Study Finds That Nobody Changes Their Mind After Reading Fake News

You'll Never Believe What Trump Said About It

The title, in case you didn’t already guess, is fake news. There was no study. But think about your reaction when you read it. Raise your hand if you said “wait a minute, I always thought fake news was a huge deal but I guess this study proved me wrong. I’ll just change my mind without thinking about it at all.” Anyone? Yeah I didn’t think so. And if you aren’t convinced by a headline on a reputable publication such as this one (OK maybe not so much), are you really buying the fake headlines that the Pope backed Trump or that Hillary actually didn’t win the popular vote?

Recently there has been an uproar surrounding these fake headlines. Germany wants Facebook to pay $500,000 for every fake news story that shows up. California (of course) wants to pass a law that will make sure every high school teaches its students how to spot fake news stories. I wish those stories were themselves fake news, but they appear to be all too real.

Now there probably are some people who do read these fake headlines and don’t do their research. Maybe they’ll store it somewhere in the back of their mind and use it as evidence to support their positions in debates with their friends. But I suspect that the only people who believe a fake headline are ones who were already inclined to believe it before they read it. No study has been done, but I’ll make the claim anyway: Nobody changes their mind because of fake news.

(One qualification to the above point is that it may break down if real news were censored. Here I am thinking about a case where the government restricts the media so that propaganda becomes the only source of information. Obviously that would be a major problem)

Perhaps more concerning is that people also don’t seem to change their mind because of real news either. They don’t let the facts guide their positions, but instead seek out the facts that support the positions they already held. Is believing a fake news story any worse than only believing the stories that confirm your preconceived inclinations?

In other words, the problem is not fake news. The problem is confirmation bias. Everyone’s guilty of it. I certainly am. How could you not be? With the internet at your fingertips, evidence supporting nearly any argument is freely available. And I don’t just mean op-eds or random blog posts. Even finding academic research to support almost anything has become incredibly easy.

Let’s say you want to take a stand on whether the government should provide stimulus to get out of a recession. Is government spending an effective way to restore growth? You want to let the facts guide you so you turn to the empirical literature. Maybe you start by looking at the work of Robert Barro, a Harvard scholar who has dedicated a significant portion of his research to the size of the fiscal multiplier. Based on his findings, he has argued that using government spending to combat a recession is “voodoo economics.” But then you see that Christina Romer, an equally respected economist, is much more optimistic about the effects of government spending. And then you realize that you could pick just about any number for the spending multiplier and find some paper that supports it.

So you’re left with two options. You can either spend a lifetime digging into these dense academic papers, learning the methods they use, weighing the pros and cons of each of their empirical strategies, and coming to a well-reasoned conclusion about which seems the most likely to be accurate. Or you can fall back on ideology. If you’re conservative, you share Barro’s findings all over your Facebook feed. Your conservative friends see the headline and think “I knew it all along, those Obama deficits were no good,” while the liberals come along and say, “You believe Barro? His findings have been debunked. The stimulus saved the economy.” And your noble fact finding mission ends in people digging in their heels even further.

That’s just one small topic in one field. There’s simply no way to have a qualified, fact-driven opinion on every topic. To take a position, you need to have a frame to view the world through. You need to be biased. And this reality means that it takes very little to convince us of things that we already want to believe. Changing your mind, even in the face of what could be considered contradictory evidence, becomes incredibly hard.

I don’t have a solution, but I do have a suggestion. Stop pretending to be so smart. On every issue, no matter what you believe, you’re very likely to either be on the wrong side or have a bad argument for being on the right side. What do the facts say, you ask? It would only be a slight exaggeration to say that they can show pretty much anything you want. I’ve spent most of my time the last 5 or so years trying to learn economics. Above all else, I’ve learned two things in that time. The first is that I’m pretty confident I have no idea how the economy works. The second is something I am even more confident about: you don’t know how it works either.

What’s Wrong With Modern Macro? Part 1 Before Modern Macro - Keynesian Economics

Part 1 in a series of posts on modern macroeconomics. This post focuses on Keynesian economics in order to set the stage for my explanation of modern macro, which will begin in part 2. 


John Maynard Keynes – Wikimedia Commons

If you’ve never taken a macroeconomics class, you almost certainly have no idea what macroeconomists do. Even if you have an undergraduate degree in economics, your odds of understanding modern macro probably don’t improve much (they didn’t for me at least. I had no idea what I was getting into when I entered grad school). The gap between what is taught in undergraduate macroeconomics classes and the research that is actually done by professional macroeconomists is perhaps larger than in any other field. Therefore, for those of you who made the excellent choice not to subject yourself to the horrors of a first year graduate macroeconomics sequence, I will attempt to explain in plain English (as much as possible), what modern macro is and why I think it could be better.

