the public views them as (major or minor) economic ills. 10
In addition, the median economist believes that excessive taxation, the deficit, welfare,
hard work, excess executive pay, and insufficient company investment in job training are
less severe than the median member of the general population does.11 Economists and
the public approximately agree about only two items: inadequate education and low
savings rates, which both groups see as major drags on economic performance. 12
There is only one problem out of the first 18 that economists take more seriously: the
rate of productivity growth.13
Disagreements on the next cluster of seven questions (which ask respondents to rank
items as bad, neutral, or good) are slightly smaller. Economists are somewhat less
sanguine about the economic effect of tax cuts: 61% of the public sees them as good,
whereas the median economist believes that they don't make much difference.
Majorities of both groups acknowledge the economic benefits of increased female
participation in the labor force, increased use of technology, and trade agreements,
though economists' positive judgment is more lop-sided. But their views on the effect of
downsizing on the economy and trade agreements on domestic jobs are exactly
opposed: a majority of economists sees both as good, a majority of the public sees both
as bad. Furthermore, the median member of the general public expects that even in the
long-run (20-years from now) "new technology, competition from foreign countries, and
downsizing" will make little difference, whereas economists almost unanimously think
10
Variable identifiers IMMIG, AA, PROFHIGH, and TECH.
11
Variable identifiers TAXHIGH, DEFICIT, WELFARE, HARDWORK, EXECPAY, and
COMPEDUC.
12
Variable identifiers INADEDUC and SAVINGS.
13
Variable identifier BUSPROD.
8
that these current trends will have good long-run effects.14
The two questions relating to the gasoline market again show sharp differences between
economists and the general public.15 In a binary logit, 89% of economists accept the
supply-and-demand explanation for the recent gas price increase, versus only 21% of
the public. Similarly, the median economist views the current price of gasoline as "about
right," while the majority of the general public thinks it is "too high." In contrast, when
asked to assess the current economic situation on a scale from 0 (depression) to 4
(growing rapidly), the two groups have the same median response - growing slowly even though economists are on average significantly more optimistic.16 And the ordered
logit for predicting beliefs about the president's ability to improve economic performance
shows virtually no impact of the Econ dummy: the median member of both groups takes
the intermediate view that the president can do "a little."17
The results for the remaining questions continue to show that economists are
systematically more optimistic about the past, present, and future of the economy than
other people are. While economists are slightly more likely to hold that inequality has
increased over the last 20 years, they are much more likely to think that family income
and real wages have risen or held steady during the same period. Economists are much
more likely to think that new jobs are high paying, and to expect that living standards will
14
Variable identifier TAXCUT, WOMENWORK, TECHGOOD, TRADEAG, DOWNGOOD,
TRADEJOB, and CHANGE20.
15
Variable identifiers WHYGASSD and GASPRICE.
16
Variable identifier CURECON.
17
Variable identifier PRES. Looking at the raw data does however show that the variance of the
general public's belief distribution is greater than for economists; for this variable, the standard
story works - information changes the variance of beliefs, not their means.
9
rise during the next five years. Economists are also somewhat more likely to think that
their children's generation will have a higher living standard than the current one. Even
so, economists with children are no more optimistic than the general public about the
odds that their own children will eventually live better than their parents personally do
now.18
3. Self-Serving Bias
Do the raw differences between the economic beliefs of economists and the public solely
reflect economists' greater objectivity and knowledge?
Or do economists' implicitly
assume that whatever is good for economists is good for the country? Observers aware
of economists' unusual perspective have frequently suggested that there is an intimate
connection between economists' material self-interest and their positive views. (Brossard
and Pearlstein 1996; Chandler and Morin 1996; Blendon et al 1997)
As Brossard and
Pearlstein put it:
The disconnect between economists and typical Americans reflects, at least in
part, the fact that economists tend to be members of a social, intellectual, and
economic elite that has fared relatively well over the past 20 years. Two-thirds of
economists report that their household incomes have outpaced inflation over the
past five years - compared with only 14 percent of the public. And many of the
economists hold down tenured teaching positions that afford them a lifetime of
job security. (1996, A6)
Economists might innocently over-generalize from their own circumstances to the whole
economy, but this is a rather naive mistake readily corrected by using aggregate rather
than anecdotal evidence. The literature on self-serving bias suggests a more robust
mechanism. (Dahl and Ransom 1998; Babcock and Loewenstein 1997; Babcock, Wang,
and Loewenstein 1996; Rabin 1995) Considerable empirical evidence suggests that
faced with normative constraints, people tend to accept positive beliefs slanted to serve
18
Variable identifier GAP20, INCOME20, WAGE20, NEWJOB, STAN5, CHILDGEN and
CHILDSTAN.
10
their self-interest. Economists do not have to be more subject to this bias than other
people are in order to explain their beliefs. The simple fact that economists are usually
affluent and economically secure relative to the general population suffices. Realizing
that free trade, immigration, technological progress, and so on are advantageous for
well-off people like themselves, they are biased towards the conclusion that they are
socially optimal too. Since economists personally have bright futures, they rationalize
their privileged position to be part of a broad social trend.
Economists' other demographic characteristics may also be relevant from the standpoint
of self-serving bias.
They are disproportionately male and white, and are even
somewhat older than the average non-economist.19 Each of these traits could influence
their selfishly optimal policies, and thus (via self-serving bias) their perceptions about the
structure of the economy. Males are less likely to collect welfare, to take one example.
Affirmative action hurts whites' job prospects, while immigration's effect on labor markets
may be most harmful to blacks.
The old could be less able to adapt to economic
change, and more concerned about the impact of economic policy on their retirement.
Self-serving bias, if active, would incline each group to view the social impact of the
same policies differently.
I use the following econometric strategy to test this hypothesis. The initial equations are
re-estimated to see if the typically enormous coefficients on Econ disappear or
substantially diminish taking self-interested variables into account. The set of control
variables available in this data set (Table 2) is quite rich: in addition to income, it is
possible to control for individual's fear of losing their job during the next year, their
19
A regression of age on a constant and Econ shows that in the SAEE economists are on
average about 4 years older than non-economists.
11
retrospective income growth rate for the last five years, their prospective income growth
rate for the next five years20, race, age in years, and gender. Accordingly, all of the
ordered logits from the previous section are run with five race dummies, age, age
squared, male, Jobworry, Yourfam5, Yournext5, and income as control variables.
a. Self-Serving Bias and the Public's Beliefs
The self-interested variables are frequently significant. For the most part, materially
well-off males think more like economists than the average person. Income is usually
not significant, but past and expected changes in real income frequently are.
