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IPA’s weekly links

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Guest post by Jeff Mosenkis of Innovations for Poverty Action

Coronavirus patient, comedian Noam Shuster, found herself at the center of an accidental social experiment profiled on the Rough Translation podcast

This was also a good reminder about the usual script when it comes to how viruses play out in poor vs. rich countries:

  • The Economist has a nice profile of Princeton economist Leonard Wantchekon, who escaped from being a political prisoner in Benin, and went on to found the African School of Economics there to make top notch econ training more accessible. But you can read his story in his own words: He’s posted the introduction and chapter 7 of his book here.
    • One of the points made in the Economist profile about the school is that talent is found all over, opportunity is not. It’s a helpful reminder that if you’re an econ researcher who relies on talented staff in another country for data collection (even if your communication goes through an American RA), a helpful thing to do is set aside some time to talk to them about their career goals and how you can help.
  • Dave Evans pioneers a YouTube paper “reaction video” format, walking the viewer through a paper – in this case, on refugee child education. And today he has a “movie trailer“-style one explaining how advance market commitments for vaccines work.
  • A good podcast from Rough Translation: Hotel Corona (Apple) about how a hotel leased to the Israeli government for recovering Corona patients became a nation-captivating social experiment and unwitting reality show.

 

Click through for this thread of the best historical U.S. Congressional facial hair, you won’t be sorry.

 

The post IPA’s weekly links appeared first on Chris Blattman.



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Escaping Paternalism Book Club: Part 1

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Summary

Rizzo and Whitman (R&W) begins with a primer on the “new paternalism” – the influential policy reform movement powered by the engine of behavioral economics.

For most of history, paternalists have drawn their support from religious or moral notions of goodness. They have claimed special knowledge, from God or some other source, about how people ought to live. The overtly religious character of temperance movements in the nineteenth and early twentieth centuries exemplifies this kind of “old” paternalism. Given their moral convictions, the old paternalists did not usually appeal to the preferences and desires of those whose behavior they wished to regulate. The very desire for alcohol – or drugs, or deviant sex – was condemned directly.

[…]

Behavioral economists, like most economists, still accept subjectivism. However, they have rejected the notion of accurate preference revelation. Experimental evidence suggests that individuals may systematically deviate from the behavior that would best satisfy their own preferences. The list of alleged deviations from strict rationality includes – but is not limited to – status quo bias, optimism bias, susceptibility to framing effects, poor processing of information, and lack of willpower or self-control. To the extent that these phenomena cause people to make errors, paternalist policies can in principle help them to do better – not by some exogenous standard, but by their own standards. This is the defining feature of new paternalism that distinguishes it from the old: the new paternalists claim to help people better achieve their own preferences, not someone else’s.

Cass Sunstein and Richard Thaler are the popular and intellectual leaders of the new paternalists.  As R&W succinctly explain:

Cass Sunstein and Richard Thaler, coming from an economic perspective, support policies that will make people better off “in terms of their own welfare.” That welfare is best advanced by the choices people would make “if they had complete information, unlimited cognitive abilities, and no lack of willpower” (Sunstein and Thaler 2003, 1162). In other words, Sunstein and Thaler define the correctness of choices in terms of what people would choose for themselves – if only they were not afflicted with cognitive biases.

New paternalists then present novel rationales for a wide range of government interventions.  For example, they advocate “sin taxes” to help not society, but the “sinners” themselves.  Fat taxes help fat people weigh what they “really want to weigh.”

R&W close the chapter by explaining their multi-stage argumentative strategy.

Our case will consist of a series of challenges – in effect, hurdles that behavioral paternalist proposals must clear in order to be justified as a matter of policy. We will begin with the most abstract and conceptual, then proceed to more pragmatic and applied challenges.

The most abstract: Behavioral economists take simple models of rational choice too literally.

