Economist Mom: The Psychology of Deficit Reduction

Blog Post
Monday, December 10, 2018

In the latest "Economist Mom" segment on Facing the Future, Diane Lim discussed some of the reasons that politicians and the public are often overly optimistic about federal deficits and the economy.

“Traditional economic theory would say. . .people should be rational about this,” said Lim, a principal at District Economics Group and former chief economist for The Concord Coalition. “They should be looking over the long term and they should see that the costs of deficit-financing outweigh the benefits.”

“But, of course, in the real world. . .people tend to be much more short-sighted,” she said.

Lim also said that largely because of voter behavior, lawmakers believe they are more likely to attract support if they propose tax cuts or benefit increases.

During the program segment, we played a short clip of Bing Crosby’s “Ac-Cent-Tchu-Ate the Positive.”

“Americans. . .tend to be more optimistic,” Lim said. “But when it comes to the deficit issue and government borrowing in particular, our optimism . . . our faith in the short-term economy. . . becomes a problem.”

Lim pointed to behavioral economics and the concept of “confirmatory bias,” which is when someone who has settled on a position grasps onto anything that supports it and screens out any new information that is contrary to that view.

“It's something you find happens on both sides,” said Concord Coalition Executive Director Robert L. Bixby, who joined the discussion.

Bixby said the tendency to accentuate the positive and eliminate the negative, as Bing Crosby sang, is difficult for politicians and the public to resist.

“That’s fine in song...but when you're thinking about fiscal policy...you can get into big trouble,” he said. “I think that has something to do with why we are facing trillion-dollar deficits for as far as the eye can see right now.”

He added: “If you're counting on a rosy scenario to make your numbers work, and the rosy scenario doesn't come to pass, the numbers are going to be even worse.”

Bixby, reflecting on the legacy of the late President George H.W. Bush, said he was vilified by some fellow Republicans and given no credit by Democrats at the time for his 1990 bipartisan budget deal.

Many believe that was one of the reasons why Bush did not win reelection. Bixby said that may have set a dangerous precedent for future presidents, leading them to believe a bipartisan, common-sense budget deal will get them into trouble.

Lim said politicians have “abandoned the notion of good government coming from both parties. They start to view it as a contest . . . one will win and one will lose.”

Hear more on Facing the Future. I host the program each week on WKXL, NHTalkRadio.com (N.H.), and it is also available via podcast. Join me and my guests as we discuss issues relating to national fiscal policy with budget experts, industry leaders, elected officials and candidates for public office. Past broadcasts are available here. You can now subscribe to the podcast on iTunes, Google Play or through RSS.

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