I read a very interesting Chris Dillow article, On Misunderstanding Economics. It is based upon research that shows that people are very confused about how economics work. The most obvious example of this is the idea that the macro-economy is like a household. This is where we get this nonsense from Obama in 2009 when we were still deeply in recession saying, “All across America, families are tightening their belts and making hard choices. Now, Washington must show that same sense of responsibility.” It sounds right, but it is totally wrong. It’s fine for me to tighten my belt when I’m trying to pay down my debt, but when everyone does it — when your spending is my income — it doesn’t work.
In addition to this, people make associations. For example: inflation and unemployment are both bad, so people put the two things together and think there is a correlation. That’s not true, of course; it is generally the opposite. Similarly, they associate government spending with unemployment. Again: exactly the opposite of the way things are. People are deeply confused about economics. And what I’ve noticed in my life is that those who think they understand economics the best are usually the most confused. It is a classic example of a little knowledge being a dangerous thing.
But it comes as no surprise to me that all of these misunderstandings lead to conservative policy. I think a large part of this is because conservatives run around saying that these things are correlated. For example, for decades, conservatives have claimed that tax cuts for the rich will cause economic growth because the rich will use the extra money to create jobs. They’ve been so successful at this propaganda that they no longer even have to explain why tax cuts for the rich will lead to more jobs. It is just “common sense” that tax cuts for the rich will create jobs.
The issue with government “belt tightening” is a great example. It isn’t hard to make people understand this. If everyone spends less money, everyone will see the amount of money they earn go done. As a result, everyone will have less money to pay their debts. But the debts themselves will not get smaller. Thus, everyone spending less will actually make the debt problem worse. Indeed, we have seen this in a number of EU countries, where they’ve cut their spending savagely, only to end up owning more money relative to their GDPs. This is not hard to understand.
The problem is that the our media infrastructure is totally vested in believing the “common sense” that “families are tightening their belts and making hard choices” so “Washington must show that same sense of responsibility.” No one goes around saying that billiard balls move according to Newton’s laws of classical mechanics so quarks must too. Everyone understands that reasonable sounding analogies don’t necessarily work. Indeed, I don’t know of any economist who claims that the macro-economy acts the way that a household economy does. But conservatives who have a vested interest in pushing bad economic policy are allowed to do so. And that’s the reason that people misunderstand economics.