Tuesday, September 29, 2009

More detail about recession and attitudes...

One interesting tidbit revealed in the General Social Survey I posted about recently was which cohorts are most affected.  Surprisingly, there is a key age for attitudes to be powerfully and firmly fixed.
The attitudinal effect of recessions is not evenly shared.
Four points are worth noting.
    •    First, the effects of a severe recession experienced are large when the individual is between the ages of 18 and 24 – the so-called formative age – during which social psychologists think most of social beliefs are formed; the effects are not so strong when the recession is experienced later in life.
    •    Second, these effects are permanent because attitudes of recession-stricken individuals remain significantly altered many years after the severe recession ends.
    •    Third, we control for individuals’ endowments such as income, level of education, and ownership of a house that could also have an impact on beliefs. We thus measure the direct effect of a recession on beliefs; this effect could be even bigger if we added also the indirect effect through the personal endowments, which are also affected by a recession.
    •    Fourth, our estimation represents a lower bound of the effect of a recession on beliefs because our identification strategy relies only on regional shocks implicitly ignoring the effects of nationwide recessions.
Focusing on the financial market and using nationwide shocks, Ulrike Malmendier and Stefan Nagel (2009) shows that that birth cohorts that have experienced high stock market returns throughout their life report lower risk aversion, are more likely to be stock market participants, and, if they participate, invest a higher fraction of liquid wealth in stocks. In addition, cohorts that have experienced high inflation are less likely to hold bonds. Interestingly, stock market returns and inflation early in life affect risk-taking several decades later. These findings explain why different generations have different investment patterns.
Why do beliefs on the importance of luck, the role of the state, and redistribution matter for the economy? Today’s experiences and beliefs shape tomorrow’s political climate, and, ultimately, determine policies. Thomas Piketty (1995) has shown that people who believe that luck plays a big role are more comfortable with higher taxes. Similarly, Alesina and Angeletos (2005) and Benabou and Tirole (2006) show that the interaction between a belief in fairness or “in a just world” respectively are able to generate an “American” equilibrium with laissez-faire policies and just-world beliefs and a “European” equilibrium with social welfare and a more pessimistic view about how just the world is.
A new Big Government generation?
So, it is possible that the experience of the current severe recession is forming a generation that will be more risk -verse, invest less in the stock market, want more state intervention, believe more in redistribution, and accept higher taxes?
Large political realignments in the US have often coincided with traumatic economic events, which were supposed (but without firm evidence so far) to change attitudes and, ultimately, the political climate. Each crisis is a point of choice with important implications for the future.3 A consistent body of research is now showing how economic conditions affect beliefs and attitudes. However, it seems that politicians around the world are welcoming the new zeitgeist even without waiting for economists’ results. [More]

Assuming these young people vote in increasing numbers as they age, this effect would seem to predict an America that drifts socially and politically closer to Europe - or at least the Europe we see today.

More ominously for fiscal hawks and libertarians, even conservatives may be coming around to the realization that unless you raise taxes (inflict economic pain) there will be no budget cutting.

Therefore, it is simply stupid and a waste of time to say that massive budget cuts are the answer to our problem without taking account of inevitable congressional resistance. Of course, presidents can try to influence Congress to be more supportive of their requests. They can give speeches to joint sessions of Congress, as Barack Obama recently did, or go over the heads of Congress to the people and try to create grass roots pressure, as Ronald Reagan often did, or they can try to pressure, cajole or threaten individual members of Congress the way Lyndon Johnson did. But at the end of the day, a president has to find at least a majority of congressmen and senators to vote for something or it doesn't become law.
Devising a package of budget cuts large enough to prevent national bankruptcy must also deal with other realities that make them almost impossible to achieve. These include the changing nature of the federal budget and the changing composition of the population.
Many of those favoring budget cuts have ridiculous notions about how much of the budget can be cut without reducing services. A recent Gallup poll found that Americans generally believe that 50% of the budget is wasted. This suggests that they believe the federal budget could be cut in half without cutting anything important like Social Security benefits or national defense. [More]

Unrealistic political beliefs and major attitude shifts coupled together could have a profound influence on how everything works here in the US. My guess is it would slow economic mobility while stabilizing a social safety net.

For farmers, I would suggest the days of starting from scratch could be over, as the forces that generate turnover and opportunities for new entrants are mitigated by government programs.  In other words, them as has, keeps.  

This is the essence of "stability" in most minds, even as we advocate vigorous competition to allow us to get more. The allure of stability may now outshine opportunity.


Anonymous said...

Surprisingly, there is a key age for attitudes to be powerfully and firmly fixed.
The attitudinal effect of recessions is not evenly shared.

This post reminds me of the axiom;
The only thing worse than experiencing the great depression is being a child of someone who expereinced the great depression.

Anonymous said...

I recently read an article from the Tax Foundation which pretty much explains where we are with our governmental budget problems. Those of us in the "real world" generally look at our estimated income and use that to decided which expeditures we can afford and which we cannot. However, the budgeting process in government is the exact opposite. Government programs are given an estimated cost, thrown in a budget, and then another committee decides whether or not they can tax the people enough to afford the program. How did we get to this point in time? Please tell me the end is near!