The Frontal Cortex

Placebo Economics

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.

See Will Wilkinson for more. And listen to Radio Lab!

Comments

  1. #1 Coturnix
    January 31, 2009

    Economic acupuncture? You only think you got poked?

  2. #2 Nattering Nabob of Negativism
    January 31, 2009

    Placebo economics?

    Ahem. “The fundamentals of the economy are strong.”

    Do anything for you?

    Yeah, you were right to doubt.

  3. #3 Hank Roberts
    January 31, 2009

    > the problem, of course, is that no one knows what
    > such a placebo might look like.

    Well, the last big dose was before neuroimaging, but we do seem to have a pretty good idea what it would look like.

    Here are a few I recall being especially pithy, though good luck finding them if you don’t have an academic librarian.

    “Securities Legislation and the Accounting Profession in the 1930s: The Rhetoric and Reality of the American Dream”, with B.D. Merino, Critical Perspectives on Accounting (Volume 12, 2001), 501-525.

    “Prophets or Puppets of Profit: Securities Legislation and the Accounting Profession in the 1930s,” with
    B. Merino. Proceedings of the Fifth Interdisciplinary Perspectives on Accounting Conference, University
    of Manchester, July 1997, Refereed.

    “Twentieth Century Reform: the Regulatory State and the Denial of Accountability,” with D. Pickens and
    B. Merino. Proceedings of the Seventh Interdisciplinary Perspectives on Accounting Conference, Madrid,
    Spain, 7/13-16/03

    “Is Accounting a Moral Discipline? (revised version),” with B. Hoops, B. Merino and R. Pavur.
    Proceedings of the Asian-Pacific Interdisciplinary Research on Accounting Conference, Adelaide, South Australia, Australia, Adelaide University, July 2001, Refereed.

    They used to be findable online, but I can’t find them now.

    Look at the accounting profession — which managed to defeat New Deal efforts to actually test and license accountants in a consistent way, deferring to the “generally recognized” standard that’s no real standard at all. Look where that got us.

    OR look at the SEC — which originally was supposed to have not only teeth but a digestive tract, and ended up with baby teeth and no guts to speak of within a few years.

    There are many papers about this.

    THe “American Dream” paper that used to be available online and then disappeared behind a paywall was especially devastating. It was written drawing on the paper records in the storage boxes in the archives of correspondence in the 1930s, as the SEC was being invented and in its first few years. IT ends up documenting how the effort to “restore the confidence of the American people” was necessary in order to get them to put money back into the banking system, and how “a little larceny” in said banking system was not too high a price to pay for having the system working.

    A memorable quote therefrom was to the effect that you can’t cheat the people if they don’t trust you.

  4. #4 Hank Roberts
    January 31, 2009

    Abstract at least found:
    http://www.ingentaconnect.com/content/ap/pa/2001/00000012/00000004/art00432;jsessionid=fltpb29eds3ks.alexandra?format=print

    Securities legislation and the accounting profession in the 1930s: The rhetoric and reality of the American Dream

    Excerpt from the abstract follows:

    In summary, our arguments are as follows: (i) the rhetoric used by the New Deal was intended to restore trust and fairness in American society; (ii) the underlying basis for the political persuasion was the restoration of the American dream in a liberal environment; (iii) in a contemporaneous analysis of the New Deal environment, Dewey (Liberalism and Social Action, New York: Putnam, 1935) states that, without radicalism of change, the New Deal was doomed to failure since it would be viewed as protecting the status quo—we concur with this view as to the securities regulation and the behavior of Douglas; (iv) Douglas appears to act in favor of the status quo due to his close relations with the accounting profession, and, in our view, being “captured” by the profession and (v) we support our thesis by examining several SEC actions during Douglas’s tenure.
    Copyright 2001 Academic Press

  5. #5 mrcreosote
    January 31, 2009

    Can’t be any worse than the voodoo economics we’ve suffered from lately….

  6. #6 Phillip
    January 31, 2009

    Could Shy-Drager be treated with placebo?