We refer to the traditional economic definition of rationality, adopted by mainstream and behavioral economists alike, as “puppet rationality.” It is a brand of rationality well suited for building models of how the world works. Models are not unlike stage plays, and puppets are the players. The puppets are always well behaved. They play the roles they were designed to play. They follow the rules. They have no motive force of their own. Real human beings, however, are not puppets. Their preferences and behavior may deviate from what is expected of agents in a model. But such deviation does not provide sufficient warrant for deeming them irrational.

But even if standard notions of rationality are solid, the much-hailed experimental evidence is sorely lacking in external validity:

Much of the evidence for “failures of rationality” derives from experimental settings that are effectively context-free. Such experiments may identify “raw” or unmodified propensities in human behavior in the laboratory. But they do not tell us how strong those propensities are “in the wild,” where people make real decisions…

We also argue that people are often (though not always) aware of their cognitive biases, and sometimes they act to counteract or control them. People “self-debias” in myriad and idiosyncratic ways…

Pragmatically, R&W argue that the new paternalism suffers from a massive yet neglected knowledge problem.  Most fundamentally: “If actions do not reveal preferences, then what does?”

Last, the book explores public choice and slippery-slope problems with paternalism in great detail.

This is only Chapter 1.  In Chapter 2, R&W appeal to “inclusive rationality” to critique behavioral economics at its root.

Are human beings rational? …But it is not easily answered, because the word “rational” has many meanings. Rationality can simply mean purposefulness, that is, trying to use the best means available to satisfy your goals or preferences given your beliefs about the world. It can mean taking an abstract approach to solving problems, applying universal systems of thought and inference, and following scientific methods. It can mean avoiding errors of logic and reasoning. It can mean revising one’s beliefs in accordance with Bayes’ Rule. It can mean having preferences that conform to certain axioms – transitivity, completeness, and so forth – which together guarantee the preferences are internally consistent and have a certain structure. In neoclassical economic theory, it has historically meant all of the above.

[…]

In this book, we will defend what we call inclusive rationality. Inclusive rationality means purposeful behavior based on subjective preferences and beliefs, in the presence of both environmental and cognitive constraints. This notion of rationality preserves the core notion of purposefulness, and in that sense it should seem familiar. But unlike other notions of rationality – many of which were invented for modeling purposes but have since taken on a life of their own – inclusive rationality… allows a wide range of possibilities in terms of how real people select their goals, form and revise their beliefs, structure their decisions, and conceptualize the world.

They continue:

[R]eal people may do all of the following and still qualify as inclusively rational:

  • Experience internal conflict that has not yet been (and may never be) resolved;
  • Have preferences that change over time;
  • Have preferences that are indeterminate or incomplete – i.e., that do not specify attitudes over all possible decisions at all possible times and states of the world;! Have preferences that are in the process of being created or discovered;
  • Have preferences that depend on context, including both the options available and the way in which decisions are framed;
  • Hold beliefs that serve purposes other than truth-tracking, such as providing motivation or intrinsic satisfaction;
  • Make inferences based not on the strict rules of classical logic, but on contextual and linguistic cues they have learned from human interaction;
  • Indulge “biased” modes of decision-making when the costs are low and rein them in when the costs are high;
  • Economize on scarce mental resources by refusing to impose perfect consistency on their preferences and beliefs;
  • Structure their environments, possibly in ways that constrain their own choices;
  • Adopt personal rules and resolutions that create internal incentive systems;
  • Enlist the help of friends, family, and other groups to assist in attaining goals;
  • Rely on institutions, social customs, and market structures to assist in attaining goals;
  • Employ heuristics that minimize cognitive effort and/or informational input.

R&W are well-aware of the methodological objection:

Because our notion of inclusive rationality is very broad, we might be accused of offering a theory that cannot be falsified. We should therefore clarify that we do believe positive claims should, in principle, be falsifiable. But some claims are more easily tested than others, and there is no guarantee that the most easily tested claims are also normatively relevant.