The
coefficient on male is often relatively large and significant. People's fear about losing
their job during the next year also matters considerably. The race dummies usually do
not matter, but are important on a few topics: in particular, ceteris paribus blacks think
that welfare and affirmative action are less serious, and tax breaks, slow productivity
growth, downsizing, and inadequate private investment in human capital are more
serious than others do.21 Age sometimes has a marginal impact.
This is not to say that self-serving bias produces radical belief differences within the
population, only that the control variables sometimes have a detectable impact. In order
to appreciate the implied magnitude of these self-interested effects, Tables 4a, 4b, and
4c compare the ordered logits' implications about the belief distributions of three different
sub-types of non-economists, setting all variables except those under consideration
equal to their medians for the combined sample: race is white, gender is male, age=43,
20
21
One can interpret these as proxies for the effect of permanent income.
Variable identifiers Yourfam5, Yournext5, Jobworry, WELFARE, AA, TAXBREAK, BUSPROD,
DOWNSIZE, and COMPEDUC.
12
Jobworry=1, Yourfam5=1, Yournext5=1, income=6, Econ=0.
Table 4a compares extremely high-income individuals with maximal job security
(income=9, Jobworry=0) to extremely low-income individuals with minimal job security
(income=1, Jobworry=3). As a rule, the well-off think that problems are somewhat less
serious, whether or not the incidence falls upon them. They are less concerned about
high taxes, foreign aid, immigration, tax breaks, welfare, excessive profits and executive
pay, overseas competition, downsizing, and companies' low investment in human
capital, and more optimistic about greater female labor force participation, technological
progress, trade agreements, the effect of trade agreements on jobs, the price of gas, the
competitiveness of the gasoline market, and the quality of new jobs.22 The well-off are
only more pessimistic about the low level of savings, the path of real income over the
last 20 years, the living standard of the next generation, and the living standard of their
own children.23
Table 4b compares individuals with recent and expected real income growth
(Yourfam5=2, Yournext5=2) to those with recent and expected real income decline
(Yourfam5=0, Yournext5=0). Like people with high income and job security, people who
have experienced and/or anticipate real income growth take economic problems less
seriously even if those problems specifically involve them. They downplay the severity
of high taxes, foreign aid, tax breaks, welfare, excessive profits and executive pay,
22
Variable identifiers TAXHIGH, FORAID, IMMIG, TAXBREAK, WELFARE, PROFHIGH,
EXECPAY, OVERSEAS, DOWNSIZE, COMPEDUC, WOMENWORK, TECHGOOD, TRADEAG,
TRADEJOB, GASPRICE, WHYGASSD, and NEWJOB.
23
Variable identifiers SAVINGS, INCOME20, CHILDGEN, and CHILDSTAN.
13
technological unemployment, overseas competition, and downsizing.24 They are more
inclined to see the upside of technological progress, trade agreements, downsizing,
current economic dislocations, current economic conditions, and new jobs; to believe
that trade agreements create jobs, that one-earner families can live comfortably, that
income and real wages have increased over the last 20 years but inequality has not, that
living standards will rise over the next five years, and that the next generation and their
own children will enjoy higher living standards; and that the price of gas is about right
and is set by supply and demand.25
Table 4c contrasts the economic beliefs of males and females. Males and economists
think alike for 15 questions, compared to only 5 questions where females and
economists do.26 Like economists, males are less worried about the height of taxes,
foreign aid, immigration, tax breaks, welfare, high profits and executive compensation,
technological unemployment, overseas competition, and downsizing.
Also like
economists, males are more likely to believe that technological progress and downsizing
are good, trade agreements create jobs, the price of gas is about right, and real income
has risen over the past 20 years.27 However, females and economists are more in
agreement about the impact of regulation, the declining work ethic, greater female labor
24
Variable identifiers TAXHIGH, FORAID, TAXBREAK, WELFARE, PROFHIGH, EXECPAY,
TECH, OVERSEAS, and DOWNSIZE.
25
Variable identifiers TECHGOOD, TRADEAG, DOWNGOOD, CHANGE20, CURECON, and
NEWJOB, TRADEJOB, NEED2EARN, INCOME20, WAGE20, GAP20, STAN5, CHILDGEN,
CHILDSTAN, GASPRICE, and WHYGASSD.
26
This is consistent with political scientists' finding that males score significantly higher than
women on tests of political knowledge even controlling for numerous other factors. See e.g. Delli
Carpini and Keeter (1996), esp. pp.203-9.
27
Variable identifiers TAXHIGH, FORAID, IMMIG, TAXBREAK, WELFARE, PROFHIGH,
EXECPAY, TECH, OVERSEAS, DOWNSIZE, TECHGOOD, DOWNGOOD, TRADEJOB,
GASPRICE, and INCOME20.
14
force participation, whether living standards will rise in the next five years, and whether
their children's generation will have a higher living standard.28 Men and women also
think differently on a few issues where the Econ dummy is not statistically significant:
women are more likely to believe that education is underfunded, the president can
favorable affect the economy, and families need two incomes to live comfortably.29
b. Self-Serving Bias and Economists' Beliefs
Even though people who are rich, getting richer, and/or male think more like economists
than others, controlling for self-serving bias does not come close to eliminating the
apparent impact of economic training. Table 5 shows how controlling for self-serving
bias affects the belief differences between economists and non-economists. It displays
the coefficient on Econ, its z-stat, and the implied belief distributions of economists and
non-economists - setting all self-interested variables equal to their overall sample
medians. The absolute value of the coefficients significant in Table 3 typically falls by
about one-quarter.
In a few instances, the coefficient actually grows in absolute
magnitude: controlling for self-interested variables, economists are more concerned
about business productivity, more likely to think inequality has increased, and more
optimistic about the standard of living of the next generation in general, and their own
children in particular.30 The coefficients on INADEDUC and PRES also grow in absolute
value, though they remain statistically insignificant.
Controlling for self-interested variables seems particularly important for the perceived
28
Variable identifiers REG, HARDWORK, WOMENWORK, STAN5, and CHILDGEN.
29
Variable identifiers INADEDUC, PRES, and NEED2EARN.
30
Variable identifiers BUSPROD, GAP20, CHILDGEN, and CHILDSTAN.
15
economic impact of tax breaks, the benefits of downsizing, the behavior of real wages
over the last 20 years, the ability of single-income families to live comfortably, and the
current state of the economy.31 In each of these cases, the coefficient on Econ falls by
45% or more in absolute value. Self-serving bias makes the least difference for beliefs
about the harmful effects of the deficit, affirmative action, low value placed on hard work,
and regulation, the benefits of tax cuts and higher female labor force participation, and
the propensity to attribute gas price increases to the normal operation of supply and
demand.32 In each case the estimated coefficient declines by less than 10%.