    I suppose the point is that multiple systems are in, at a minimum, dystrophy, and the suggestion by a lot of the classical liberal Hayek fans that a placebo could function to solve the problem–to offset risk-aversion, fear, etc., as if that’s the only problem here–is the height of denial. In this sense it would come as no surprise that Will Wilkinson would be frustrated over the inherent misunderstanding that: median wages have dropped consistently for years now, while the consumption per income rate has been at 120% for the same period (the normal healthy rate being around 80%), leaving consumers unable to fulfill the “savings = investment” *equilibrium* (think Sodium and Water, and the equilibrial function the kidney serves to stop the body from being hypo/pernatremic, rather than a behavioral equation stating: savings necessarily -> investment. Major distinction) that tax cuts would serve the purpose of doing, IF that is, we didn’t have multiple other problems, such as being up against the zero-bound, the deflation in the housing markets, export prices dipping, and so on. For a more thorough vitiation that placebo or pure psychology is the issue here rather than a systemic failure due to policies that have left consumers ‘dead in the water’, have stratified classes, and left the citizenry incapacitated as a whole, economically, see:

    http://www.prospect.org/cs/articles?article=fromconsumers_to_commons

    I’m a student in neurobiology, and I must say I’m a bit insulted at some classical liberal’s blatantly dissonant skepticism toward stimulus as being simply a means to achieve a neuropsychological end.

  7. #7 Steve Gelmis
    February 1, 2009

    Great subject for a post, but I think you and the other commenters so far are missing the boat. The most powerful moral booster would be to see the guilty punished and the greedy have their personal (falsely claimed) profits clawed back. What people need in order to proceed in the new economic environment is to have their sense of fair play and justice reaffirmed.

    By itself it won’t put food on the table of the unemployed, but it may lower the average level of despair and disgust about “what this country is coming to,” as the old cliche phrase goes.

    To be effective, the net would have to reach must further than Madoff and his ilk, to the corrupt brokers and appraisers who wrote the phony mortgages, the regional bank managers who encouraged reckless lending to “make their numbers,” to the corrupt regulators who allowed back-dated capital injections to extend the running room (and future losses) of insolvent banks backed my public FDIC money, as well as the mid and upper level bankers and executives on the other end of that corruption.

    It might not at fist seem as though addressing the broken social contract embedded in these events would serve any economic purpose, but given the future tax increases all this government spending will eventually lead to I think it’s an important and relatively costless investment in future social stability, and a boost of motivation to undertake the additional effort needed to work our way out of what is coming (or already here for any).

    Since this comment is getting longer than I planned I’ll skip elaboration on the other leg of this idea – complete outside auditing and disclosure of bank balance sheets (needed in order to put solvency doubts to final rest (one way or the other).

  8. #8 Sam
    February 1, 2009

    …er, what does this have to do with the fact that placebo effects are mediated by the PFC? A rare descent into neuroscience quackery – we’re used to better at this blog!

  9. #9 Ward
    February 1, 2009

    In the lab we do have people talking about the placebo effect and we do not have a collection of researchers who are claiming to alleviate our pain by confiscating our money and our children’s money.

  10. #10 Hank Roberts
    February 1, 2009

    Wanta bet there’s a corporate funded neurology lab somewhere showing various scenario ads and hypothetical headlines to test audiences, trying to measure out what particular string of words produced by monkeys with typewriters would change the audience brain patterns to indicate increased trust in the marketers?

    They want trust and faith, but remember how long it’s been since you heard the words “social contract” from anyone but a union organizer, if you’ve even met one?

    http://seekingalpha.com/article/117135-thinking-the-impossible-could-bank-of-america-go-to-zero?source=article_sb_popular says
    “… keep the depositors happy and calm at all costs. They have to do this to avoid major social unrest; everything else is secondary. …”

  11. #11 david evans
    February 1, 2009

    part of our current doom and gloom is that we expect things to get worse or stay bad. this is to me in part because we’ve forgotten just how far we’ve come in the last 20, 40, or 100 years in terms of efficiency, productivity, and ability to generate wealth. so maybe a way to adjust our expectations in a real and not placebo sense would be to collectively reflect on how we’ve generated the wealth already – because we’re able to produce so much more per person now than historically. i’m naive, yes, but it generally feels like panic requires a lack of perspective. and perspective seems to have something to do with expectations.