In Chapter 3, R&W flesh out this critique in great detail.  To take one example: In real life, people often seem to change their preferences.  Yet behavioral economists either refuse to consider this possibility, or treat changing preferences as ipso facto “irrational.”

The second interpretation is that the agent’s preferences have simply changed over time. In other words, if someone chose A over B on Monday but B over A on Tuesday, that could be the result of consistent (complete and transitive) preferences on Monday, and a different set of consistent (complete and transitive) preferences on Tuesday.

In general, economists resist preference change as an explanatory strategy because it feels ad hoc. Virtually any change in behavior can be rationalized as resulting from changing preferences, but economists usually wish to show the reasons why behavior may change even if tastes do not – for example, because of changing relative prices. To resort to saying preferences have changed seems like cheating. These are valid concerns from a positive perspective. But from a normative perspective, they hold little weight. There is no reason a person’s preferences should remain fixed. Rational people may change their minds – and we have not encountered anyone arguing otherwise.

Critical Comments

1. Escaping Paternalism focuses almost entirely on the “new paternalism.”  Yet the more I read the book, the more I concluded that “new paternalism” is largely an attempt to repackage “old paternalism” for an elite, secular audience.  Even today, no more than 5% of people who want to forcibly reduce alcohol consumption think they’re helping heavy drinkers “achieve their true preferences.”  Instead, they seek to give drinkers “what they need, instead of what they want.”  The main audience for the new paternalism is: meddlers who also have an ideological ax to grind against the want/need distinction.

2. On present bias, behavioral economists don’t go far enough.  It’s not enough to have exponential discounting rather than hyperbolic discounting.  Instead, I say the rational discount rate for utility is no time discounting at all.  Contrary to what you may have heard, this would not lead you to starve to death.  And you should still discount for uncertainty, finite life, and so on.  But, pace Hume, ’tis contrary to reason to prefer a present pleasure to a future pleasure solely because the present is now and the future is later.

3. R&W repeatedly mention behavioral economists’ support for mandatory “cooling-off periods.”  I wonder how many behavioral economists have ever examined how often people even take advantage of this opportunity to cancel a contract.  The last time I refinanced, we had to sign paperwork apprising us of our right to renege.  When I asked the banker how often people exercised this right, he furrowed his brow and laughed, “Never.”  I believed him.

4. R&W repeatedly discuss behavioral economists’ support for “employee-friendly” labor contract defaults.  Given all the evidence that unemployment breeds misery, a wise paternalist would strive to “nudge” labor’s total compensation down, not up!

5. R&W insist that “inclusive rationality” is falsifiable, but I don’t think they name a single concrete counter-example.  This is arguably intentional, for they often say things like:

We do not, however, claim that everyone is always fully rational. We are happy to concede that they are not. But it is one thing to say people make mistakes; it is another to clearly and definitively identify which actions are, in fact, mistakes.

Strikingly the word “opioid” does not appear in the text.  (“Heroin” does, but sans empirics).  I sincerely wish they had provided an “inclusive rationality” take on the putative opioid crisis.

6. One of my favorite passages:

We don’t expect that every reader will find all of our challenges to paternalism equally compelling. Some may find our conceptual objections persuasive, others may see the knowledge problem as definitive, etc. But our hope is that, taking the gauntlet of challenges as a whole, readers will recognize just how tenuous the entire new-paternalist enterprise is. Behavioral paternalism’s proponents often present it as just common sense – a set of smart, simple, straightforward corrections that will make us all better off. All we’re trying to do is correct some mistakes; who could be opposed to that? But the reality is far more difficult, complicated, and even dangerous.

As you’ll see, I find the conceptual objections only moderately persuasive, but the rest of their critique is strong indeed.

7. R&W go through a lengthy list of defensible “mistakes” people make in experiments.  Let’s consider them one-by-one:

When real people take tests designed to test neoclassical rationality norms, they do not leave their inclusive and contextually shaped rationality at the testing room door. Instead, they may behave as they do in the real world. For example:

  • They may assume, in accordance with ordinary conversational norms, that experimenters provide only information that is relevant to solving the problem – i.e., no irrelevant or “tricky” information. They do not immediately assume the experimenters are trying to fool them.

