What Does the Public Know about Economic Policy, and How Does It Know It?

Article excerpt

A LONG TRADITION IN economic theory models economic policy decisions as solutions to optimization problems solved by rational and well-informed agents: (1) a single policymaker minimizes a loss function subject to some constraints. Another body of literature models policy decisions as if they were made by well-informed voters in elections of some sort. (2)

As everyone knows, each of these approaches is allegorical in some respects, two of which are germane to this paper. First, apart from votes on school budgets and on some bond issues, economic (and other) policy decisions are rarely made by direct democracy. We instead utilize representative democracy, in which elected politicians decide on our behalf. Second, in many cases the agents making the decisions may be neither as well informed nor as rational as homo economicus. Robert Blendon and his coauthors, for example, find large gaps between measured economic performance and the public's perception thereof. (3)

Monetary policy decisionmaking may perhaps approximate the loss function model. Decisions there are made by a technocrat or by a committee of technocrats, many of whom think like (or are) economists. (4) But fiscal policy clearly is not made this way. Even if one models the president of the United States as minimizing a loss function, the president's recommendation is just the starting point of a long process of political horse trading. There may be 536 relevant loss functions rather than just one--and they will not all be the same. Similarly, a complex brew of politicians makes the major decisions in virtually all other areas of economic policy: labor laws, tax laws, environmental policy, and social insurance programs, to name just a few. (5)

Of course, the fact that the voting and loss function models are allegorical does not necessarily make them misleading, when interpreted as "as if" hypotheses. But to make a judgment on the applicability of these models of decisionmaking, it seems worth digging down deeper into the actual processes that guide policymaking. This paper takes a step in that direction.

Specifically, we take it as axiomatic that, first, the political mechanism makes almost all important economic policy decisions, and second, the decisions of elected politicians are heavily influenced by public opinion. These are hardly dazzling insights. The first statement is simply a fact; it is also central to both standard approaches to the economic theory of policymaking: loss functions and voting. The second is rarely discussed by economists in their scholarly work. But its importance is apparent from the tremendous resources that politicians devote to assessing public opinion, and there is plenty of supportive evidence in political science. (6)

Legitimate doubts have been raised about whether the types of questions commonly asked in public opinion polls elicit individuals' true preferences. (7) That is not our question here, because understanding the determinants of public opinion as expressed in standard polls remains important as long as these polls influence politicians' policy decisions. This point remains valid irrespective of whether people understand the issues well or are confused about them, whether they are self-interested or public spirited, and whether they are well informed or poorly informed.

If we accept these points, a host of interesting questions arise, two of which are the foci of this paper. First, to what extent is mass public opinion shaped by political ideology, self-interest, and--don't laugh--economic knowledge? Second, to the extent that knowledge is relevant to opinions on economic issues, how do people inform themselves?

This paper offers many detailed answers to these and related questions, and so it may be useful to begin with a broad characterization that may help the reader see the forest amid all the trees to follow. Subject to many caveats, our main finding is that ideology is the most consistently important determinant of public opinion on a number of major economic policy issues, and objective measures of material self-interest are the least important. …