In only one out of 37 equations does the coefficient on Econ lose its statistical
significance: Controlling for self-interested variables, economists are not especially likely
to deny that the average family needs two full-time wage-earners to earn a comfortable
living. However, there is also an equation where controlling for self-serving bias actually
makes an initially near-zero coefficient become significant and positive: holding other
factors constant, economists are more likely than others to believe that their children will
eventually live better than they personally do.33
Controlling for self-serving bias rarely eliminates differences in the median beliefs of
economists and the public either, but there are a few exceptions. Holding self-interested
variables fixed, economists and the public have the same median estimate of the longrun effect of recent economic changes (good), the nature of new jobs (low-paying), the
behavior of real wages over the last two decades (falling), and the expected behavior of
31
Variable identifiers TAXBREAK, DOWNGOOD, WAGE20, NEED2EARN, and CURECON.
32
Variable identifiers DEFICIT, AA, HARDWORK, REG, TAXCUT, WOMENWORK, and
WHYGASSD.
33
Variable identifiers NEED2EARN and CHILDSTAN.
16
living standards over the next five years (constant). They also disagree less about the
impact of trade agreements on jobs: the median economist still thinks they create jobs,
but the median member of the public believes they have no effect.
In a couple
instances, though, median beliefs actually move further apart: the median economist is
actually more worried about low savings rates, and more optimistic about their own
children's future than the median member of the public.34
Even when the coefficients on the control variables are statistically and economically
significant, it is far from clear that they uniformly reflect self-serving bias.35 High-income
males with recent and expected real income growth and little fear of job loss do tend to
be less worried about excessive tax breaks, profits, and executive pay, along with
technological unemployment, overseas competition, and downsizing. But in other cases,
individuals view policies inimical to their material well-being more favorably than the
presumed beneficiaries: Past increases in real income and reduced fear of losing one's
job correlate with milder estimates of the economic harm of high taxes, not more. Males
and high-income individuals think that foreign aid and welfare are less serious problems
than the average person does.
Individuals get increasingly concerned about low
aggregate savings rates after the age of 40, and excessive immigration after the age of
35, even though scarce capital and abundant labor become increasingly advantageous
for individuals as they near retirement. High income individuals are actually more likely
to believe that real incomes have fallen over the past twenty years. They are also
pessimistic about the real living standard of their children's generation, and especially
34
Variable identifiers CHANGE20, NEWJOB, WAGE20, STAN5, NEWJOB, SAVINGS and
CHILDSTAN.
35
Dahl and Ransom (1999) report some similar findings in their study of tithing.
17
pessimistic about the living standard of their own children.36
4. Ideological Bias
Another popular account of economists' beliefs maintains that economists are
ideologically biased. (Soros 1998; Greider 1997; Kuttner 1996; Lazonick 1991) Their
political preconceptions color their positive analysis, partially blinding them to evidence
against standard economic theories. Probably the most prominent version of this theory
holds that economists tend to be dogmatic proponents of free trade, competition,
deregulation, privatization, and laissez-faire generally. As Kuttner puts it, "[M]uch of the
economics profession, after an era of embracing the mixed economy, has reverted to a
new fundamentalism cherishing the virtues of markets." (1996, pp.3-4)
Data from the SAEE makes it possible to test this hypothesis. The survey includes two
relevant variables: one for political party and one for ideology.
The political party
variable is straightforward: people may be Democrats, Republicans, independents, or
members of another party. The ideology variable is slightly more unusual: respondents
classify themselves as very liberal, liberal, moderate, conservative, or very conservative.
They could also volunteer the response "I don't think in those terms." Note that while
honest ideological self-assessments may not be incentive-compatible for votemaximizing politicians, survey respondents have no comparable reason to lie.
Even if controlling for political views did significantly reduce the coefficient on Econ, one
should not immediately infer that the economists are biased. Were an initially apolitical
economist to reach the conclusion that free trade enriches everyone in the long run, his
36
Variable identifiers TAXBREAK, PROFHIGH, EXECPAY, TECH, OVERSEAS, DOWNSIZE,
TAXHIGH FORAID, WELFARE, SAVINGS, IMMIG, INCOME20, CHILDGEN, and CHILDSTAN.
18
ideology and/or party affiliation would presumably change as a result. The direction of
causation between economic training and political conclusions could run either way.
However, if controlling for political variables does little or nothing to shrink the magnitude
of the coefficient on Econ, it is difficult even to make a prima facie case that economists'
beliefs are the product of ideological bias.
The equations in this section reestimate Table 3's ordered logits controlling for the
following variables: Dem, Rep, Othparty, Ideology*(1-Othideol), and Othideol. The Indep
dummy is omitted to preserve full rank. Othideol turns on if a respondent does not think
in terms of the liberal-conservative continuum (i.e., Ideology=3); using (1-Othideol) as an
interaction term makes it possible to pick up the effect of movements along that
continuum for everyone who does think in left-right terms.
The results, shown in Table 6 provide no support for the ideological bias hypothesis.
Partisan and ideological variables frequently matter, yet controlling for them has no
tendency to make the coefficient on Econ smaller. If anything, the differences between
economists and the public grow: the absolute value of the coefficient on Econ rises by .1
or more in ten equations, and falls by .1 or more only three times. In any case, the
implied distribution of beliefs barely shifts. The explanation for these findings is fairly
simple: The control variables are close to orthogonal to Econ, with economists slightly
more left-leaning and likely to be Democrats or independents than average.37
The
original coefficient estimates are thus close to unbiased; but on issues where
Republicans and conservatives think more like economists than Democrats and liberals,
37
This may be seen from two simple regressions: (Dem or Indep) =.66+.12*Econ, and (limiting
the sample to Othideol=0) Ideology=.14-.18*Econ. The coefficients on Econ are significant at the
.01 level.
19
the coefficient on Econ has to slightly rise to compensate for economists' average
political slant.
There is considerable evidence that political party and ideology somehow interact with
positive economic beliefs, though the direction of causation is not easy to ascertain.
Ideology and party also seem closely connected: while each has independent predictive
power some of the time, there is only one instance where they seem to move in opposite
directions.
(Republicans are more optimistic about the long-run effects of new
technology, foreign competition, and downsizing, but ideological conservatism seems
weakly associated with greater pessimism).38
Overall, the empirical results confirm conventional ideological stereotypes for the overall
sample.