Reasonable.

  • They may resist the distinction between the validity of a syllogistic inference (e.g., “People with red hair are Martians, John has red hair, therefore John is a Martian”) and the truth of a conclusion itself (John is not a Martian). Normally, in everyday life, it is the truth that is more important.

This isn’t entirely wrong, but the ability to recognize such logical errors really is a crucial real-life skill.  Anytime you propose an explanation for anything, logical reasoning opens your theory up to testing.  Even for an explanation as simple as, “If I go to McDonald’s before 7 AM, the line will be less than 5 minutes long.”

  • They may not assume that prior probabilities about something – such as the likelihood that someone has a disease – must be equal to the “base rates” from the population provided to them. Instead, their priors may be affected by their evaluation of the significance of the base rates to a particular problem in front of them – say, whether a specific person who chose to visit the doctor and chose to take a test has the disease. Treating priors in this way is fully consistent with the subjectivist Bayesian view that prior probabilities are subjective – a fact frequently ignored in the rush to deem subjects “irrational.”

Reasonable.

  • They may not agree with model-builders on the informational equivalence of different descriptions of a situation. Instead, they may infer implicit information or advice from how a problem is presented. For example, they may perceive an important difference between a stated probability of success equal to 0.7 and a stated probability of failure equal to 0.3. Perhaps the former conveys greater optimism, despite the formal mathematical equivalence of the two statements. Conversational norms and expectations do not always align with logic and probability theory. The former can be adaptive in the real world while the latter is adaptive on experimental tests. Which is more important?

Seems pretty crazy to me.  Sure, if you’re marketing a product, you’re better off saying “70% success” rather than “30% failure.”  Yes, the former phrasing suggests “greater optimism.”  The only reason such rhetoric works, however, is that some potential customers are confused.

  • They may attach satisfaction or utility to things other than what the analysts expect. For instance, they may value an object more because it is theirs already. Or they may care about feelings of gain and loss experienced during the experiment, not just how much money they have when they leave the laboratory. Or they may gain satisfaction purely from having a particular belief, irrespective of its truth (“My wife is beautiful and my children are gifted”).

Somewhat reasonable, though it’s usually tempting to call such behaviors “childish.”  Picture a kid who wants his teddy bear, not an identical teddy bear that’s a hundred miles closer.

8. While we’re on the subject, R&W never discuss children.  Are they, too, “inclusively rational”?  If so, should parents stop treating them paternalistically?  Or what?

9. Suppose someone has inconsistent preferences.  How are we supposed to identify their “real” preference?  While this might seem like nitpicking, R&W show that behavioral economists have been cavalier  at best.

Some defenses have been offered for favoring some preferences over others in cases of conflict, but we find these defenses weak:

Verbal Statements and Survey Responses: When asked, people may say they would rather behave differently or have different preferences. For instance, smokers may say they would rather not smoke, and overweight people may say they would like to eat less. It is indeed possible that these statements reveal “true” preferences. However, the incentives for speech differ from the incentives for other kinds of action. Behavioral research has cast doubt on many economic principles previously taken as given, but the principle that talk is cheap remains intact. Speakers who say one thing while doing another may simply be expressing what they regard as socially approved attitudes – a phenomenon known as social desirability bias (King and Bruner 2000; Grimm 2010). Or their statements may simply reflect “experienced opportunity cost,” i.e., the dissatisfaction that always results from options the agent has forgone.

Note: If we take Social Desirability Bias seriously – as I think we should – we can readily identify the “real” preference.  Namely: Contrary to the new paternalists, the real preference is what people really do!

