Solving the coronavirus economic downturn — good psychology makes for good politics and policy

As Congress debates how best to keep the country out of a severe recession as businesses shutter their doors and lay off workers, in large part in response to governmental calls for social distancing, we hear familiar solutions, such as an “economic stimulus,” “tax cuts” and “bailouts” (or “rescue packages,” depending on which party is in the majority).  

An economic stimulus helped restore the economy during the Great Depression and Great Recession, with solid economic reasoning behind it:  if unemployed workers are employed through public works projects, or if people who cannot work receive a lifeline through Social Security or unemployment insurance, they have money in their pockets to spend. That, in turn, creates jobs for other workers, which ultimately breaks the downward cycle.  

Republicans favor tax cuts, whether a booming economy can “now afford” them, or in a recession, to provide an infusion of money to kick the economy back into gear.  That is essentially the GOP version of a stimulus, although usually targeted to individuals and businesses that spend much less of their income than the people who are the targets of Democratic stimulus plans. 

“Bailouts” limited the free fall of the banks in 2008 and saved the automobile industry, which is now one of our most robust industries and employers. Along with the stimulus, the bank bailouts stopped the hemorrhaging of nearly three quarters of a million jobs a month when Obama took office, and the rescue of the Big Three automakers — GM, Chrysler and Ford — saved a million jobs. Thus, we are now hearing calls to rescue industries such as airlines and cruises, along with whatever industries can afford enough lobbyists to argue their case to Members of Congress who are still congregating in Washington.  More recently, Andrew Yang’s proposal of $1000 per person has seemed like another potential solution to many.

Before rounding up the usual solutions, however, we should pay careful attention to the problems for which we are seeking solutions and be careful to avoid cognitive biases that distort our decision-making.

In 1945, a classic psychological article described a phenomenon called “functional fixedness,” our difficulty recognizing ways we could use familiar tools in unfamiliar ways to solve problems. Thus, as I sat on my deck today in beautiful weather in Atlanta, sipping wine, 15 minutes passed between the time I began swearing about the gnats diving head first and dying in my wine glass and the time I realized that the cell phone sitting on the table, which, sure, is great for texting, surfing the web, and even occasionally making phone calls, covered the entire diameter of the wine glass, so I could drink my wine in peace.    

Twenty years later, Abraham Maslow famously wrote something to the effect that “if you only have a hammer, everything looks like a nail.”  So if the only weapon in your arsenal at times of economic downturn is a tax cut, you cut taxes to your usual targets.  Or if you have a plan to give every family $1000 – or perhaps everyone earning below some threshold – then everyone is a nail, regardless of whether that is enough to keep people in their homes or food on the table.  

Then came research on yet another concept, confirmation bias, our tendency to search for answers, information or interpretations that fit our prior expectations. Thus, we are more likely to see the similarities than the differences between the current situation and our preferred solutions. Thus, having helped flailing industries before, in the 2008 financial crisis, we bailed out the banks to deal with the problem of their “toxic assets” – packages of loans they sold off knowing would fail because the loans were ticking time bombs with escalator clauses that would lead to foreclosures – rather than protecting six million people from having their homes foreclosed by giving them an interest holiday of two or three years and a fair, low, fixed interest rate, so their loans were no longer toxic assets, and let the banks pay the difference.  

So how do we avoid psychologically dysfunctional decisions, such as a hammer for every nail instead of a chicken in every pot?   

Lawmakers might do well to ask, first, what, exactly, are the causes of the current financial crisis accompanying the medical one, and how might we adapt solutions with data supporting them to these particular circumstances?  And second, how can we prevent our minds from playing tricks on us, which are only magnified under conditions of uncertainty?  

As Sir Francis Bacon said, knowledge is power, and as Freud added, self-knowledge offers power over our own minds.  

So what, exactly, is the economic problem?  For businesses, such as restaurants and manufacturing plants, people are either afraid to come or forbidden from congregating. That means consumption, production and sales are coming to a screeching halt, which makes paying fixed costs such as rent impossible and renders variable costs expendable. Unfortunately, that includes labor.

For workers, as businesses close their doors, those who cannot work digitally from home, particularly lower wage-earners, such as waiters, retail workers and plant workers, are now flocking to unemployment offices in record numbers and will soon fall behind on their rent or mortgage. Offering them 20 or 30 percent of their income, or $1000 a month, is close to useless, unless they only earned $12,000 a year to support themselves or their family. The same is true for parents who cannot work from home, where they need to stay with their kids because of school closings.

If we start with more precise premises, we can more readily see how to retool our hammers.  For example, we could solve most of these problems through tax policy. We cannot use a WPA-like stimulus program, because that would require workers to congregate. A tax cut, whether across the board or for the usual suspects — the wealthy and big corporations — is too blunt an instrument to address businesses closing, workers without jobs and parents without schools.  

But depending on the size and typical earnings of a business (e.g., whether averaged over the last several months or the last few years at this time for more seasonal industries, or both), the federal government could offer tax incentives up to 80 percent to cover the costs of keeping their workers on the payroll whether they are currently working or not, and to cover some of their fixed costs until consumers and workers can congregate again, perhaps combined with low-interest loans for businesses and individuals who need it to stay afloat.  

That would satisfy Democrats with a strong stimulus, targeted at working people; Republicans, with a strong tax cut, targeted at business; and the stock market, with a sensible solution coming from Washington, while people stayed home for two, three, or four weeks.  The only unhappy party would be the coronavirus, which would have nowhere to go, flattening the curve of new cases.

As I learned on my deck this evening, while avoiding nose-diving gnats, sometimes an iPhone is not just an iPhone.  And sometimes good psychology makes for good politics and good policy.  

Drew Westen is a psychology professor at Emory University and author of “Political Brain: The Role of Emotion in Deciding the Fate of the Nation.”

Tags Andrew Yang Coronavirus COVID-19 COVID19 economy Stimulus tax cuts tax holiday Unemployment

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