Sunday, December 18, 2005

Why Social Programs Don’t Have Bipartisan Support

Economics has experienced a Renaissance of late with the burgeoning sub-field of behavioral economics, which incorporates aspects of psychology into traditional economic models. One of the more powerful theories of behavioral economics is loss aversion, which posits that a person experiences a greater loss in utility (happiness) when they move backwards from state B to A than the amount of utility they gain when they advance from state A to B. If you’re wondering what this means, let me try to explain.

People tend to feel stronger emotions if they lose an item than when they gain the item in the first place. For example, in financial markets, loss aversion kicks in when people are reluctant to sell assets at a loss even when the risk of losing more grows by the day. People tend to hold out in the hope of recouping their earnings because losses are so painful, while they are quicker to reap gains once these have been realized.

I have come to believe that loss aversion affects Republicans and Democrats (conservatives and liberals) very differently, and that this helps to explains why it is so hard to get bipartisan support for many social programs that would benefit American society.

From almost two decades of studying politics and conversing with people across the political spectrum, I hypothesize that Republicans on average experience extreme loss aversion regarding the abuse of social programs and public tax money. For example, while Social Security, health care, and welfare may benefit a majority of Americans, I am continually amazed at how Republicans (conservatives) will hone in on the minority of examples where people are taking advantage of the system and in effect cheating. Democrats (liberals), on the other hand, while certainly bothered by these cases, do not seem as upset about them. I think loss aversion partially explains this, and here’s why by way of a simple numerical example.

Let’s assume that Democrats and Republicans derive utility from social programs on a scale of -100 to +100; -100 being extreme unhappiness (disutility) when they witness people abusing the program and + 100 being extreme happiness (utility) when they witness law-abiding citizens benefiting from the program. Now let’s assume that both Republicans and Democrats gain an average utility of +10 from knowing that an individual is benefiting from a given social program. Let’s assume that Democrats experience loss aversion such that cases of individuals cheating the system cause disutility of -15 (greater than 10 in absolute value, which is what loss aversion predicts). As long as the number of people benefiting from the system is greater than 60% of the population, Democrats will experience net positive utility towards the program and therefore support it.

Now let’s assume that Republicans, on the other hand, are so incensed by people taking advantage of their hard-earned tax money that each case of cheating causes them unhappiness of -100 (extreme loss aversion). In this case, in order for Republicans to feel positively inclined towards the program over 90% of the population would need to be making good use of the program, or else the unhappiness caused by the cheating would overwhelm the positive utility derived from those who are benefiting.

While this is a fictitious example, I think it gets at the heart of the divide over social spending. Democrats are willing to accept a lower success rate for social programs (perhaps too low) because they do not get as angry as Republicans do over fraud. It is this anger which leads Republicans to call for (unrealistically) high rates of success for any government program. There is little room for agreement because the pros and cons of social programs enter so differently into the respective utility functions of these two groups.

One thing that remains a mystery is why Republicans are not more adamant about cutting corporate welfare. If they are truly incensed by fraud, they should be at the forefront of opposing all forms of corporate subsidies; the negatives are vast, and almost no societal good comes from them. While both Democrats and Republicans are beholden to corporate money, I think something else is at work here.

As some of the most despotic figures in history have pointed out, one death is a tragedy while a million is a mere statistic. In the case of corporate malfeasance, it is hard to find examples as colorful as a “welfare queen” bilking the government through dozens of false identities. Corporate welfare is often buried in accounting logs, is (usually) legal, and is simply not very sensationalistic, despite the gross waste and inequity it represents. And while corporations are largely faceless, there is nothing like a personality with a story behind it to stoke people’s emotions.

This is understandable but unfortunate; if there were one area where extreme loss aversion would serve society well, it would be in making the case for the elimination of corporate welfare (especially the extremely environmentally damaging subsidies given to farmers, fishermen, loggers, energy companies, and ranchers). With Democrats not as averse to government waste, we will have to wait for Republicans to take this on (don’t hold your breath). Unless of course, Democrats want a winning political strategy to help them justify increased social spending in areas that are actually beneficial for the majority of Americans (don’t hold your breath for this either).



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