Alan B. KruegerPrinceton University

June 28, 2007

What Does it Matter if the Public is Poorly Informed about Economics?

•Public opinion has a powerful affect on politicians in a democracy.

• Blinder and Krueger (2004) study what determines public opinion on economic policy. Self-interest? Knowledge? Ideology? Surveyed 1,002 Americans in Spring 2003.

• Economic models normally assume that people are well informed. But Blendon et al. (1997) and Blinder and Krueger (2004) find that many Americans are poorly informed about economic matters.

• Related questions: How do ordinary people get their information about the economy? What information sources lead to more accurate understanding?

Motivation

Knowledge Questions

1. The share of income that a typical American family pays in taxes

2. Whether most people pay more in payroll or income taxes

3. The size of this year’s federal budget deficit (in billions) Asked of half the sample; informed the other half

4. The level of the federal minimum wage5. The size of the average Social Security benefit check6. Whether Medicare covers prescription drugs for

outpatients7. The percentage of Americans who do not have health

insurance

Economic Knowledge: Actual vs. Survey Estimates

Question

Tax share

Actual

23.3%

SurveyMean31.3%

SurveyStd. Dev.

15.6%

Survey Median

30%

Payroll or income tax is larger?

Payroll (83%)

Income (52%)

-- Income

Size of budget deficit* $246-$310b $334b $739b $90b

Level of minimum wage $5.15 $5.86 $1.27 $5.65

Size of SS check $898 $824 $493 $800

Medicare drug benefit? No No (54%) -- No

Percent without health insurance

15.2%(15.6%)

37% 16.7% 35%

*Nonresponse rate was 48 percent for deficit question.

Fra

ctio

n

npscore50 50 100

0

.05

.1

Mean = 43.3Std. Dev. = 16.7

Distribution of General Knowledge Scores

Scoring of Exam: Score answers to each question in terms of percentile rank, and then average scores. Give 0 credit if no answer.

Split Ballot Experiment on Deficit

“This year’s federal budget deficit is approximately $300 billion. This works out to around $3,000 per household.”

Note: The median estimate for those who were asked to estimate the size of the deficit was only $90 billion. So the $300 billion frames the issue for most respondents.

In 2001, Congress passed a series of income tax cuts that were scheduled to take effect over a period of ten years. President Bush has now proposed that these tax cuts should become effective immediately. Do you favor or oppose that idea, or do you have no opinion?

Favor …………… 43%Oppose …………... 26%No Opinion .……… 31%

Example of Analysis: Estimated Ordered Probits

-Outcome variable: 1 if oppose 2003 Bush tax bill,2 if no opinion, and 3 if favor it.

-Explanatory variables: self-interest (income);ideology/politics (liberal, moderate, conservative; favor tax progressivity); general knowledge score and specific knowledge about taxes; beliefs (e.g., taxes too high); and demographics.

-Main results:• Self interest has little effect.• General knowledge; More knowledgeable less supportive. • Ideology (general and specific to taxes) mattered tremendously.

Determinants of Policy Positions: Summary

Policy Issue Knowledge Education Self-interest Ideology

Bush tax cut? - *** + ***Deficit a problem? + * + ***Raise min wage? + *** - ** + *** + ***Private Social Security Accts?

+ ** + *** + ***

SS taxes? - * SS benefits? ? *Universal HI? - * + *** + ***Medicare Drug benefit?

- *** + ***

Case Study of Misinformation: Hungarian Gov’t Deficit

PM Ferenc Gyurcsany, tape released Sept. 17, 2006 "There is not much choice. There is not, because we

screwed up. Not a little, a lot. No European country has done something as boneheaded as we have.”

"Evidently, we lied throughout the last year-and-a-half, two years... You cannot quote any significant government measure we can be proud of, other than at the end we managed to bring the government back from the brink."

"We lied in the morning, we lied in the evening."

What was the reaction?

Ratio of Hungarian Forints to Avg. of Czech, Polish, and Slovak Currencies,

March 2006-March 2007

10.8

11

11.2

11.4

11.6

11.8

12

12.2

12.4

Date

2006. 03. 28.

2006. 04. 07.

2006. 04. 20.

2006. 05. 03.

2006. 05. 15.

2006. 05. 25.

2006. 06. 07.

2006. 06. 19.

2006. 06. 29.

2006. 07. 11.

2006. 07. 21.

2006. 08. 02.

2006. 08. 14.

2006. 08. 24.

2006. 09. 05.

2006. 09. 15.

2006. 09. 27.

2006. 10. 09.

2006. 10. 19.

2006. 11. 02.

2006. 11. 14.

2006. 11. 24.

2006. 12. 06.

2006. 12. 18.

2007. 01. 02.

2007. 01. 12.

2007. 01. 24.

2007. 02. 05.

2007. 02. 15.

2007. 02. 27.

2007. 03. 09.

Date

Fo

rin

t to

Avera

ge o

f T

hre

e C

urr

en

cie

s

• Americans express strong desire to be well-informed.• People (e.g., Hungarians) don’t like to be misinformed.• Knowledge is imperfect, but not terrible on average. • Public opinion on economic policy depends strongly on ideology, less so

(but not insignificantly) on knowledge and beliefs• Knowledge matters more and is better for issues that people can relate to

(minimum wage vs. deficit) • People want to solve problems if they perceive them to be bigger (e.g.,

uninsured and universal health insurance). • Providing information can have counterintuitive effects on policy positions

(e.g., deficit) and can be polarizing. • Objective self-interest matters less than one might think. Why? (a)

confusion: People don’t understand their self-interest. (b) generosity: People care more about the commonweal (but differ in how to advance it).

Conclusions