Democrats and/or liberals believe some problems are less serious than
independents and/or moderates: high taxes, the deficit, immigration, welfare, affirmative
action, the declining work ethic, and over-regulation.39
Republicans and/or
conservatives downplay the negative consequences of tax breaks, excessive profits and
executive pay, overseas competition, downsizing, and businesses' low investment in
training the workforce.40 Democrats and/or liberals have more optimistic beliefs about
the current state of the economy, greater female labor force participation, and trade
agreements, while Republicans and/or conservatives report more positive assessments
of tax cuts, technological progress, downsizing, the competitiveness of the gasoline
market, the nature of new jobs, the ability of one-earner families to live comfortably, and
38
Variable identifier CHANGE20.
39
Variable identifiers TAXHIGH, DEFICIT, IMMIG, WELFARE, AA, HARDWORK, and REG.
40
Variable identifiers TAXBREAK, PROFHIGH, EXECPAY, OVERSEAS, DOWNSIZE, and
COMPEDUC.
20
the behavior over the past 20 years of real income, real wages, and inequality.41
Interestingly, both Democrats and Republicans (plus adherents of third parties) are more
optimistic about the president's ability to affect the economy than are independents.
Economists do frequently hold extremely conservative beliefs, in the sense that the
average economist takes a position as extreme (or more extreme) than the typical very
conservative Republican. But economists affirm the extremely liberal view about equally
often. Table 7 compares three archetypes: ideologically moderate, political independent
economists; very liberal Democratic non-economists ("left-wing ideologues); and very
conservative Republican non-economists ("right-wing ideologues"). When left-wing and
right-wing ideologues disagree in a statistically significant way and the coefficient on
Econ is also significant, one can classify economists' beliefs as left- or right-leaning. If
the economists lean towards the left-wing belief, Table 6 shows economists' and leftwing ideologues' belief distributions in bold-face, and vice versa if economists lean
towards the right-wing belief. When economists actually on average hold more extreme
views than ideologues, the second column of the table gets marked with a †.
For the 37 questions in Table 7, economists lean towards the rightist position in 13
cases, and the leftist position in 11.
Moreover, economists typically take extreme
positions. Their beliefs are more liberal than the liberal ideologues' 8 times out of 11,
and more conservative than the conservative ideologues' 13 times out of 13.
For
example, a politically independent, ideologically moderate economist is actually more
likely to believe that high taxes are "not a problem" than very liberal Democrats without
economic training. The same applies to the deficit, immigration, welfare, affirmative
41
Variable identifiers CURECON, WOMENWORK, TRADEAG, TAXCUT, TECH, DOWNSIZE,
WHYGASSD, NEWJOB, NEED2JOB, INCOME20, WAGE20, and GAP20.
21
action, the work ethic, increased female labor force participation, the benefits of trade
agreements, and the level of inequality. Economists also lean towards liberal views on
regulation, the effects of tax cuts, and the current state of the economy, but in these
cases, left-wing ideologues hold more extreme beliefs.42
At the same time, middle-of-the-road economists frequently go beyond the extremism of
right-wing ideologues. Economists are less concerned about tax breaks for business,
excessive profits and executive compensation, overseas competition, downsizing, and
low corporate investment in human capital than very conservative Republicans.
Economists also have more positive beliefs about the benefits of technological progress,
downsizing, the competitiveness of the gasoline market, the nature of new jobs, the
ability of one-earner families to live comfortably, and the trend growth of real income and
real wages.43
The flip side of economists' extremism is the relative homogeneity of beliefs across noneconomists' ideological spectrum. While left-wing and right-wing ideologues do sharply
disagree on some areas, they often have the same median beliefs nevertheless. The
median very liberal Democrat and the median very conservative Republican agree that
the deficit, foreign aid, and overseas competition are major problems, and technology
and trade agreements are good. They both think that gas markets work uncompetitively,
that new jobs are low-paying, that inequality has increased, that real income and real
42
Variable identifiers TAXHIGH, DEFICIT, IMMIG, WELFARE, AA, HARDWORK,
WOMENWORK, TRADEAG, GAP20, REG, TAXCUT, and CURECON.
43
Variable identifiers TAXBREAK, PROFHIGH, EXECPAY, OVERSEAS, DOWNSIZE,
COMPEDUC, TECHGOOD, DOWNGOOD, WHYGASSD, NEWJOB, NEED2EARN, INCOME20,
and WAGE20.
22
wages have fallen, and that families need two incomes to live comfortably.44 When their
median beliefs do differ, they never "polarize"; i.e., it is never the case that the median
extreme leftist thinks something is a major problem even though the median extreme
rightist think it is not a problem at all or vice versa.
As section two notes, such
polarization does frequently characterize the belief distributions of economists and noneconomists.
5. Education and Economics
If the experts and the public systematically disagree, there is a prima facie case that the
public is biased.
If neither self-serving bias nor ideological bias explain their
disagreements, it is natural to return to the default hypothesis: Economic training helps
eliminate the systematic misconceptions almost everyone has prior to their exposure to
economics. The study of economics does not merely impart information, it de-biases
people, making them more rational in the rational expectations sense of the term.
If studying economics makes people more rational, one might expect general education
to do the same. If education merely transports information from one mind to another,
learning would be subject-specific. But if education actually trains people to be rational to think logically and objectively - systematic biases could easily be less pronounced
among non-economists as their level of education increases. This suggests a final test of
the "we're right, they're wrong" explanation for the belief differences about economics:
Do education and economics training generally work in the same direction?
The SAEE measures individuals' highest level of educational attainment on a scale from
44
Variable identifiers DEFICIT, FORAID, OVERSEAS, TECHGOOD, TRADEAG, WHYGASSD,
NEWJOB, GAP20, INCOME20, WAGE20, and NEED2EARN.
23
1 to 7.45 But in order to see if education and economic training really work in the same
direction, is necessary to control for both self-serving and ideological bias; education
surely changes people's socio-economic status and possibly their ideological views. The
last battery of tests accordingly re-estimates ordered logits of the standard dependent
variables on race dummies, age, age squared, male, Jobworry, Yourfam5, Yournext5,
income, party dummies, Ideology*(1-Othideol), Othideol, education, and Econ.
Table 8 shows the main results, comparing economists and the public, with all variables
except for the Econ dummy set equal to their overall sample median.46 Three main facts
stand out: First, adding education to the set of control variables usually makes the
coefficient on the Econ dummy fall relative to specifications controlling for self-serving
bias alone (Table 5). Second, even controlling for self-serving bias, ideological bias, and
education, the effect of economic training usually remains very large. Third, whenever
both are statistically significant, the coefficients on education and economics almost
always have the same sign. Both variables' effects are statistically significant in 22
equations, and have the same sign in 20.