Regret: A person may feel, and express, feelings of regret about the choices they have made: “I wish I had not done that.” Although regrets are real, they do not necessarily reflect all costs and benefits associated with an action.  specially for intertemporal choices, such as getting inebriated last night and having a hangover today, the regret is typically experienced while the cost is being experienced in the present and the benefit is already in the past. That does not mean the costs outweighed the benefits at the moment of choice – only that the remaining costs outweigh the remaining benefits. In addition, it’s worth noting that regret can also be felt about the kinds of choices that behavioral paternalists favor. When approaching death, people often express regret at not having lived a more spontaneous and present-oriented life (Ware 2012).

They’ve got them there!

If regret may be experienced regardless of the action taken, then it offers little guidance to the paternalist about which preferences are “true.” As with verbal statements, regret can simply reflect the experience of opportunity cost…

Self-Constraint and Commitment Devices: People will often use various devices and strategies to try to keep their vices under control: planning automatic deductions for savings, avoiding locations where they will be tempted to smoke or drink, etc. These activities do provide further evidence of conflicting preferences, and we will discuss them more in future chapters. They do not, however, show which preferences are superior. Commitment devices reveal one set of preferences at work – but other choices show other preferences at work. Furthermore, the outside observer has no means of knowing whether the right amount of self-constraint has been performed.

Planned versus Unplanned Choices: Behavioral paternalists often favor the preferences of a “planning self” over the spontaneous or “acting self.” The idea is that the planning self is more likely to take all costs and benefits into account and render a considered decision. But the planning self does not necessarily represent a disinterested party; rather, the planning self may represent only the longer-term and more self-denying parts of one’s personality (Cowen 1991). This becomes most apparent in the case of extreme behaviors such as anorexia, where the planning self dominates an acting self that might wish to indulge more often.

10. When I began Escaping Paternalism, I skipped over chapters 1-5, fearing they’d be long-winded, half-baked Austrian philosophy.  I was so impressed with chapters 6-10, however, they I started reading the book from the beginning as soon as I finished chapter 10.  I swiftly concluded that unlike so many other Austrian-inspired works, Escaping Paternalism was not only conceptually thoughtful, but eager to engage with an array of empirical literatures.  If you’re impatient with economists waxing philosophical, I urge you to make an exception here.

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What If Public Schools Were Abolished?

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In American culture, public schools are praised in public and criticized in private, which is roughly the opposite of how we tend to treat large-scale enterprises like Walmart. In public, everyone says that Walmart is awful, filled with shoddy foreign products and exploiting workers. But in private, we buy the well-priced, quality goods, and long lines of people hope to be hired.

Why is this? It has something to do with the fact that public schools are part of our civic religion, the primary evidence that people cite to show that local government serves us. And there is a psychological element. Most of us turn our kids over to them, so surely they must have our best interest at heart!

But do they? Murray N. Rothbard’s Education: Free and Compulsory explains that the true origin and purpose of public education is not so much education as we think of it, but indoctrination in the civic religion. This explains why the civic elite is so suspicious of homeschooling and private schooling: it’s not fear of low test scores that is driving this, but the worry that these kids aren’t learning the values that the state considers important.

But to blast public schools is not the purpose of this article. There are decent public schools and terrible ones, so there is no use generalizing. Nor is there a need to trot out data on test scores. Let me just deal with economics. All studies have shown that average cost per pupil for public schools is twice that of private schools (here is a sample study).

This runs contrary to intuition, since people think of public schools as free and private schools as expensive. But once you consider the source of funding (tax dollars vs. market tuition or donation), the private alternative is much cheaper. In fact, the public schools cost as much as the most expensive and elite private schools in the country. The difference is that the cost of public schooling is spread out over the entire population, whereas the private school cost is borne only by the families with students who attend them.

In short, if we could abolish public schools and compulsory schooling laws, and replace it all with market-provided education, we would have better schools at half the price, and be freer too. We would also be a more just society, with only the customers of education bearing the costs.

What’s not to like? Well, there is the problem of the transition. There are obvious and grave political difficulties. We might say that public education enjoys a political advantage here due to network effects. A significant number of “subscriptions,” etc. have been piled up in the status quo, and it is very difficult to change those.

