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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
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.
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 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 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: anti-foreign 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 counter-productive 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 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.
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.
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-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 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 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 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.