Most survey respondents were randomly presented with one of five statements that laid out historical national data for either average, high, or low rates of economic growth, and then saw similar data about how unemployment tracks with booms and recessions. (One set of participants received all the available data.) With this data context embedded in each question, respondents were asked how much spending they would forgo in return for an economy that hit the average growth rate.
Across the 13 countries, participants were on average willing to forgo nearly 6 percent of spending in return for a smoother economy, the researchers find. Despite some variation, willingness to pay was high even in more stable economies such as the Netherlands, where it was 3.4 percent. By comparison, WTP was nearly 8 percent in South Korea, which has experienced more economic volatility. In all, while theory holds that consumers won’t forgo any spending for a smoother economy, 90 percent of total respondents said that they would.
To measure consumer attitudes toward inflation, the researchers asked participants to first choose an annual inflation rate (ranging from -10 percent to 10 percent) that they believed would be “most beneficial” to their household over the next three years. They also weighed in with their inflation expectations for the coming year.
The participants then said how much spending they would forgo to close the gap between their expectations and their desired level of inflation. Not only were they on average willing to give up more than 5 percent of spending to get inflation to their desired level; they also said they would accept an unemployment rate 2 percentage points higher and GDP growth 2 percentage points lower to get there.
Moreover, while macroeconomic theory typically treats stable prices and a stable economy as separate issues, this research indicates that consumers see the two as more closely intertwined.
These findings are part of a larger argument that consumer opinions and behavior can be useful tools in economic forecasting. (For more, read “Want more accurate economic forecasts? Consumer surveys may hold the key.”)
“Ignoring public perceptions of economic conditions and tradeoffs is a recipe for designing policies that may well succeed in theoretical models and perhaps even in practice, but yet may still fail in the polls and ultimately find themselves replaced by populist alternatives,” the researchers conclude.