But let’s pretend. Let’s say that a single town decided that the costs of public schooling are too vast relative to private schooling, and the city council decided to abolish public schools outright. The first thing to notice is that this would be illegal, since every state requires localities to provide education on a public basis. I don’t know what would happen to the city council. Would they be jailed? Who knows? Certainly they would be sued.

But let’s say we somehow get past that problem, thanks to, say, a special amendment in the state constitution that exempts certain localities if the city council approves. Then there is the problem of federal legislation and regulation. I am purely speculating since I don’t know the relevant laws, but we can guess that the Department of Education would take notice, and a national hysteria of some sort would follow. But let’s say we miraculously get past that problem too and the federal government lets this locality go its own way.

There will be two stages to the transition. In the first stage, many seemingly bad things will happen. How are the physical buildings handled in our example? They are sold to the highest bidder, whether that be to new school owners, businesses, or housing developers. And the teachers and administrators? All let go. You can imagine the outcry.

With property taxes abolished, people with kids in public schools might move away. There will be no premium for houses in school districts that are considered good. There will be anger about this. For the parents that remain, there is a major problem of what to do with the kids during the day.

With property taxes gone, there is extra money to pay for schools, but the assets have just fallen in market value (even without the Fed), which is a serious problem when it comes to shelling out for school tuition. There will, of course, be widespread hysteria about the poor too, who will find themselves without any schooling choices other than homeschool.

Now, all that sounds pretty catastrophic, doesn’t it? Indeed. But it is only phase one. If we can somehow make it to phase two, something completely different will emerge. The existing private schools will be filled to capacity and there will be a crying need for new ones. Entrepreneurs will quickly flood into the area to provide schools on a competitive basis. Churches and other civic institutions will gather the money to provide education.

At first, the new schools will be modeled on the public school idea. Kids will be there from 8 to 4 or 5, and all classes will be covered. But in short order, new alternatives will appear. There will be schools for half-day classes. There will be large, medium, and small schools. Some will have forty kids per class, and others four or one. Private tutoring will boom. Sectarian schools of all kinds will appear. Micro-schools will open to serve niche interests: science, classics, music, theater, computers, agriculture, etc. There will be single-sex schools. Whether sports would be part of school or something completely independent is for the market to decide.

And no longer will the “elementary, middle school, high school” model be the only one. Classes will not necessarily be grouped by age alone. Some will be based on ability and level of advancement too. Tuition would range from free to super expensive. The key thing is that the customer would be in charge.

Transportation services would spring up to replace the old school-bus system. People would be able to make money by buying vans and providing transportation. In all areas related to education, profit opportunities would abound.

In short, the market for education would operate the same as any other market. Groceries, for example. Where there is a demand, and obviously people demand education for their kids, there is supply. There are large grocery stores, small ones, discount ones, premium ones, and stores for groceries on the run. It is the same for other goods, and it would be the same for education. Again, the customer would rule. In the end, what would emerge is not entirely predictable—the market never is—but whatever happened would be in accord with the wishes of the public.

After this phase two, this town would emerge as one of the most desirable in the country. Educational alternatives would be unlimited. It would be the source of enormous progress, and a model for the nation. It could cause the entire country to rethink education. And then those who moved away would move back to enjoy the best schools in the country at half the price of the public schools, and those without children in the house wouldn’t have to pay a dime for education. Talk about attractive!

So which town will be the first to try it and show us all the way?

[This article was originally published April 7, 2008]



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Economists Think Congress Could Create An Economic Disaster This Summer

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Congress has less than a month to hammer out a deal on the next round of stimulus before expanded unemployment benefits expire. State and local governments are starting to feel the pinch of budget shortfalls. And while the U.S. got a piece of (relatively) good news in last week’s jobs report, which featured an unemployment rate 2.2 percentage points lower in June than it had been in May, the economy has been thrown back into chaos in the meantime, with a number of states pulling back on their reopenings amid spiking COVID-19 infections and hospitalizations.