Controlling for education, economists' beliefs about regulation and inequality are not
unusual, being statistically indistinguishable from the typical person with post-graduate
education. In most other cases, economists' unusual beliefs on topics like high taxes,
foreign aid, immigration, tax breaks, welfare, affirmative action, technological
unemployment, female labor force participation, and the functioning of the gasoline
45
Economists were not asked their education level, but since only Ph.D. economists were
sampled, they all have an education level of 7 (post-graduate).
46
The sample median value of education=5.
24
market are just more exaggerated versions of the beliefs of the highly educated.
Economics training still looks like the primary factor behind economists' views on the
deficit, slow business productivity growth, downsizing, corporate investment in human
capital, tax cuts, and technological progress. The two issues where economics and
education work in opposite directions both involve expectations of economic progress:
whereas economists are more likely to believe that living standards will rise in the next
five years and for their children's generation, the educated are less likely to think so,
particularly in the latter case.47
Ideological explanations for the belief patterns of the educated can be largely ruled out,
since the specification controls for self-reported ideology as well as political party. Like
economists, the educated hold a mixture of extremely liberal and extremely conservative
beliefs.
For example, economists, the highly educated, and ideological liberals all
believe that the immigration problem is less serious than the rest of the public does. But
at the same time, like ideological conservatives, economists and the highly educated
downplay the economic danger of excessive profit levels.48
To a large extent, one can place the poorly educated, the highly educated, and
economists on a belief continuum from most pessimistic to most optimistic. Table 9
illustrates this point by comparing the beliefs of Ph.D. economists, other people with
post-graduate educations (education=7), and people with primary educations only
(education=1).
What is striking is that minimal education is associated not with
47
Variable identifiers REG, GAP20, TAXHIGH, FORAID, IMMIG, TAXBREAK, WELFARE, AA,
TECH, WOMENWORK, GASPRICE, WHYGASSD, DEFICIT, BUSPROD, DOWNSIZE,
COMPEDUC, TAXCUT, TECHGOOD, CHILDGEN and CHILDSTAN.
48
Variable identifiers IMMIG and PROFHIGH.
25
agnosticism about economics, but with a cluster of extreme beliefs.
Consider
immigration, excessive profits, technological unemployment, overseas competition,
downsizing, and the effect of trade agreements on jobs.49 In all but one of these cases,
the median low-education non-economist sees "major" problems, the median higheducation non-economist sees "minor" problems, and the median economist sees no
problem at all. The only exception is overseas competition; though there is a large
negative coefficient on education, the median highly educated individual still believes it is
a major problem.
There are many less extreme examples of the same pattern. Frequently, the median
economist sees minor problems (tax breaks, welfare, declining work ethic, regulation,
insufficient business investment in human capital) or good consequences (more female
labor force participation, trade agreements, current economic dislocations) where the
median
person
with
minimal
education
sees
major
problems
or
indifferent
consequences.50 The beliefs of highly educated non-economists again tend to be in the
middle.
Admittedly, on a few issues non-economists of all educational levels cluster together.
Non-economists are much more pessimistic about the deficit, businesses' investment in
human capital, and about the gasoline market.
Whether highly educated or barely
educated, the median non-economist thinks that the deficit and low corporate investment
in the workforce are major problems, new jobs are low-paying, real incomes have
49
Variable identifiers FORAID, IMMIG, PROFHIGH, TECH, OVERSEAS, DOWNSIZE, and
TRADEJOB.
50
Variable identifiers TAXBREAK, WELFARE, HARDWORK, REG, COMPEDUC,
WOMENWORK, TRADEAG, and CHANGE20.
26
declined over the past 20 years, the price of gas is too high, and gas prices increase
because of price-gouging, not supply-and-demand.51 Even though education matters, in
such cases it is only able to mildly counter-balance the public's deep-set biases.
It is only in their forecasts of future economic performance - whether medium- or longterm - that economic training and education tend to move in opposite directions.
Economists are significantly more optimistic about economic growth in the next 5 years
even though the educated are significantly more pessimistic. On this topic, economists,
the most educated, and the least educated do have the same median belief ("stay about
the same"), but 41% of highly educated non-economists actually expect decline,
compared to 30% of the poorly educated and 13% of economists.
Pessimism and
education are even more tightly associated for estimates of the living standard of their
children's generation.
Median Ph.D. non-economists actually expect their children's
generation to live worse than the current generation; only 15% think it will live better.
Both economists and those with little education tend to disagree: as Table 9 shows, the
median member of both groups believes living standards will be constant. (The modal
economist expects they will increase). Interestingly, though, when asked about the living
standard of their own children, economic training still correlates with greater optimism,
but education makes no difference. The educated are pessimistic about the future in
general, but not their own children's' future; economists are more optimistic about both,
but less so for their own descendants.52
51
Variable identifiers DEFICIT, COMPEDUC, NEWJOB, INCOME20, GASPRICE, and
WHYGASSD.
52
Variable identiers STAN5, CHILDGEN, and CHILDSTAN. Since the question wording for
CHILDSTAN asks the respondent to their current living standard to the living standard of their
children once they reach the current age of the parent, this might just reflect economists'
knowledge of regression to the mean.
27
One control variable that the Survey of Americans and Economists on the Economy
does not contain is a measure of respondent's IQ. It does seem likely that intelligence
would explain part of the apparent effect of education: More intelligent people are both
more likely to devote more years to education and intrinsically less likely to make large
systematic mistakes. (Delli Carpini and Keeter, 1996, esp. pp.193-6) It seems much
less probable that controlling for IQ would reduce the effect of economic training: Are
economists' IQs high relative to those of other people with post-graduate educations? In
other words, while it is highly likely that economic training moderates systematic errors
about economics holding intelligence fixed, it is less certain that non-economic education
can be credited with this effect.
Further data collection and more research are
necessary to answer this question.
6. Populist Biases: Analysis and Implications
a. Four Populist Biases
Are there any general patterns to be found in the economic biases of the public? It is
difficult to subsume this paper's main findings under any of the standard rubrics of the
"heuristics and biases" literature.
The systematic mistakes may be connected to
availability bias in particular instances. (Rabin 1998; Kuran and Sunstein 1999) For
example, memorable stories about welfare fraud may explain the public's over-estimate
of problem's severity. But the availability heuristic's connection to other misperceptions
is tenuous: How could availability give rise to the widespread belief that gas prices are
not determined by supply and demand, or that excessive profits are a major economic
problem? The general patterns also seem consistent with the psychological evidence on
overconfidence in low-information beliefs. (Rabin 1998; Lichtenstein, Fischhoff, and
Slovic 1982)
But why do people with little information gravitate towards one over-
28
confident answer rather than another?
