Anyone with a grandparent who lived through the Depression knows the experience changed them: they seem to save everything and shame you for wasting anything. But it turns out that living through the Great Recession has also changed us: it's made us more selfish, according to a new NBER working paper, and it could have major implications for economic policy.
Researchers had students play a "dictator game," a simple scenario in which subjects had a certain number of tokens at their disposal, which each person was 50 opportunities to divide between herself and another, unknown person.
Each participant at the end of the game would receive money based on how many tokens she had left and how many tokens another user had (anonymously) given to her.
But it wasn't just a matter of handing money over; for some people, giving up one token meant giving one to the other person. For others, giving up one token might mean giving less than one to the other. And for some, it meant giving more money to the other person. In other words, the price of redistribution varied.
Participants were also in one of three environments. The first was 2004, prior to the financial crisis, when the economy was relatively strong. That data had already been collected for another study. s had three sets of data to look at. One group of people, which researchers called the Gain Boom group, was from a 2004 study, when the economy was still relatively healthy. And two other groups were tested in the harsh economic climate shortly after the recession ended. The Gain Recession group, tested in 2011, had largely the same setup as the people in 2004. And the Loss Recession group, tested in 2010 and 2011, had the same setup except either the subjects themselves or the anonymous other recipients necessarily had to lose tokens in the transaction — this was meant to be a way of simulating the recession's damaging impacts in a lab setting.
What they found
Researchers write that both of the recession groups were more selfish — meaning they tended to keep more tokens for themselves — than people in the Gain Boom group. Not only that, but the recession groups responded more to the price of redistribution. That is, the more it cost to give money to the other person, the less likely they were to do it. The less it cost, the more likely they were to do it. These effects were even more pronounced in the Loss Recession group than the Gain Recession group. Meanwhile, the group from the boom years tended to prioritize equality over efficiency — they didn't respond as much to changes in the price of redistribution.
What it means
It could be easy to laugh these results off — look at that; the recession made us all more crotchety. But Pamela Jakiela, an assistant professor of agricultural and resource economics at the University of Maryland, says that subjects' choices reflect real-life political beliefs. And those beliefs could have important economic consequences.
People's choices to keep their tokens and maximize efficiency in their transactions can translate in the real world into opposing government taxation and stimulus.
That's because there's some "deadweight loss" as Jakiela puts it, when people's money goes to government redistributive programs like food stamps or extended unemployment benefits. And seeing that the government isn't perfectly efficient at alleviating inequality, people might think twice about their tax dollars going to their countrymen.
And that means Americans may support policies that are counterproductive at alleviating economic downturns.
"There is potentially a feedback loop between the business cycle and the type of redistributive policies that voter might support," says Jakiela. "The need for more government spending to cushion the recession that might be exactly when voters are leaning away from supporting those sorts of policies."