  12. #12 Benign Brodwicz
    February 2, 2009

    Actually, the problem of what drives confidence in America is largely explained in research referenced at http://animalspiritspage.blogspot.com .

    The forecast is for “animal spirits” to improve in the near future.

  13. #13 Richard
    February 2, 2009

    False reports may not be the only placebo option. There seem to be many anti-placebo actions proposed now in the form of bad economics. For example, a bailout that saves a few jobs in a company that’s doomed anyways may sound good to a lot of people, but since government money has to come from somewhere this has a cost for everyone else, and also encourages employees to stay in an unsustainable situation.

    There might be other false economic ideas that would give the majority of the population one idea while actually having a different effect (which doesn’t cause much real damage). I have no idea what they would be, but it sounds like a good place to look.

  14. #14 Richard
    February 3, 2009
  15. #15 Donald Ernest LaFave
    February 6, 2009

    Hello: I know what the placebo could be Government Guaranteed home energy loans like guaranteed student loans but you buy solar panels and the associated hardware you pay what you would have paid the electric company but the money is split between the manufacturers installers maintenance(tree trimming etc) and the investors a huge useful domestic industry is formed using money that would have went to Saudi Arabia

  16. #16 Gen
    February 7, 2009

    I’m in strong agreement with Steve…An actual step, without deception that later will be uncovered (and trust eventually lost, as per the last quote in Hank’s post). A step which will actually alleviate a large part of the economic problem, as well as reinstate a belief in justice in the people.

    When lower-middle class people assess their lives and careers, they look at their history, as well as others like them…Low incomes staying low, as the wealthy become some of the wealthiest ever on record. How discouraging! If someone does not believe to be capable of improving themselves or their situation, they will not attempt to.

    Psychosomaticism is prevalent and useful in every aspect of our daily lives, and using it (or placebo, if you will) to regain confidence in those living through an economic crisis would be useful, if applied correctly.

  17. #17 lee pirozzi
    February 10, 2009

    I have two pieces of artwork (photography) that will give you a pertinent chuckle to the subject of placebo economics: see the Saatchi website under lee pirozzi by the end of this week, feb 14th. It is vital that we laugh.

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    April 10, 2009
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  25. #38 GanjaBoy75
    October 22, 2009

    Part of maturity is being able to appreciate, or at least tolerate, the success of others. ,

  26. #39 Hank Roberts
    December 1, 2009

    Here’s another quote for you (by the way, you have spammers)

    http://www.bloomberg.com/apps/news?pid=20601039&sid=ahD2WoDAL9h0

    Arming Goldman With Pistols Against Public
    Commentary by Alice Schroeder

    Dec. 1 (Bloomberg) — “I just wrote my first reference for a gun permit,” said a friend, who told me of swearing to the good character of a Goldman Sachs Group Inc. banker who applied to the local police for a permit to buy a pistol. The banker had told this friend of mine that senior Goldman people have loaded up on firearms and are now equipped to defend themselves if there is a populist uprising against the bank. …

    Henry Paulson, U.S. Treasury secretary during the bailout and a former Goldman Sachs CEO, let it slip during testimony to Congress last summer when he explained why it was so critical to bail out Goldman Sachs, and — oh yes — the other banks. People “were unhappy with the big discrepancies in wealth, but they at least believed in the system and in some form of market-driven capitalism. But if we had a complete meltdown, it could lead to people questioning the basis of the system.”

    Torn Curtain

    There you have it. The bailout was meant to keep the curtain drawn on the way the rich make money, not from the free market, but from the lack of one. Goldman Sachs blew its cover when the firm’s revenue from trading reached a record $27 billion in the first nine months of this year, and a public that was writhing in financial agony caught on that the profits earned on taxpayer capital were going to pay employee bonuses.

    This slip-up let the other bailed-out banks happily hand off public blame to Goldman, which is unpopular among its peers because it always seems to win at everyone’s expense.

    Plenty of Wall Streeters worry about the big discrepancies in wealth, and think the rise of a financial industry-led plutocracy is unjust. That doesn’t mean any of them plan to move into a double-wide mobile home as a show of solidarity with the little people, though. …

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    September 1, 2011

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