But before getting to modern macro itself, it is important to understand what came before. Keep in mind throughout these posts that the pretense of knowledge is quite strong here. For a much better exposition that is still somewhat readable for anyone with a basic economic background, Michael De Vroey has a comprehensive book on the history of macroeconomics. I’m working through it now and it’s very good. I highly recommend it to anyone who is interested in what I say in this series of posts.

Keynesian Economics

Although Keynes was not the first to think about business cycles, unemployment, and other macroeconomic topics, it wouldn’t be too much of an exaggeration to say that macroeconomics as a field didn’t truly appear until Keynes published his General Theory in 1936. I admit I have not read the original book (but it’s on my list). My summary here will therefore be based on my undergraduate macro courses, which I think capture the spirit (but probably not the nuance) of Keynes.

Keynesian economics begins by breaking aggregate spending (GDP) into four pieces. Private spending consists of consumption (spending by households on goods and services) and investment (spending by firms on capital). Government spending on goods and services makes up the rest of domestic spending. Finally, net exports (exports minus imports) is added to account for foreign expenditures. In a Keynesian equilibrium, spending is equal to income. Consumption is assumed to be a fraction of total income, which means that any increase in spending (like an increase in government spending) will cause an increase in consumption as well.

An important implication of this setup is that increases in spending increase total income by more than the initial increase (called the multiplier effect). Assume that the government decides to build a new road that costs $1 million. This increase in expenditure immediately increases GDP by $1 million, but it also adds $1 million to the income of the people involved in building the road. Let’s say that all of these people spend 3/4 of their income and save the rest. Then consumption also increases by $750,000, which then becomes other people’s incomes, adding another $562,500, and the process continues. Some algebra shows that the initial increase of $1 million leads to an increase in GDP of $4 million. Similar results occur if the initial change came from investment or changes in taxes.

The multiplier effect also works in the other direction. If businesses start to feel pessimistic about the future, they might cut back on investment. Their beliefs then become self-fulfilling as the reduction in investment causes a reduction in consumption and aggregate spending. Although the productive resources in the economy have not changed, output falls and some of these resources become underutilized. A recession occurs not because of a change in economic fundamentals, but because people’s perceptions changed for some unknown reason – Keynes’s famous “animal spirits.” Through this mechanism, workers may not be able to find a job even if they would be willing to work at the prevailing wage rate, a phenomenon known as involuntary unemployment. In most theories prior to Keynes, involuntary unemployment was impossible because the wage rate would simply adjust to clear the market.

Keynes’s theory also opened the door for government intervention in the economy. If investment falls and causes unemployment, the government can replace the lost spending by increasing its own expenditure. By increasing spending during recessions and decreasing it during booms, the government can theoretically smooth the business cycle.

IS-LM

The above description is Keynes at its most basic. I haven’t said anything about monetary policy or interest rates yet, but both of these were essential to Keynes’s analysis. Unfortunately, although The General Theory was a monumental achievement for its time and probably the most rigorous analysis of the economy that had been written, it is not exactly the most readable or even coherent theory. To capture Keynes’s ideas in a more tractable framework, J.R. Hicks and other economists developed the IS-LM model.

I don’t want to give a full derivation of the IS-LM model here, but the basic idea is to model the relationship between interest rates and income. The IS (Investment-Savings) curve plots all of the points where the goods market is in equilibrium. Here we assume that investment depends negatively on interest rates (if interest rates are high, firms would rather put their money in a bank then invest in new projects). A higher interest rate then lowers investment and decreases total income through the same multiplier effect outlined above. Therefore we end up with a negative relationship between interest rates and income.

The LM (Liquidity Preference-Money) curve plots all of the points where the money market is in equilibrium. Here we assume that the money supply is fixed. Money demand depends negatively on interest rates (since a higher interest rate means you would rather keep money in the bank than in your wallet) and positively on income (more cash is needed to buy stuff). Together these imply that a higher level of income results in a lower interest rate required to clear the money market. An equilibrium in the IS-LM model comes when both the money market and the goods market are in equilibrium (the point where the two lines cross).

The above probably doesn’t make much sense if you haven’t seen it before. All you really need to know is that an increase in government spending or investment shifts the IS curve right, which increases both income and interest rates. If the central bank increases the money supply, the LM curve shifts right, increasing income and decreasing interest rates. Policymakers then have two powerful options to combat economic downturns.

In the decades following Keynes and Hicks, the IS-LM model grew to include hundreds or thousands of equations that economists attempted to estimate econometrically, but the basic features remained in place. However, in the 1970s, the Keynesian model came under attack due to both empirical and theoretical failures. Part 2 will deal with these failures and the attempts to solve them.