"How Public Opinion Does Matter"
I feel like Duncan Black’s written this post a million times:
Nobody cares about the deficit. Why don’t people understand this?
This question has a real answer, though. Politicians don’t understand that the voters don’t care about the deficit because the voters themselves don’t understand that they don’t care about the deficit. Black, Paul Krugman, Brad DeLong, and I all believe that with unemployment high and interest rates and inflation low that a larger short-term deficit will help post real output and reduce unemployment. If most people agreed with that, then politicians would talk about the deficit in a different way.
But they don’t. Public understanding of fiscal policy is hazy, inaccurate, and dominated by fallacious analogies between a national government and a household. What’s more, voters believe that deficits are primarily driven by wasteful government spending. So when a recession strikes the deficit spikes, and people complain. The smart thing for a politician to do under the circumstances is ignore the voters, do what you can to fix the economy, and recognize that in the end the economy drives public opinion. But of course much like the voters themselves, many politicians and political staffers are not that savvy about New Keynesian macroeconomic models. Indeed, it seems to me that many grassroots proponents of expansionary fiscal policy seem to actually be in the grips of the broken windows fallacy. Over the long-term, the country and the world will be a lot better off if we can improve people’s understanding of the business cycle. And improvement on the margin counts. It’s not that everyone needs to be expert in this subject, but people all up and down the spectrum of “need-to-know”-ness (politicians, staffers, journalists, voters) could be better informed than they are.