Over at the Economist, a number of economists have been speculating on the possibility of an economic “placebo” that would boost consumer confidence without actually triggering a massive spike in government spending. In other words, it would be a Keynsian bump without the cash, akin to giving someone a sugar pill and telling them it’s Prozac. Here’s Tyler Cowen:
To the extent that the real problem is fear, this militates in favour of placebo policies. By that I mean initiatives which appear bold and have great symbolic value, but which don’t necessarily cost us very much.
Sounds great, right? The problem, of course, is that no one knows what such a placebo might look like. This is where neuroscience comes in handy.(Not that handy, but it can help us better understand how an economic placebo might work.) Consider this experiment, which I describe in my book:
A few years ago, Tor Wager, a neuroscientist at Columbia University, wanted to figure out why placebos were so effective. His experiment was brutally straightforward: he gave college students electrical shocks while they were stuck in an fMRI machine. Half of the people were then supplied with a fake pain-relieving cream. Even though the cream had no analgesic properties⎯it was just a hand moisturizer⎯people given the pretend cream said the shocks were significantly less painful. The placebo effect eased their suffering. Wager then imaged the specific parts of the brain that controlled this psychological process. He discovered that the placebo effect depended largely on activity in the prefrontal cortex. When people were told that they’d just received a pain-relieving cream, their frontal lobes responded by inhibiting the activity of emotional brain areas (like the insula) that normally respond to bodily pain. Because people expected to experience less pain, they ended up experiencing less pain. Their predictions became self-fulfilling prophecies.
So what does this mean for a potential economic placebo? The key lesson is that placebos work by manipulating our expectations: because we expect the pill to make us happier, we end up feeling happier. This suggests than any economic placebo would need to entail more than just a piddling rebate check, or some other short-term (and hopefully cheap) stimulus. The problem with these measures it that they don’t alter our expectations – they just make the present a little bit less unpleasant. Instead, a genuine economic placebo would need to focus on modulating our long-term expectations, so that we become convinced that next month, or next quarter, or certainly next year, things will start getting better. The question, of course, is how the government could do this. I’m ashamed to admit that the first thing that came to mind is the possibility of cooking the books, so that the government starts issuing trumped up GDP and unemployment figures. But why stop there? I think it’s clearly time that CNBC become a tool of the state, a mouthpiece of economic propaganda. These lies/public service announcements would certainly improve our expectations, just like a sugar pill, but at what cost? Placebos inevitably involve deceit, which is why I’d rather my government just spend the money.