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'Framing' Prevents Needed Stimulus

September 11, 2012 by John Prestbo

Robert J. Shiller, The New York Times Why have so many teachers, police officers, firefighters and other public workers been laid off since the financial crisis hit — and why are so few being offered new jobs now? From July 2008 to July 2012, the number of state and local employees nationwide fell by 715,000, according to the Bureau of Labor Statistics. The reality is actually worse than that figure suggests. The total ended up 1.31 million people below where it would have been had public sector employment simply kept pace with population growth. The situation did not improve as the financial crisis eased and the economy picked up. From March 2009 to March 2012, the nation’s total nonfarm employment increased 0.6 percent. State and local government employment, by contrast, fell 2.9 percent. It is not as if many Americans say they want this to happen. A CBS News-New York Times poll in July asked: “Looking at your local public schools, would you be willing or not willing to have shorter school days or more crowded classrooms if it meant you would pay significantly less in taxes?” Seventy-four percent of respondents replied that they were “not willing” (21 percent were willing and 5 percent were unsure). When similar questions were posed about firefighters or police officers, the percent “willing” was even lower (12 percent and 15 percent). Keeping the number of teachers, firefighters, police officers and other public employees in line with the local population seems sensible enough, even if it means higher taxes. Granted, no one likes paying higher taxes. But in this case, the result would be a more livable community and more local jobs. If state and local governments had not cut back so much, the broader economy would be stronger today. That would be true even if they had raised taxes to avoid incurring more debt. This would be a result of the balanced budget multiplier theory I have been discussing in this column, coupled with various studies of the impact of tax and expenditure changes on the zero-interest-rate economy. Why, then, did governments do what they did? One answer comes from the field of behavioral public finance, which applies psychology to the world of taxes. What actually happens with tax policy in the political marketplace may be entirely different from what we would choose if, as a community, we focused on salient questions. Bruce Ackerman of Yale and James S. Fishkin of Stanford have proposed a new national holiday, Deliberation Day. Before an election, everyone would get Deliberation Day off and be paid to attend community meetings. The idea would be to encourage communities to share information. Maybe one day. For now, however, many citizens simply are not engaged. And when that is the case, public decisions can become quixotic and arbitrary. In their 2006 book Behavioral Public Finance, Edward J. McCaffery of the University of Southern California and Joel B. Slemrod of the University of Michigan summed it up by saying that in real-world public finance, “form matters.” They were applying to public finance the psychological principle of “framing” — the notion that when people make decisions without enough deliberation, consultation and information, they are easily influenced by superficial forms and irrelevant details of presentation or wording. Read More


Author

John Prestbo
John Prestbo

2012 Economic Growth Fellow

John Prestbo is retired as editor and executive director of Dow Jones Indexes. Previously he was markets editor at The Wall Street Journal. He has co-authored or edited several books over the past 30 years. The most recent is “The Market’s Measure: An Illustrated History of America Told Through the Dow Jones Industrial Average,” published in 1999 by Dow Jones Indexes. His column, Indexed Investor, appears on the highly regarded “MarketWatch” business and finance website. He received his bachelor's and master's degrees from Northwestern University.

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