Most of the psychology and economics literature emphasizes biases driven by contentindependent rules, yet there is also considerable evidence that some biases are contentdriven. (Gigerenzer and Murray 1987; Rabin 1995; Akerlof 1989 + others) People may
be irrational not because they follow an imperfect heuristic for all problems of a given
form, but because there are specific topics, issues, or conditions that elicit emotional
rather than analytical responses.
For example, people may have strong negative
feelings about foreigners that incline them to blame foreigners for economic difficulties
and to angrily dismiss contrary evidence. Many economists, past and present, implicitly
suggest such content-dependent biases are at work when they lament the public's
"populism."53 (Sachs 1994; Newcomb 1893; Bastiat 1964) The current paper provides
quantitative evidence that populist attitudes are genuine biases, and makes it possible to
characterize them more precisely. Four strains of populist biases stand out, which I refer
to as: anti-foreign bias, anti-business bias, make-work bias, and pessimistic bias. (Morin
and Berry 1996)
Anti-Foreign Bias. Whenever questions involve foreigners, the public is especially likely
to be pessimistic: Foreigners cause serious problems but bring trivial benefits. Three of
the first eighteen questions relate to foreigners: foreign aid, immigration, and overseas
competition. In each case, as Table 8 shows, there is a huge gap between economists'
53
As Newcomb wrote in the QJE over a hundred years ago: "If they were consistent enough to
constitute a system, that system might be called the popular political economy. What I first
propose to show is that we have to deal with ideas centuries old, on which the thought of
professional economists has never made any permanent impression, except, perhaps, in Great
Britain, and that in the every-day applications of purely economic theory our public thought, our
legislation, and even our popular economic nomenclature are what they would have been if
Smith, Ricardo, and Mill had never lived, and if such a term of political economy had never been
known." (Newcomb 1893, p.377)
29
beliefs and the public's, even controlling for self-serving bias, ideological bias, and
education. Similarly, on both questions relating to trade agreements, the public much
more pessimistic than economists.54 While one could try to subsume the anti-foreign
bias into other categories, the public appears to react differently to otherwise similar
questions if they involve foreigners.
For example, the public thinks that excessive
foreign aid is a much greater economic problem that excessive welfare dependence,
even though foreign aid is actually a much smaller percentage of the budget.
Anti-Business Bias. The public has severe doubts about how much it can count on
profit-seeking businesses to produce socially beneficial outcomes. While economists
admit that profit-maximization plus market imperfections may yield bad results, members
of the general public tend to see successful greed as socially harmful regardless of
institutional context. Thus, the public over-estimates the economic harm caused by tax
breaks, excessive profits, and excessive executive compensation.
The questions
concerning the gasoline market also reveal anti-business beliefs55: Non-economists are
largely unwilling to see the world in supply-and-demand terms. Instead they are more
inclined to attribute price increases to business greed, implicitly modeling businesses as
monopolists of variable altruism.
Make-Work Bias. Members of the public to some extent believe that it is better to use up
labor than conserve it, a fallacy Bastiat labeled "Sisyphism." (Bastiat 1964, pp.20-7)
Where economists see the production of more goods with less labor, non-economists
see the destruction of jobs. Nor is one's proneness to make-work bias primarily rooted
54
Variable identifiers FORAID, IMMIG, OVERSEAS, TRADEAG and TRADEJOB.
55
Variable identifiers TAXBREAK, PROFHIGH, EXECPAY, GASPRICE and WHYGASSD.
30
in self-interest: Affluent individuals with complete job security are only modestly less
subject to it than the rest of the population. (Table 5) Most of the public worries about
technological unemployment, jobs going overseas, and downsizing; most economists do
not. The median economist thinks that trade agreements create jobs, while the median
non-economist thinks they have no effect. The modal non-economist actually believes
they destroy jobs. Even though a majority of the public sees "new technology in the
workplace" as on the whole good, they lack economists' virtual unanimity. Admittedly,
economists may look at problems over a different time horizon, but even when the
question asks about the effect of labor-saving changes (new technology, foreign
competition, and downsizing) 20 years in the future, economists are on average vastly
more optimistic.56
Pessimistic Bias. For the remaining questions, greater knowledge normally leads to
more optimism, controlling for all other characteristics. Non-economists think that the
deficit, high taxes, affirmative action, the declining work ethic, and insufficient private
investment in human capital are more harmful than economists do. They are also more
likely to believe that increased female labor force participation is bad, new jobs are lowpaying, real income and real wages fell over the last 20 years, families need two
incomes to live comfortably, living standards will not rise during the next five years, the
next generation will have a lower living standard than the current one, and their own
children will live worse than they do.57 Even on the benefits of tax cuts, where the public
seems to be more optimistic than economists, this may just reflect the public's
56
57
Variable identifier TECH, OVERSEAS, DOWNSIZE, TRADEJOB, and CHANGE20.
Variable identifiers DEFICIT, TAXHIGH, AA, HARDWORK, COMPEDUC, WOMENWORK,
NEWJOB, INCOME20, WAGE20, NEED2EARN, STAN5, CHILDGEN, and CHILDSTAN.
31
pessimistic overestimate of budget share of unpopular programs.58
It is also noteworthy that economists and the public are most likely to agree when both
groups are pessimistic in absolute terms.
Most economists think that inadequate
spending on education and the low savings rate are major problems; so does the public.
Most economists think that inequality increased over the last 20 years; so does the
public. The only problem economists are more worried about than the public is "slow
business productivity growth." (In all likelihood this is because many members of the
public did not understand the question, which seems markedly more technical than any
of the others).
Could the public's biases be attributed to the media's focus on bad news, as Blendon et
al (1997) suggest?59 For anti-foreign bias, anti-business bias, and make-work bias, this
is a hard case to make: Newcomb (1893) and Bastiat (1964 [1845]) make it clear that
these biases were widespread long before the appearance of radio and television.
Connecting the media to the public's pessimistic bias is more credible since earlier
accounts make little mention of it. Still, the media can hardly bear all of the blame.
Rational agents discount biased information, so a rigorous account requires both
pessimistic bias in the media, and "under-discounting bias" in the general public. And
isn't the media's pessimistic bias itself a response to consumer demand? The complex
interaction between biased consumers of information and and profit-maximizing
suppliers deserves more study.
