Do voters have a conservative bias rather than a pessimistic bias?

This post further considers the question of whether most people have a pessimistic bias, which was discussed in my last post.

Bryan Caplan defines “pessimistic bias” as “a tendency to overestimate the severity of economic problems and underestimate the (recent) past, present, and future performance of the economy” (“The Myth of the Rational Voter”, 2007: 44). On reflection, however, it seems to me that Caplan’s discussion relates to two separate questions: whether people are generally too pessimistic about economic performance in the recent past, the present and the near future; and whether people are unduly susceptible to arguments appealing to nostalgia, and to gloom and doom prognostications. I argue below that Caplan’s answer to the first question is probably wrong and that the second question has more to do with loss aversion than pessimism.

As discussed in my last post, Caplan’s argument that people are too pessimistic about economic performance rests mainly on a survey which showed that economists were more optimistic about short-term economic prospects than the general public. As subsequent events have shown, the economists were probably too optimistic. Moreover, the survey results do not seem to me to suggest that the American public were particularly pessimist about economic prospects at the time of the survey. In an earlier post, ‘Would a chain index provide a better guide to change in the quality of life’, I argued that surveys conducted by the Pew Research Center imply that over the last 30 years Americans have tended to perceive their quality of life to be rising more rapidly that per capita GDP. If anything, this would suggest an optimistic bias, rather than a pessimistic bias.

I therefore reject the view that people generally have a pessimistic bias in considering short-term economic performance. I think there is probably a pessimistic bias at present, but as a rule I expect that public opinion about economic prospects is as much prone to irrational exuberance as to irrational pessimism.

I think Caplan is probably on much firmer ground in relation to the second aspect of bias – susceptibility to arguments appealing to nostalgia, and to gloom and doom prognostications. It seems to me that the common element here is fear of change, or more precisely, loss aversion. Research by Daniel Kahneman and Amos Tversky has shown that most people will reject a gamble with even chances to win and lose, unless the possible win is at least twice the size of the possible loss (refer Kahneman’s Nobel Prize lecture p 461). It seems reasonable to speculate that such considerations impart a conservative bias to political choice.

Some of my “conservative” friends might think that a conservative bias among voters should be encouraged. I am not so sanguine because a conservative bias - a bias in favour of the status quo - tends to favour retention of government regulation that has outlived its usefulness (if indeed it was ever useful). A conservative bias may also tend to favour increased regulation to prevent changes that some groups fear – whether economic, social or environmental – irrespective of cost.

Postscript:
I have been reminded that Milton and Rose Friedman wrote a book entitled "The Tryanny of the Status Quo" in 1982. This "tyranny" was seen to be the result of the the actions of politicians, bureaucrats and special interest groups who advance their own interests at the expense of the public.

Do most people have a pessimistic bias?

I did not respond enthusiastically when Jim said that he wanted further discussion of Bryan Caplan’s book, “The Myth of the Rational Voter”. I told him that I was looking forward to talking about something else, like the recent research that suggests that happiness is contagious, but Jim was not to be distracted.

After referring to an earlier conversation (reported here) Jim said: “I accept Caplan’s view that most people have an anti-market bias, an anti-foreign bias and a make-work bias, but I’m not too sure what to make of his claim that most people have a pessimistic bias. How does he support that?”

I explained that the main support came from a survey of the attitudes of economists and the general public in America. Economists were much more optimistic than the public on questions such as whether you expect your children’s generation to enjoy a higher standard of living than your own and whether you expect the average American’s standard of living to rise or fall over the next five years.

I didn’t think what I had said was funny, but Jim burst out laughing. After he composed himself he asked: “What grounds did those economists have for being so optimistic?”

My response was that there has been a vast improvement in living standards in many countries over the last 200 years. Adam Smith was right when he said that efforts of everyone to better their own conditions is often powerful enough to maintain “the natural progress of things toward improvement” despite the failures of government. Over the years some very prominent economists have forecast the stagnation or secular decline of market economies, but subsequent events have always proved them to be wrong.

Jim then said: “I can see that optimism is justified if you take a long enough time frame and have faith that the average voter will not elect populist politicians who are likely to regulate economic incentives out of existence. But economists who share Bryan Caplan’s views about the irrationality of voters do not have grounds to be optimistic, do they?”

I don’t know whether or not that question was meant to be answered. I suggested that even now there are probably stronger grounds to be hopeful about the future than, say, 30 years ago. Markets are a lot more flexible now as a result of reforms introduced in the 1980s and 1990s. I added that all we need to get out of the bubble–bust cycle is for central banks to introduce monetary policy rules that will have a stabilising effect, rather than a destabilising effect.

Fortunately Jim didn’t ask what would be wrong with a monetary policy rule that interest rates should be determined by market forces in the same way that other prices are determined in a market economy. It would have been a good question for Jim to ask, but it is just as well he didn’t ask it because I don’t have an answer.

As usual, Jim had the last word. He said: “You know how every generation has a tendency to be pessimistic about the next generation.” I nodded and he continued: “From the beginning of history old people have always been talking about the good old days when young people used to have good manners and respect for their elders. Well, I actually don’t think that there is much wrong with the younger generation these days. If only they could learn to hold their liquor as well as we could when we were young, then they wouldn’t be too bad.”

Postscript: Jim has actually not had the last word this time. There is further discussion of this question in my next post.

What was Sandy Cuthbertson like?

Most people who knew Sandy would say that he was outgoing, witty and courageous. He was a good-humoured person. He had the knack of getting people to laugh along with him within moments of meeting them. Above all, he was a good family man, a wise economist and a loyal friend.

