Economic Dissonance

In today’s economy, the theory of cognitive dissonance is itself dissonant.

Social psychologist Leon Festinger believed that humans strive for internal consistency, and that two or more contradictory beliefs cause mental stress.  Yet in today’s world, it seems that every policy, every vote, every executive order is designed to contradict rationality and add to our collective mental stress.

We’ve given a few examples of economic dissonance in the past:

The stock market.  During six years of quantitative easing (QE), bad economic news caused the stock market to rise and good economic news caused the stock market to fall.  That’s because bad news meant more Fed bond buying and good news made bond buying unnecessary.

Higher inflation.  Lower oil prices have done more to give the economy a boost than trillions of dollars in bond buying – yet the Federal Reserve Board has fretted that the U.S. is headed toward deflation.  Its policies were designed to increase inflation to the magic rate of 2%.  Why 2%?  No one seems to know.College Costs

The unemployment rate.  The widely used U-3 unemployment rate drops when people give up looking for work and leave the workforce.  As a result, we have absurdities such as this latest report from The Boston Globe:

“U.S. employers hired at a stellar pace last month, wages rose by the most in six years, and Americans responded by streaming into the job market to find work.

“The Labor Department says the economy gained a seasonally adjusted 257,000 jobs in January. The unemployment rate rose slightly to 5.7 percent from 5.6 percent.”

So Americans are “streaming into the job market” – causing an increase in the unemployment rate!

Even More Dissonance

There are plenty of other examples of economic dissonance:

Unemployment insurance.  The Obama Administration supported extending unemployment benefits to help people who are unemployed.  Benefits were extended from the usual 26 weeks to as long as 99 weeks.  Yet doing so kept unemployment high; the jobless rate dropped when the extension of unemployment rates ended.

According to a study by Yale University researchers, “Our estimates imply that most of the persistent increase in unemployment during the Great Recession can be accounted for by the unprecedented extensions of unemployment benefit eligibility.”

Who knew that paying people not to work was a bad idea?

Taxes.  An increase in taxes typically does not produce the projected federal revenues, as taxpayers seek ways to avoid paying the higher taxes.  The Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT), which project the costs of new legislation, have rarely calculated “the deleterious effects of tax hikes or new regulations on economic growth,” according to The Wall Street Journal.

As a result, new legislation often falls short of producing the expected tax revenue or otherwise costing more than expected.

One of the first moves by the Republican-controlled Congress was to require the CBO and JCT to use dynamic scoring when producing budget estimates for major pieces of legislation.  Dynamic scoring takes the macroeconomic impact of legislation into account, such as changes in human behavior to avoid taxes.

Democrats opposed the changes.

“[The changes] would undermine the integrity of budget scorekeeping, hurt our ability to maintain fiscal discipline and lead to more financial inequality,” Representatives Chris Van Hollen and Louise Slaughter, the ranking Democrats on the House Budget Committee and House Rules Committee, wrote in Politico last month.

Student loans.  An increase in federal student loans was supposed to make college more affordable.  But with federal money available, it resulted in major increases in the cost of college.  Demand for college is inelastic, as a college education is needed for jobs that pay well; so when you increase the supply of students by providing them with the means to afford college, prices increase.

As the chart shows, college costs have escalated at more than four times the rate of the consumer price index (CPI) since 1978.

According to The Wall Street Journal, “Ever-escalating tuitions, especially in the past dozen years, have produced an explosion of associated debt, as students and their families resorted to borrowing to cover college prices that are the only major expense item in the economy that is growing faster than health care. According to the Federal Reserve, educational debt has shot past every other category—credit cards, auto loans, refinancings—except home mortgages, reaching some $1.3 trillion this year. Analyses in The Wall Street Journal and by Experian in 2014 show that 40 million people, roughly 70% of recent graduates, are now borrowers. In the class of 2014, the average borrower left with an average load of $33,000.”

The housing market.  For The Mortgage Reports, it was newsworthy that more than half of mortgage applications were approved.  So it’s good news that nearly half of the population can qualify for a mortgage – even though that means that nearly half of the population can’t qualify for a mortgage.

At the same time, the news last week was that an estimated 87% of properties in the U.S. qualify for mortgage assistance.  Great.  If you qualified for a mortgage, the government would be there to help, but since you don’t qualify, tough luck.

The federal budget.  President Obama proposed a federal budget this week that totaled $3.99 billion.  It’s designed to help the middle class because he said so.  Yet an analysis by the Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute,  found that it would result in a tax increase for the middle class.

The Wall Street Journal reported that “those making between $49,000 and $84,000—the middle quintile of earners—would actually see their taxes go up by an average of $7 under Mr. Obama’s proposals.”

We could go on.

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