Our newest survey of economists highlights just how consequential governmental decisions over the next month may be: On average, these economists think that a refusal by Congress to extend unemployment benefits or bail out state and local governments is just as likely to hurt the economy as local economies staying open in spite of COVID-19 spikes — or even closing because of the virus.

In partnership with the Initiative on Global Markets at the University of Chicago Booth School of Business, FiveThirtyEight asked 31 quantitative macroeconomic economists what they thought about a variety of subjects around the coronavirus recession and recovery efforts. The most recent survey was conducted from July 2 through 6, which means the June jobs report was fresh on respondents’ minds — but so was the state of the pandemic, along with challenges ahead for lawmakers.

[Related: How Americans View The Coronavirus Crisis And Trump’s Response]

“There’s a distinct risk that between now and November, Congress’s ability to continue fiscal support will be very limited by election-year politics,” said Jonathan Wright, an economics professor at Johns Hopkins University who has been consulting with us on the design of the survey. “That could be more of a drag on the economy than the local and state shutdowns just because the effect would be so huge.”

With a congressional showdown looming, we asked the experts to estimate the probability that several policy decisions would have the biggest negative impact on U.S. gross domestic product in the fourth quarter of 2020. Among the five options we presented, the single most important to the economists was a decision by state and local governments to reclose their economies because of COVID-19 outbreaks. But a decision by Congress not to provide funding to state and local governments was close behind. And the weight given to choices made by the federal government — bailing out local governments, extending unemployment insurance and providing ongoing aid for small businesses — added up to be even more important when taken as a whole:

What are the biggest economic risk factors by year’s end?

Average probabilities that each scenario would have the largest negative impact on U.S. GDP in the fourth quarter, according to economists

Local or state response options Avg. Probability
Decision to reverse local economic openings due to COVID-19 spikes 26%
Decision to keep local economies open despite COVID-19 spikes 17
Total 43
Federal response options
Not providing funding for state and local governments* 23%
Ending/reducing expansion of unemployment benefits 20
Ending/cutting back on aid to small businesses 14
Total 57

* Funding to address budget shortfalls associated with COVID-19.

The survey of 31 economists was conducted July 2-6.

Source: FIVETHIRTYEIGHT/IGM COVID-19 ECONOMIC SURVEY

“[State and local governments] are facing severe budget crises and will be laying off workers to balance their budgets,” said Julie Smith, a professor of economics at Lafayette College. That, she said, could lead to longer periods of high unemployment and financial pain for many households. Meanwhile, she added, cutting back or ending the federal unemployment extension would cause many people’s incomes to decline dramatically, leaving them with much less money to spend — which could make a big dent in GDP.

Perhaps for this reason, there’s a lot of uncertainty in the economists’ fourth-quarter real GDP predictions. When we last asked the panel for its forecast, it thought that GDP would be growing by 4.1 percent at the end of the year, a big improvement from the -28.2 percent quarter-over-quarter annualized growth it foresaw for the second quarter of 2020. This time around, the panel is calling for less negative growth (-25.5 percent) in the second quarter and a very similar fourth-quarter growth rate to last time (3.8 percent). But the range around that end-of-year forecast has gotten a lot wider — a sign of just how much things could go wrong. The gap between our consensus forecast’s 10th and 90th percentile predictions for fourth-quarter GDP growth was 10.9 percentage points in the last survey; now that gap is 12.8 percentage points, with almost all of the extra uncertainty coming in the form of downside risk. (The panel’s consensus 10th percentile GDP growth forecast has dropped from -2.0 percent to -3.5 percent.)

[Related: Voters Who Think The Economy Is The Country’s Biggest Problem Are Pretty Trumpy. That Might Not Help Him Much.]