58
Variable identifier TAXCUT. See e.g. National Survey of Public Knowledge of Welfare Reform
and the Federal Budget (1996) for evidence on the public's biased estimates of the federal
budget's composition.
59
For evidence of the effect of the media on public opinion, see Iyengar and Kinder (1987) and
Page and Shapiro (1992).
32
b. Populist Biases, Rational Irrationality, and the Logic of Collective Belief
This paper's findings are consistent with Caplan's (1999a) "rational irrationality" account
of how large, systematic mistakes persist. The idea is to model irrationality (in the sense
of deviation from rational expectations) as a good like any other; the lower the private,
marginal cost of irrationality, the more irrationality people "buy." Sometimes the private,
marginal cost of irrationality is high: for example, "creating jobs" by avoiding machinery
and doing household chores by hand. In other cases, the private, marginal cost of
irrationality is low or even zero: Whether overseas competition is really a major problem
for the economy is irrelevant from the point of view of an individual buying a car. The
rational irrationality model suggests that beliefs will be more irrational in the latter case
than the former. Economic beliefs do affect individuals' votes, but it does not follow that
irrational economic beliefs are privately costly.
Since it is almost certain that one
person's vote will not change electoral outcomes, the marginal private cost remains
trivial. In politics, irrationality is not a puzzle; it is just what an economic theory of
irrationality predicts.60
These biases can still have extremely high social costs. As Caplan's (1999b) analysis of
the "logic of collective belief" emphasizes, privately costless biases tend to produce
socially costly outcomes via the democratic process. At the margin, each individual
60
Bastiat, (1965) in his analysis of the make-work fallacy ("Sisyphism"), makes a similar
observation: "People will perhaps think I am exaggerating, and that there are no real Sisyphists.
If this means that in practice no one carries the principle to its logical extreme, I willingly agree.
This is always the case when one starts from a false premise. It soon leads to such absurd and
injurious consequences that one is obliged to stop short. That is why it is never the practice of
industry to permit Sisyphism; the penalty would follow the mistake too closely not to expose it.
But in the realm of speculation, such as theorists and statesmen engage in, one can cling to a
false principle for a long time before being made aware of its falsity by its complex practical
consequences..." (p.21)
33
under the sway of the make-work bias pays nothing for his mistake. But if make-work
bias dominates the thinking of everyone, politicians will have to implement inefficient
make-work policies in order to stay in office. Voters may unanimously back policies
harmful to everyone, subconsciously figuring "The same policy will win whatever I
believe, so I'll believe what I feel like believing." Democracy sets the private cost of
socially costly irrationality at zero, enabling Pareto inferior policies to enjoy genuine
majority support.
What the current paper adds to Caplan (1999a, 1999b) is detailed, quantitative evidence
on the magnitude and orientation of non-economists' systematically biased beliefs about
economics.
Combining its findings on the strength of populist biases with Caplan's
(1999b) analytical framework shows that simple voting models can readily explain
severe political failure. It is neither necessary nor credible to model political failure as
the product of complex strategic interaction by voters with rational expectations.
(Wittman 1995, 1989; Rodrik 1996) Recognizing the minimal private, marginal cost of
populist bias can reconcile the microfoundations of economic theory with the reality of
economic policies that are at once popular and foolish. (Olson 1996)
7. Conclusion
On the surface, the general public's economic beliefs exhibit large, systematic biases.
The main finding of this paper is that the first impression is correct. Using the SAEE, it is
possible to empirically test and decisively reject the main alternative explanations. Selfserving bias explains only a modest fraction of the systematic differences between
economists and the public. Controlling for ideological bias seems if anything to make
the belief gap between economists and the public bigger. The propensity of education
and economic training to move beliefs in the same direction - holding self-interest and
34
ideology constant - further supports the conclusion that the biases lie within the general
public, not economists.
My analysis of the source of the public's biases is necessarily more speculative and in
need of further testing. While the existing psychology and economics literature provides
some insight into the public's mistakes, it seems difficult to reduce "populism" to a
convex combination of familiar biases. Rather, as e.g. Bastiat (1965), Newcomb (1893),
and Sachs (1994) implicitly maintain, the public's economic biases are largely contentdependent. Most people's beliefs are slanted in an anti-foreign, anti-business, makework, and pessimistic direction. And at least the first three of these four populist biases
are persistent over time.
It is for the political economy literature that this paper's findings are most relevant. While
modeling extreme political failure in a rational expectations framework is possible, the
exercise frequently strains credulity.
This paper highlights the empirical potential of
Caplan's (1999b) alternative approach: combine realistic accounts of voters' economic
beliefs with relatively simple models of the political process. If the public's economic
biases are as pronounced as this paper's findings suggest, the main puzzle for political
economy may not be why political outcomes are suboptimal but why they are not far
worse.
35
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39
Table 1: Questions and Mean Answers
#
Variable
Question
Mean
(Pub)
Mean
(Econ)
Regardless of how well you think the economy is doing, there are always some problems that keep it from being as
good as it might be. I am going to read you a list of reasons some people have given for why the economy is not
doing better than it is. For each one, please tell me if you think it is a major reason the economy is not doing better
than it is, a minor reason, or not a reason at all.
1
2
3
4
5
6
7
8
TAXHIGH
DEFICIT
FORAID
IMMIG
TAXBREAK
INADEDUC
WELFARE
AA
9
10
11
HARDWORK
REG
SAVINGS
0="Not a reason at all"; 1="Minor reason"; 2="Major reason"
Taxes are too high
1.50
The federal deficit is too big
1.73
Foreign aid spending is too high
1.53
There are too many immigrants
1.23
Too many tax breaks for business
1.29
Education and job training are inadequate
1.56
Too many people are on welfare
1.61
Women and minorities get too many advantages under
.76
affirmative action
People place too little value on hard work
1.44
The government regulates business too much
1.23
People are not saving enough
1.39
.77
1.14
.14
.22
.65
1.61
.72
.21
.82
.97
1.49
Now I am going to read you another list of reasons, having to do with businesses, that some people have given for
why the economy is not doing better than it is. For each one, please tell me if you think it is a major reason the
economy is not doing better than it is, a minor reason, or not a reason at all.
12
13
14
15
16
17
18
PROFHIGH
EXECPAY
BUSPROD
TECH
OVERSEAS
DOWNSIZE
COMPEDUC
0="Not a reason at all"; 1="Minor reason"; 2="Major reason"
Business profits are too high
Top executives are paid too much
Business productivity is growing too slowly
Technology is displacing workers
Companies are sending jobs overseas
Companies are downsizing
Companies are not investing enough money in education
and job training
1.27
1.59
1.18
1.26
1.59
1.50
1.53
.18
.69
1.43
.27
.48
.48
1.16
Generally speaking, do you think each of the following is good or bad for the nation's economy, or don't you think it
makes much difference?
