Business & Economics

The Great Recession and preferences for redistribution

Carola Binder

Differences in attitudes towards welfare and redistribution are an important source of political tension, especially during recessions. What factors shape people’s attitudes towards welfare and redistribution?

There are two main strands of thought on this question in the literature. One strand emphasizes economic self-interest as a key determinant of attitudes toward welfare and distribution. According to this view, people’s position in the labor market, exposure to layoff risk, and financial status are the main factors determining their attitudes. Another strand emphasizes different ideological dispositions on issues such as fairness, equality, and the role of government.

It is empirically difficult to distinguish between the two strands, since material circumstances and ideology may influence each other. Two recent papers — one from Berkeley — take advantage of the Great Recession in their empirical design to study social preference formation. First is a paper by Yotam Margalit titled “Explaining Social Policy Preferences: Evidence from the Great Recession“:

I use an original panel study that consists of four waves of surveys in which the same national sample of respondents was contacted for repeat interviews between July 2007 and March 2011. In these repeat interviews, detailed information was collected not only on respondents’ changing labor market circumstances but also on their political attitudes. Utilizing this rich longitudinal data, covering periods both before and after the eruption of the financial crisis, I estimate how individuals’ preferences on welfare policy shift in response to the personal experience of three types of economic shocks: a substantial drop in household income, a subjective decrease in perceived employment security, and the actual loss of a job.

The central finding of the analysis is that voters’ preferences regarding welfare policy are strongly affected by changes in their own economic circumstances. In particular, the loss of employment is found to have a major effect, increasing the average probability of support for greater welfare spending by between 22-25 percentage points.

An interesting secondary finding is the following:

The analysis also reveals that the experience of the economic shock does indeed lead to a convergence in the welfare preferences of harmed individuals who prior to the shock held distinct political views. In particular, I find that in response to a personal economic shock such as layoff, Republicans and Independents grew significantly more supportive of welfare assistance, while among Democrats the effect was much smaller.

The effect may not be permanent:

I find that with the passing of time, as job losers regain employment, their support for the expansion of welfare spending decreases significantly. This shift in attitude among the re-employed is more frequent among voters on the right.

The other paper is a working paper by Raymond Fisman, Pamela Jakiela, and Shachar Kariv called “How did the Great Recession Impact Social Preferences?” This paper focuses on the formation of ideological dispositions toward equity and redistribution. This is an experimental paper utilizing the Xlab at UC Berkeley. Subjects were drawn from the UC Berkeley student body, the socioeconomic composition of which is held fairly constant by the admissions office.

The same experiments were conducted both before and during the Great Recession. Subjects played different variations of the “dictator game,” in which one player decides how much money (or tokens) to allocate to herself and to other players. The game is an experimental test of people’s self-interestedness. Variations of the game, discussed in the paper, allow researchers to disentangle selfishness from the willingness to tradeoff efficiency and equity.

Our main finding is that the Great Recession had a dramatic effect on individual social preferences: subjects who participated in laboratory dictator games prior to the economic downturn are significantly more altruistic than those who took part in identical experiments after the onset of the recession. Our experimental design — employing graphical representations of modified dictator games that vary the price of redistribution — enables us to distinguish indexical selfishness from the willingness to tradeoff equality and efficiency. Moreover, our experimental method generates many observations per subject, and we can therefore analyze both types of social preferences at the individual level. We find that subjects exposed to the economic downturn place greater emphasis on efficiency and display greater levels of indexical selfishness.

(This article is reposted from my blog.)

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