‘‘Policy is almost ultimately about people, what they want and what is best for them’’
Expansionary fiscal policy is very common nowadays. High levels of government expenditure that aim at stimulating the economy by creating demand according to Keynesian macroeconomics are frequently used at the expense of fiscal deficits. However, government spending is not always efficient and well-oriented, and you would be surprised to find out how our thinking determines it. As citizens we should be aware that it is our demands that shape government policy and therefore the public spending (as it should be in a democracy). It is within our sphere of rights to demand certain policies from the government and thus discretely shape the balance. But do we always know what we need and should demand? To what extent would our needs, adequate or inadequate, affect priorities and impact our economy through fiscal stimuli?
The answer to the first question is a straight ‘No’. Contrary to classical thought, humans are not infinitely rational. Although we may look to maximize utility, we hardly do so. Human decision-making is strongly biased by unconscious mental processes that lead to uncertain outcomes and this inefficiency in reasoning translates into inefficiency in identifying needs. We don’t identify correctly what is best for our community but what we merely perceive as such, which is a product of each one’s minds, emotions, what we hear from other people, or what we see from media coverage, which tends to be subject to exaggerations in order to attract audience. This inadequate reasoning is product of several types of biases amongst which there is the availability and the affect bias, intrinsic in the imperfect human mind. The availability bias is defined as a distortion of reality that surges from the use of readily available information rather than what is more precise. Also, the affect bias is defined as a distortion of reality surging from the prevalence of emotions in critical judgements. Ultimately, people don’t always know what is best for them and this paves the way for an inadequate political configuration that promotes wrongly-oriented spending.
Legal scholar Cass Sunstein and Economist Timur Kuran coined a concept called Availability Cascade, a mechanism that explains the incidence of these biases into public policy. It is a self-sustaining chain of events, which starts from specific coverage or other event that leads up to a substantial public response followed by government action. These cascades are the amplification of each of our mind’s biases regarding a certain problematic that eventually influence public spending, and they are script-like evidenced today. Their direct consequence is the possible distortion of priorities that results in an inefficient government spending with great opportunity cost of misallocated resources. Furthermore, it could potentially worsen a deficit to the extent of contributing to an unsustainable debt that will have to be paid with higher taxes by future generations. This proposition essentially answers the second question and underlines the importance of being critics of our reasoning. To wrap up Sunstein’s and Kuran’s idea, in front of the high propensity to fall in availability cascades, they promote a more objective assessment of priorities and higher scrutiny from the public before adopting perspectives.
Finally, we must recall that inefficient reasoning distorts our perception of needs, and through an availability cascade this can potentially translate into inefficient spending and a wasted fiscal stimulus which may worsen a deficit. Therefore, by acknowledging these consequences, we should start to be more critical with our perspectives, challenging our reasoning and acknowledging when we are being influenced by biases so that we can correct their effects on our perspectives.