19
20
21
22
TAXCUT
WOMENWORK
TECHGOOD
TRADEAG
23
DOWNGOOD
0="Bad"; 1="Doesn't make much difference"; 2="Good"
Tax cuts
More women entering the workforce
Increased use of technology in the workplace
Trade agreements between the United States and other
countries
The recent downsizing of large corporations
1.46
1.47
1.57
1.33
1.04
1.73
1.98
1.87
.62
1.40
Some people say that these are economically unsettled times because of new technology, competition from foreign
countries, and downsizing. Looking ahead 20 years, do you think these changes will eventually be good or bad for
the country or don't you think these changes will make much difference?
24 CHANGE20
0="Bad"; 1="Won't make much difference"; 2="Good"
1.15
1.92
Do you think that trade agreements between the United States and other countries have helped create more jobs in
the U.S., or have they cost the U.S. jobs, or haven't they made much of a difference?
25 TRADEJOB
0="Cost the U.S. jobs"; 1="Haven't made much
.64
1.46
difference"; 2="Helped create jobs in the U.S."
Do you think the current price of gasoline is too high, too low, or about right?
26 GASPRICE
0="Too low"; 1="About right"; 2="Too high"
1.68
.63
40
Which do you think is more responsible for the recent increase in gasoline prices?
27 WHYGASSD
0="Oil companies trying to increase their profits";
1="The normal law of supply and demand"
["both" coded as 1; "neither" as 0]
.26
.89
Do you think improving the economy is something an effective president can do a lot about, do a little about, or is that
mostly beyond any president's control?
28 PRES
0="Beyond any president's control"; 1="Do a little
.92
.92
about"; 2="Something president can do a lot about"
Do you think most of the new jobs being created in the country today pay well, or are they mostly low-paying jobs?
29 NEWJOB
0="Low-paying jobs"; 1="Neither"; 2="Pay well"
.37
1.07
Do you think the gap between the rich and the poor is smaller or larger than it was 20 years ago, or is it about the
same?
30 GAP20
0="Smaller"; 1="About the same"; 2="Larger"
1.70
1.85
During the past 20 years, do you think that, in general, family incomes for average Americans have been going up
faster than the cost of living, staying about even with the cost of living, or falling behind the cost of living?
31 INCOME20
0="Falling behind"; 1="Staying about even";
.39
1.14
2="Going up"
Thinking just about wages of the average American worker, do you think that during the past 20 years they have
been going up faster than the cost of living, staying about even with the cost of living, or falling behind the cost of
living?
32 WAGE20
0="Falling behind"; 1="Staying about even";
.34
.76
2="Going up"
Some people say that in order to make a comfortable living, the average family must have two full-time wage
earners. Do you agree with this, or do you think the average family can make a comfortable living with only one fulltime wage earner?
33 NEED2EARN
0="Can make living with one wage earner";
.87
.75
1="Agree that need two wage earners"
Over the next five years, do you think the average American's standard of living will rise, or fall, or stay about the
same?
34 STAN5
0="Fall"; 1="Stay about the same"; 2="Rise"
.93
1.43
Do you expect your children's generation to enjoy a higher or lower standard of living than your generation, or do you
think it will be about the same?
35 CHILDGEN
0="Lower"; 1="About the same"; 2="Higher"
1.06
1.28
[If you have any children under the age of 30] When they reach your age, do you expect them to enjoy a higher or
lower standard of living than you do now, or do you expect it to be about the same?
36 CHILDSTAN
0="Lower"; 1="About the same"; 2="Higher"
1.30
1.30
When you think about America's economy today, do you think it is...
37 CURECON
0="In a depression"; 1="In a recession";
2="Stagnating"; 3="Growing slowly";
4="Growing rapidly"
2.59
3.10
41
Table 2: Control Variables
Variable
Econ
Black
R3
R4
R5
R6
Age
Male
Jobworry
Question
-What is your race? Are you white, black
or African-American, Asian-American or
some other race?
Yourfam5
During the past five years, do you think
that your family's income has been going
up faster than the cost of living, staying
about even with the cost of living, or
falling behind the cost of living?
Over the next five years, do you expect
your family's income to grow faster or
slower than the cost of living, or do you
think it will grow at about the same pace?
If you added together the yearly
incomes, before taxes, of all the
members of your household for the last
year, 1995, would the total be:
Yournext5
Income
--How concerned are you that you or
someone else in your household will lose
their job in the next year?
Dem
Rep
Indep
Othparty
In politics today, do you consider yourself
a Republican, a Democrat, or an
Independent?
Ideology
Othideol
Would you say that your views in most
political matters are very liberal, liberal,
moderate,
conservative,
or
very
conservative?
Education
What is the last grade or class that you
COMPLETED in school?
Coding
=1 if economist, 0 otherwise
Black=1 if black, 0 otherwise
R3=1 if R3, 0 otherwise
R4=1 if R4, 0 otherwise
R5=1 if R5, 0 otherwise
R6=1 if R6 [Asian], 0 otherwise
=1996-birthyear
=1 if male, 0 otherwise
0="not at all concerned"
1="not too concerned"
2="somewhat concerned"
3="very concerned"
0="Falling behind"
1="Staying about even"
2="Going up"
0="Slower"
1="About the same"
2="Faster"
1=$10,000 or less
2=$10,000-$19,999
3=$20,000-$24,999
4=$25,000-$29,999
5=$30,000-$39,999
6=$40,000-$49,999
7=$50,000-$74,999
8=$75,000-$99,999
9=$100,000 or more
Dem=1 if Democrat, 0 otherwise
Rep=1 if Republican, 0 otherwise
Indep=1 if independent, 0 otherwise
Othparty=1 if member of another party, 0
otherwise
Ideology:
-2="very liberal"
-1="liberal"
0="moderate"
1="conservative"
2="very conservative"
3="don't think in those terms"
Othideol=1 if Ideology=3, 0 otherwise
1="None, or grade 1-8"
2="High school incomplete (grades 9-11)
3="High school graduate (grade 12 or GED
certificate)"
4="Business,
technical,
or
vocational
school AFTER high school"
5="Some college, no 4-year degree"
6="College graduate (B.S., B.A., or other
4-year degree)"
7="Post-graduate training or professional
schooling after college (e.g. toward a
master's degree or Ph.D.; law or medical
school"