The economists weren’t especially optimistic about the trajectory of the unemployment rate over the course of 2020, either. The consensus prediction was that the unemployment rate in December would be 10.1 percent, which is only 1 percentage point lower than the rate in June — and is still comparable to the unemployment rate at the height of the Great Recession. Stephen Cecchetti, a professor of international finance at the Brandeis International Business School, pointed out that workers are increasingly likely to be losing their jobs permanently, rather than temporarily, which will make it harder for them to get back into the labor force. And he added that it will take time for the economy to adjust to a new reality where working from home is the norm, which could also keep the unemployment rate from falling quickly. Cecchetti was also among the economists who thought that in a worst-case scenario, the unemployment rate could skyrocket again by the end of the year.

“There are a lot of people who haven’t been exposed to the virus,” he said. “It’s not hard to imagine new outbreaks in places like New Jersey or Massachusetts that force us to shut down all over again.”

About half of the economists in the survey also thought the country’s top earners would end the year with an even greater share of the nation’s personal income. In order to get a sense of how much the panel thought the COVID-19 recession would increase income inequality, we asked about a new metric created by the Bureau of Economic Analysis, which found that in 2016, households in the top 10 percent of incomes (adjusted for household size) accounted for 37.6 percent of the country’s personal income. Fifty percent of the respondents thought this number would be significantly higher by the end of 2020 as a result of the COVID-19 pandemic, while 47 percent thought it would be about the same. Only one respondent thought it would be lower.

“My best guess is that this pandemic is going to worsen income inequalities,” said Sarah Zubairy, a professor of economics at Texas A&M University. She hypothesized that this was because job loss has been concentrated among lower-wage workers who can’t do their jobs remotely, and who may find themselves ricocheting in and out of the labor force if states have to abruptly pull back their reopening plans.

[Related: The Economy Is A Mess. So Why Isn’t The Stock Market?]

And in another sign that the U.S. has been knocked off course by the virus — and the subsequent leadership response — our survey panel overwhelmingly believes (with 90 percent agreement) that China will beat both America and the European Union on the road back to pre-crisis real GDP levels. In retrospect, according to Wright, this was kind of a “no-brainer” because China’s economic growth so far has been quite swift, and it has tools to enact sweeping fiscal stimulus that aren’t available to less centrally controlled economies like the U.S. or the E.U. But some of this might also be based on the Chinese government’s reputation for — how should we put this? — releasing overly favorable public data. “When all is said and done, if they don’t like the actual data they can fudge the numbers,” Wright said. “Put those three things together, and there’s almost no way they can’t be the first back.”

Wright also pointed to another ominous result in the survey: 19 percent of respondents thought that the 10-year average real U.S. GDP growth rate would be reduced by 1 to 2 percent per year. To be sure, the vast majority (77 percent) of economists thought the 10-year average growth rate would be reduced by less, although only one person thought it would go up. But the responses were still alarming, Wright said, because they indicated a serious degree of pessimism about the speed with which the economy will not just return to where it was at the end of 2019, but also catch up with where it would have been if the COVID-19 pandemic hadn’t happened.

[Related: In 2008, Everyone Thought The Recession Was Bad. But in 2020, Many Americans’ Views Depend On Their Party.]

However, Allan Timmermann, professor of finance and economics at the University of California, San Diego — who has also been consulting with us on the survey — was encouraged that the majority of respondents didn’t expect more long-term damage to growth. “This is still a large impact in terms of its cumulative effect on the economy,” he wrote in an email. “But it does suggest that most respondents think the economy will bounce back in due course — as opposed to leading us to a ‘lost decade’ scenario (as we have seen in Japan) with growth slowing down by an even larger amount.”

Overall, though, the latest survey responses paint a picture of America’s still-precarious road back to economic health. So much depends on the course of COVID-19 itself and how much the virus forces local economies to shut down again to slow its spread. But a lot is also riding on important policy decisions around the virus, which are still being debated. “I think economists have been surprised so far by the pace of the rebound,” Wright said. “But that hasn’t made them less worried about the weeks or months ahead.”


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