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Lies We Tell Ourselves About Economics
Self-deception can blind us to personal as well as national economic realities
By Charles Blahous
The other day, I caught myself momentarily subscribing to a demonstrably untrue statement about economics. As a frequent Starbucks customer, I occasionally receive short surveys from them asking me to rate various aspects of my recent visit, and I sometimes complete the surveys to acknowledge their employees’ hard work. However, last time I did so, I nearly provided a response that was provably false.
The Starbucks survey asked me to rate my visit according to various criteria, such as whether my beverage tasted great and whether the employees made an effort to provide personalized service. I gave top marks for all aspects of service. But one item asked me whether my beverage was worth what I paid for it. Well, I thought, as much as I enjoy my frequent trips to Starbucks, their prices are ridiculous. $4.93 (with tax) for a double tall cappuccino? I can and do make myself delicious coffee at home for less than 50 cents a cup. I briefly clicked on a very mediocre rating for value, but I then quickly realized: I was lying to myself.
Worth the Money?
What does it mean for my Starbucks beverage to be worth the money I paid for it? Quite literally, it means I value the Starbucks beverage at least as much as or more than the money. Clearly I do, because I exchange the money for the drink day after day. If it weren’t worth the money to me, I wouldn’t do that. While I might tell myself that the drink is overpriced, my behavior is ironclad proof to the contrary. Maybe it’s not the drink alone that’s worth the money; maybe it’s also the convenience, the labor saved, the speed of collection, or maybe it’s just the value I attach to a brief break in the middle of a workday. But of all the criticisms I might honestly level at Starbucks, failing to offer me a bargain that I willingly reach for, time and time again, isn’t one of them.
Why was I initially inclined to state that Starbucks’ price exceeded its value offered? It was because I was conflating two different statements: “I wish I paid less,” and “This isn’t worth the money.” Those are two fundamentally different assertions. Wishing that we paid less for things is pretty commonplace and is felt even with purchases we voluntarily make, of things we can readily afford. Of course, we’d always rather pay less and keep more money for our other needs and wants. However, that is fundamentally different from concluding that the exchange being offered is disadvantageous to us. It is all too easy for us to mistake one concept for the other: to mistake our desire for a lower price for the existence of something unfair about the transaction.
Politicians are adept at exploiting such self-deceptions and turning them to partisan advantage. How frequently do we hear politicians decry price-gouging, alleging that evil, powerful corporations are victimizing helpless American consumers? This cynical brand of politics conflates something nearly all of us feel (a desire for lower prices) with something quite different: the charge that consumers are being forced to pay more than a fair price for something they need. In reality, this is rarely true: instances are few and far between of sellers having unlimited pricing power, i.e., of being able to set prices as high as they wish without losing sales. In the vast majority of circumstances, prices reflect the intersection between what consumers are willing and able to pay, and what sellers are willing to accept. This of course doesn’t stop politicians from encouraging us to lie to ourselves and believe that price inflation is primarily the result of corporate greed rather than what it really is: an outcome of complex interactions, including monetary and fiscal policies as well as the balance of supply and demand.
Self-Deception About National Policy Choices
Many of the little lies we tell ourselves about economics are relatively harmless, such as when I grumble to myself about Starbucks marking up the cost of a cappuccino I can comfortably afford. However, bigger problems arise when we try to base national policy decisions on self-deception.
One typical, recurring example is the canard that Social Security finances could be stabilized if only there weren’t a cap on the amount of rich people’s earnings subject to payroll taxes. It’s not even close to being true. Applying the full payroll tax to all employment earnings (not only those of the wealthy) without limit would eliminate only 38% of Social Security’s permanent deficits. There simply is no practicable solution to Social Security’s shortfalls that doesn’t involve slowing the rate of its cost growth one way or another. We put off that solution process and render it more expensive by kidding ourselves that it really isn’t necessary.
Social Security can’t be fixed simply by taxing billionaires, and this is even more true of Medicare. Social Security’s cost growth is dwarfed by Medicare’s, as shown in Figure 2-3 at the linked Congressional Budget Office (CBO) report. Medicare, Medicaid and Social Security are all growing at rates that exceed the rate of growth of U.S. economic output, an unsustainable situation requiring corrective action. Until recently, it was uncontroversial for elected officials to acknowledge this binding reality, regardless of ideology or party. They would disagree with each other about optimal solutions, but they didn’t lie to themselves or the public about whether the problem existed and had to be fixed.
However, in recent years irresponsible partisans have become increasingly adept at exploiting Americans’ desperate desire to believe that popular entitlement programs would be sustainable if only we would collect more tax dollars from billionaires. It’s flatly untrue, as CBO projections clearly show. Our collective eagerness to be deceived about this urgent policy imperative delays corrective action and causes real harm—to taxpayers, to beneficiaries of these programs and to the American citizenry as a whole.
After my estimates of the cost of enacting Medicare for All (M4A) were published in 2018, I was struck by how many people, including accomplished physicians advocating on behalf of M4A, simply refused to believe in a well-established phenomenon: that people’s consumption of healthcare services increases when their insurance coverage becomes more comprehensive. This tendency should hardly surprise us; we should recognize after a moment’s reflection that we are more likely to pursue a healthcare service when our insurance covers it than when it does not. Because of this underlying reality, M4A’s promise to provide healthcare services without deductibles or other copays must markedly increase the demand for such services. Every credible analysis of the issue recognizes this, and usually produces broadly similar estimates of the extent to which M4A would stimulate additional healthcare demand. Yet many people simply refuse to believe it when it is first explained to them as a factor increasing the costs of M4A.
The reluctance to understand this effect is rooted in an underlying lie we tell ourselves: that we all merely seek the healthcare services that we need, a need that is inherent, fixed, objective and unaffected by economic incentives. That this is untrue is actually one of the most widely documented phenomena in the economics literature, tracing back to a landmark Rand Corporation study and confirmed in countless subsequent studies. There is little excuse for any purported expert’s opining on the likely cost of M4A without recognizing these well-established findings.
So, why do so many intelligent, highly educated people deceive themselves about how M4A would affect the demand for—and thus the cost of—healthcare? The reasons are undoubtedly various, but one is probably that we first think of basic healthcare as a need or necessity (true), but then leap from that to the implicit assumption that all healthcare services are equally necessary (false). We are also subject to associative coherence, the well-documented phenomenon in behavioral economics whereby we discount evidence weighing against something we favor. Once we’ve decided that universal healthcare coverage is desirable, we simply choose to dismiss any of its adverse implications. However, we do not have that luxury in real-world policymaking. In the real world, the downsides of policies stubbornly appear whether we choose to recognize them in advance or not.
From Self-Deception to Self-Awareness
Attempting a complete list of all the ways that different sectors of the body politic deceive themselves about national policies would risk preferentially selecting the mistakes of one side of the political aisle more than the other. There’s no need to make this attempt when the point is, we all do it. We are simply faster to perceive mistakes when members of the opposing political party are guilty of them, but we’re reluctant to acknowledge the ones we make ourselves.
My hope in writing this piece is to acknowledge that I am prone to these instincts just like anyone else, and to encourage others to admit the same to themselves. The inescapable fact is, I’ve already repeatedly demonstrated that a Starbucks cappuccino is worth its cost to me, no matter how much I may grumble about forking over a price I’d rather not pay.
The next time you find yourself analyzing what you perceive to be the facts underlying an important public policy issue, apply a hefty dose of skepticism to any factual belief that seemingly supports what you want to be true. If the factual belief involves something you want from government without you personally having to pay for it, chances are especially good that you’re kidding yourself.