I expect that everyone who knew Sandy would have a slightly different view of what he was like. I first met him in 1963 when we were both studying agricultural economics at the University of New England (Armidale, NSW, Australia). Apart from our studies I don’t think we had a great deal in common at that time. I can remember him giving me some critical feedback – probably appropriate – about something I had written for the student newspaper. He wasn’t backward in saying what he thought even then, but he had a pleasant personality and a well-deserved reputation for his sense of humour.

After Sandy graduated from the UNE he went to the U.S. to do a Ph. D. in economics at North Carolina State University. I went to Canberra to work in the Bureau of Agricultural Economics (BAE) and then back to the UNE to do a masters degree. By the time I got back to the BAE, at the end of 1971, Sandy was also working there.

Sandy came back to Australia with a mission to over-turn the prevailing mind-set that the role of economists was to find market failures and to propose remedial government regulation. He presented the then innovative view that additional regulation often made matters worse. For example, the beneficiaries of regulation were often able to use political muscle to ensure that regulatory experiments were continued long after it was clear that the costs of regulation far exceeded the benefits.

Sandy would not have found the BAE to be a particularly fertile place to spread such wisdom. He soon moved to the Industries Assistance Commission (which later became the Industry Commission and then the Productivity Commission). I followed in 1975, joining a different research division of the Commission. There was a fair amount of creative tension – usually friendly – between the different divisions of the IAC, resulting from overlapping responsibilities. Sandy thrived in that environment and established a reputation for being a hard-working and innovative researcher, an entertaining writer and a talented team leader. He certainly brought out the best in the people in his team.

Sandy left the IAC in 1986 to become a founding director and managing director of the Centre for International Economics.

Sandy and I managed to collaborate successfully in 1983 on the one major project on which we worked closely together. We jointly led a project team to prepare a report on the structure of industry assistance in New Zealand for Syntec Economic Services and the NZ Treasury. We had no difficulty in agreeing at an early stage on membership of the project team, the analytical framework, the work plan and the report structure. We put a lot of effort into planning the project and didn’t leave a great deal to chance.

I had thought until very recently that the effort we put into planning that project was largely the result of my own insistance. But I now know that Sandy always put a lot of effort into planning of projects. An outside observer, who was not part of his team, might think the process was spontaneous - perhaps even chaotic - but Sandy always had a good idea where he was heading and how he would circumvent the obstacles in his path.

At a more personal level, I recall that Sandy asked me one day whether I had read John Irving’s novel, “The World According to Garp”. He recommended it highly and suggested that I make time to read some of it every day even though I was very busy. I enjoyed the book - and since then I have read just about every novel that John Irving has written. Looking back now, however, I suspect that what Sandy was really telling me was not so much that this was a great novel, but that I needed to get more humour into my life.

What more can I say? It was a privilege to have known Sandy Cuthbertson and to have enjoyed his friendship.

How can governments raise the quality of public debate in order to achieve worthwhile reforms?

Following from our recent discussions about Bryan Caplan’s book, “The Myth of the Rational Voter”, Jim said he wanted to ask me what I thought a reform-minded government could do to raise the quality of public debate in order to overcome problems posed by lack of public understanding of economic issues. I suggested that there were not many reform-minded governments around these days, but Jim made it obvious that he did not think that remark was worthy of a response. He said: “I have read a post on your blog about ‘institutionalised transparency’. After I managed to work out that the post had nothing to do with the number of windows in public institutions, I found it quite interesting. So I have got some questions I want to ask you.”

I thought that what Jim had in mind was a casual conversation, but he produced a piece of paper with three questions written on it. “I’m not interested in your top-of the-head comments”, he said, “I want you to give a thoughtful one-page response to these questions on your blog.” Anticipating that I might say that there are better things to do at the seaside on a summer’s day, he added: “Just remember that you used to tell people that you found your work so interesting that you would be willing to do it for nothing!”

Question 1: Why do you think a transparent public inquiry process would raise the quality of public debate, given that the vast amount of policy-related research that is already publicly available has not achieved this?

Answer: The public inquiry process ensures that the results of relevant research are brought to bear at the most appropriate time and in the most appropriate way. The advice resulting from the process is directly relevant to the government’s policy agenda because it is provided in response to questions posed by the government. It comes from an authoritative source - independent of government, political organisations, industry organisations and interest groups - that is required to consider the interests of the whole community, rather than the interests of particular industries or groups. It is produced by competent professionals who are capable of presenting their understanding of the issues involved in a way that can be readily understood by politicians, journalists and interested members of the general public.

Question 2: What are the critical requirements for such an organisation to be effective in raising the level of public debate?

The most critical requirement that has not already been mentioned is transparency. The whole advisory process is open to public scrutiny, not just the questions posed by government and the Commission’s final report. The Commission publishes its preliminary views on the scope of the inquiry, submissions by interested parties are made public, a draft of the Commission’s report is published and responses to the Commission’s report are also made public.

This transparency provides an incentive for all involved in the process to lift their game. When interest groups make submissions to politicians behind closed doors their most influential arguments often emphasise the likely effects of their policy proposals on gullible voters in marginal electorates. When policy issues are exposed to the transparent advisory process, however, interest groups have an incentive to consider whether the views they present are likely to be able to withstand public scrutiny by critical professionals who are interested in the economy-wide effects of policy proposals.

Question 3: Where is the evidence that Australia’s productivity commission has been effective in raising public understanding of economic issues?

The Commission answers this question in its annual reports ( see particularly, pages 43 – 48 of the 2007-08 annual report). The fact that media coverage of the Commission’s reports is fairly extensive (p 48) suggests that it capable of having a positive effect on public understanding of issues.

However, I must come back to the point I was alluding to when Jim raised this question. The Commission functions most effectively when we have a reform-minded government that is interested in raising the quality of public debate on complex issues.