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The Problem of "Stupid" in Economics

By       Message Dean Baker       (Page 1 of 1 pages)     Permalink    (# of views)   1 comment

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Reprinted from The Smirking Chimp

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M.I.T. Professor Jonathan Gruber has inadvertently become a YouTube celebrity as a result of a video of him referring to the public as "stupid." The immediate point of reference was the complexity of the design of the Affordable Care Act (ACA), which Gruber was describing as being necessary politically in order to deceive the public. With the right-wing now in a state of near frenzy after the Republican election victories, the Gruber comment was fresh meat in their attack on the ACA.

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Apart from merits of the ACA, there is something grating about seeing a prominent economist refer to the American public as "stupid." After all, the country and the world have suffered enormously over the last seven years because the leading lights of the economic profession were almost completely oblivious to the largest asset bubble in the history of the world.

While it should have been easy to recognize an $8 trillion housing bubble in the United States, prices had diverged sharply from their long-term trend with no plausible basis in the fundamentals of the housing market. In particular, rents had only risen in step with inflation, indicating there had not been a sudden upturn in the demand for housing.

It also should not have been surprising that the loss of this wealth when the bubble burst would lead to a severe economic downturn and have a major impact on the financial sector. After all, it was easy to see that the bubble was driving the economy in the last business cycle. Residential construction had hit a record as a share of GDP and the ephemeral bubble wealth led to an unprecedented boom in consumption.

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Since mortgages are a heavily leveraged asset even in normal times, and became considerably more leveraged during the bubble years, it should hardly have been a surprise that there were large numbers of defaults and foreclosures. And, given the leverage of the banking system, the fact that a large number of bad loans would put many banks in danger also should not have been a surprise.

In spite of the huge yellow warning lights flashing all over the sky, nearly all the world's top economists were caught by surprise by the collapse of the housing bubble. People in my profession should be very cautious in the use of the word "stupid."

There is some truth to Gruber's comment in that most people are ill-informed about major public policy issues, including health insurance. This is in large part due to the fact that, unlike Gruber, most people have day jobs. They put in their shift at work and then often have child care and other family responsibilities. Most of them probably don't have much time to read the Congressional Budget Office's latest report on the health care system.

But even worse, when people do take the time to get informed, the media let them down badly. Stories even in the best of outlets, like the New York Times and National Public Radio, often present information in ways that are misleading and often meaningless to nearly all readers.

The New York Times gave us a great example of misleading reporting this weekend in an article headlined, "Cost of Coverage Under the Affordable Care Act to Increase in 2015." The piece then highlighted a number of plans which are increasing premiums by large amounts in 2015.

Anyone reading this article would likely get the impression that most people are seeing big insurance price increases in 2015. This is 180-degrees at odds with reality. The Kaiser Family Foundation found that the average cost of benchmark plans in the ACA exchanges actually fell slightly in 2015. (The chart accompanying the New York Times article would show a story of declining prices or modest increases.) This is remarkable given the fact that insurance costs have been rising sharply for the last half century. Rather than highlighting the fact that for most people in the exchanges premiums are rising little or actually falling, the New York Times decided to highlight that some people will pay more, if they don't change plans.

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In the same vein, the media routinely report huge numbers without giving any context that would make these numbers meaningful to their audience. AP gave us a great example of this practice when it reported that the Social Security Disability program paid out $2 billion in benefits, to people who should have not been eligible, over the last seven years.

This article likely gave people the impression that abuse in the program is widespread. Since the program paid out close to $900 billion in benefits over this period, the improper payments came to just over 0.2 percent of payments over this period. While it would be nice if no money was improperly paid (and that no proper claims were denied), no program will be perfect. If only 0.2 percent of payments were improper, that it would be an exceptionally good track record.

The amazing aspect to this manner of reporting is that no one will defend it with a straight face. Every reporter and editor knows that next to no one can make any sense of these big numbers without some context. Yet the practice continues.

Given the quality of reporting on major issues, it is not surprising that the public is often poorly informed. It is not clear who is being stupid in this picture.


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Dr. Dean Baker is a macroeconomist and Co-Director of the Center for Economic and Policy Research in Washington, D.C. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. (more...)

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