Regular Americans and professional economists sharply disagree about the merits of key economic policies being put forward by the country’s two Presidential candidates. This is extremely important because while professional economists seek to identify rational policies, regular people are psychologically limited in their abilities to engage in rational economic analysis.
Economic analysis is complicated, detailed, and uses sophisticated techniques. Most people lack the requisite skills to understand the analysis; and therefore, they resort to intuitive “sniff tests.” These sniff tests are sometimes effective; but, not always, and it is the “not always” situations that can be dangerous.
The votes of regular Americans will decide the winner of the presidential election, not the recommendations of professional economists. Some might believe in the principle known as “the wisdom of crowds,” but that principle breaks down when the issues involve judgmental tasks that are emotionally laden.
Tariffs On All Imported Goods
An example where regular Americans and professional economists disagree is former President Trump’s proposal that the U.S. levy a tariff of up to 20% on all imported goods. According to a survey administered by the Wall Street Journal, 47% of regular Americans surveyed support this proposal, despite no professional economist surveyed doing so.
Standard economic analysis indicates that tariffs harm the general public, even though they may benefit a few special interests. Tariffs work by imposing taxes on imported goods. These taxes are paid by the consumers of those goods, not the foreign companies or countries selling the goods. The point of these taxes is to reduce the cost advantage enjoyed by foreign competitors, thereby forcing Americans to buy “made in America” that is more expensive to manufacture, or of lower quality than what comes from abroad, or both. Remember, Trump is talking about imposing a 20% tariff on all imported goods!
The 47% of Americans who favor Trump’s tariff proposal appear not to understand the economics of tariffs. Their intuitions are more likely influenced more by the language they hear from Trump, which is laden with emotion. For example, Trump describes tariffs as “beautiful.” He avoids describing tariffs as taxes on American consumers, but instead says that tariffs “will take in hundreds of billions of dollars into our Treasury and use that money to benefit the American citizens.”
The psychological elements in Trump’s pitch for tariffs are highly germane, and apparently effective. The word “beautiful” has a positive spin, what psychologists call “positive affect.” Avoiding the description of tariffs as a tax is an example of psychological salience, or the lack thereof: out of sight out of mind. The statement about billions of dollars flowing into “our Treasury” that will “benefit the American citizens” is intended to create a false image in which the 47% view themselves as being the beneficiaries of the alleged flows into the Treasury, rather than special interests.
Trust is the overarching psychological principal at work in Trump’s communications about tariffs, and of course other campaign issues. The academic framework for the psychology of trust suggests that Trump’s followers trust him because of four reasons.
1. They regard him as a friend, not a foe. He does tell them he loves them.
2. They regard him as having integrity, and believe his statements that the accusations against him in the courts are a witch hunt.
3. They judge him to be competent, and believe him when he says that, as president, “I took in from China hundreds of billions of dollars in taxes and tariffs, and I had no inflation.”
4. They view him as predictable; and indeed, he routinely delivers the same basic messages.
Behavioral economics use the term “nudge” for interventions designed to alter people’s behavior. The nudge framework has several components, such as “incentives/feelings” and “mapping of actions to consequences.” Dark nudges are interventions that harm people, even though on the surface they appear to be beneficial. In respect to tariffs, dark nudging helps people feel as if our country is socking it to China. It helps think that doing so adds billions of dollars to the Treasury. However, the nudge is dark because the tariffs will do much more harm than good for the country.
Price Gouging
Vice President Harris has proposed penalizing companies that engage in price gouging for food products. The Wall Street Journal reports that although 72% of regular Americans support this proposal, only 13% of economists do so.
Standard economic analysis focuses on the role that prices play in aligning demand and supply. Prices naturally tend to rise in the wake of a shock that either reduces supply or increases demand. Suppressing price changes typically creates market inefficiencies by reducing the motivation for producers to increase supply and for customers to reduce demand.
The 72% of regular Americans who support Harris’ price gouging proposal appear not to understand the subtleties associated with the dynamics of equilibrium pricing. Research in behavioral economics finds that people instead focus on a perceived lack of fairness when the price of key products rise after the occurrence of an unfavorable event. The term “gouging” is emotionally loaded, and implies the violation of a right people assume they have.
Harris’ economic plan, for lowering costs and creating what she calls an “opportunity economy,” states the following:
“Vice President Harris and Governor Walz’s proposal—like many of the laws already on the books in 37 states—will go after nefarious price gouging on essential goods during emergencies or times of crisis. When an emergency strikes, the American people deserve to know the government can take on bad actors that take advantage of a crisis to excessively jack up prices.”
The details of Harris’ proposal are vague, but her plan references the existing state laws that are on the books. Her plan suggests that she plans to introduce national legislation along the same lines.
Psychologically, Harris’ proposal might redirect attention away from voters’ perception that the economy is weak, and that inflation remains a threat. To be sure, the inflation experienced during the Biden presidency badly stung most regular Americans. They are still feeling the pain, still experiencing the fear of a resurgence in inflation, and by associating Harris to Biden, in her role as Vice President, connecting her to that pain and fear.
Nevertheless, the economy is currently performing well. The rate of economic growth is normal, the odds of an imminent recession are low, the unemployment rate is low, and inflation is coming down. The Federal Reserve is reducing interest rates, which sets the stage for future growth. Still, for many regular Americans, psychologically, it is the past inflation that is salient, not the state of the current economy: They find themselves experiencing the “peak-end rule.”
Conclusion
Economists are right about the negatives of both Trump’s tariff proposal and Harris’ price gouging proposal. The gut instincts of regular Americans’ psychology on these two issues are simply off.
The net costs to Trump’s tariff proposal are much larger than to Harris’ price gouging proposal. Imports are continuous, and therefore high inefficient tariffs are continuous. Moreover, Trump’s proposal applies to all imports! In contrast, price gouging in response to emergencies is intermittent, and confined to a few products.
Economists have more disagreement with Trump than with Harris. In the Wall Street Journal survey, economists and regular Americans disagree more about proposals put forward by Trump than about proposals put forward by Harris.
In going to the polls this year, regular Americans should carefully reflect on where their gut instincts might lead them, lest they get what they wish for.