142. "Mass Psychology in the White House," Society, Vol. 18, No. 1 (November-December 1980), pp. 82-85.

Early this year at the White House, we conducted an experiment in mass psychology which surpassed anything ever tried with sophomores in a Harvard psychology lab. The subjects were the nation and, indirectly, the world's economy. Psychology played a key role in the successful outcome of the experiment. It was a rather distinct use of psychology, interpretative and based on social psychology rather than experimental in the laboratory sense of the term. The time was mid-February 1980. In the background, economic news was coming in hard and fast, each bit gloomier than the last. Inflation was getting worse and worse, despite repeated efforts to stem it and predictions by government seers that it was about to subside. Instead of the thrice-predicted recession, expected to help slow inflation, the economy kept going at a heated pitch. Several attempts to cool it, by small increases in the interest rates, had no discernible effect. Overseas, the dollar was under pressure. The straw which threatened to break the camel's back came on February 22, when it was reported that inflation in January had risen to an even higher pitch: "18.2 percent annualized," screamed the headlines. The price of bonds, a major source of investment funds for the nation's industries, collapsed; indeed, new bonds found few takers. "Panic on Wall Street" were the buzzwords in the White House corridors.

In the urgent consultations which followed, one option took an early and predominant lead: balance the budget. Indeed, long before the president was presented with the usual "options" memo and had had a chance to render his decision, the word was spread: The White House is considering biting the bullet, doing it, balancing the budget. Federal agencies were asked to list which of their budget items they would cut if a balanced budget were to be decided upon. The much-dreaded Office of Management and Budget (OMB) division of the White House, which wields the financial axe, was preparing alternative blood baths. Congressional leaders from both parties were called in for "consensus building," in an almost unprecedented joint executive-legislative budget-paring drive. The president himself was largely preoccupied with Iran and Afghanistan, although he did meet with Charles Schultze, the Chairman of his Council of Economic Advisers.

The media brouhaha about the balancing act largely preempted the president's decision. The desirability of a balanced budget is an article of faith for the majority of the nation's voters and was being actively championed by the Republican presidential candidates. It would have been difficult, in an election year, not to balance the budget, though in the past both Democratic and Republican presidents had got away with it. However, to announce that balancing is being actively considered, and then not even to try, would have been like kicking a demigod. Nevertheless, the suggestion of one staff member that the White House find out quietly "whose oxen will have to be gored" before publicly considering budget balancing, was brushed aside. Soon, balancing was openly discussed and every program, from food stamps to free school lunches, from military pensions to social security payments, was publicly scrutinized.

For more than two weeks, balancing the budget was the main option considered. Soon key economic policymakers were so busy in meetings with OMB staff and on the Hill, discussing what programs were to be cut and by how much, attempting to cool down alarmed constituencies trying to protect their own programs, that meetings to discuss other options were, again and again, rescheduled.

Psychology of Expectations

Psychology has much more to do with all this than immediately meets the eye. In an economy of $2400 billion, balancing the budget--which was to entail cutting government expenditures by $13 to $14 billion--could barely have a significant, or even discernible, effect. Even if one assumes that government expenditures are particularly inflationary and have a multiplier effect, while the funds released to the private sector (if government spendings are cut) are particularly productive and anti-inflationary, the amounts are still so small--even multiplied, say by three--that they amount to little. And, of course, OPEC, hospitals, and farmers (the main engines of hyperinflation) would not stop raising their prices just because the government balanced its budget. Most importantly, it was the budget for fiscal year 1981 which was to be balanced (only a few cuts could be made in 1980), and this would not take effect until October 1980. How could this slow down runaway inflation early in 1980?

The near-unanimous answer was: by the use of psychology. As The New York Times reported, "The Administration has been forced to re-examine its economic package a month after it was unveiled, more with an eye to psychology than to economics." Key policy makers publicly cited the importance of psychology. G. William Miller, secretary of the treasury, explained, "Skepticism exists. We cannot deny that, and our job is to reestablish confidence in our budgetary stance." Confidence is not exactly an economic variable. Paul Volcker, chairman of the Federal Reserve Board, said, "I think it is important that we get at this inflationary problem, inflationary psychology, as promptly and effectively as we can."

In the hours before the anti-inflation policy was finally announced on March 14, the White House staff was briefed on how to present the policy to the public. The background paper circulated in the Roosevelt Room (and subsequently leaked to the press) stressed that "Citizens across the country have become worried that our economy is out of control. This worry affects their expectation about inflation and thus their behavior."

Not only was the problem perceived psychologically, but so were the assumptions about the cure: people believe in a balanced budget; hence, balancing it would break inflationary expectations which, in turn, would curb inflationary behavior. Data showed that for roughly the last two years, people had changed their buying behavior drastically; instead of buying when prices were perceived as low or reasonable they had, defying previous economic rules, bought more at the higher prices because they expected prices to go still higher. This, in turn, had exacerbated inflation as people decreased their savings (from 5.0 percent of disposable personal income in 1979 to 3.4 percent in the first quarter of 1980--the lowest level in almost thirty years) and borrowed hysterically (with rates of consumer credit rising from approximately $215 billion in 1977 to $315 billion in 1979) in order to buy, buy, buy. The balanced budget was to turn around these inflationary expectations. This strategy received extensive public endorsement. Paul Volcker spoke of everything being done "to reduce the deficit, to reduce spending, to reduce inflationary impulses." Treasury Secretary Miller explained: "Whether that's right or wrong, those perceptions are relevant because they will affect behavior. This has caused heightened inflationary expectations and that itself produced a pattern of behavior which works against what we want." Leif Olsen, chairman of the Economic Policy Committee of Citibank, observed, "The budget has raised inflationary expectations more than anything, so cutting federal spending is exactly what we need to do to restore confidence and cut those higher expectations." Senate Majority Leader Robert Byrd said, "I support a balanced federal budget in fiscal year 1981. I believe that this is the mood of the Senate, and the mood of the country."

My role, in effect, amounted to helping champion an alternative psychological theorem, limited to the prognosis; there was no difference of viewpoint on the diagnosis. I was serving at the time as senior adviser to a part of the White House concerned with collecting and processing information. As the behavioral scientist in residence, I got involved when issues arose which had a behavioral dimension. "Got involved" covers a fairly elaborate process. While some decisions were made in a kind of presidential huddle, with his advisers bunched around him, most were based on a much more prolonged and orderly process. Economic policy options were laid out (in preparation for a presidential decision) by a committee of five, chaired by the secretary of the treasury, G. William Miller. Other members (referred to in the White House lingo as "principals") were Charles Schultze (chairman of the Council of Economic Advisers), James McIntyre (director, Office of Management and Budget), Stuart Eizenstat (assistant to the president for domestic affairs and policy), and Alfred Kahn (chairman of the Council on Wage and Price Stability). Each of those, in turn, had a staff and advisers. The best way to get a new idea--or a variation on an old one--"sold" was to gain the ear of the principals--or their gatekeepers--before a decision was readied. That was my avenue. I spoke with two of the principals and the gatekeepers of three of the others. Since these were private conversations, I will not violate their confidence by reporting what each said. Instead, I will discuss the main points I made and the shared responses.

My main point was that balancing the budget would not have the expected effect and that another measure, psychologically much more effective, was available. I argued that while it was indeed true that people believe in a balanced budget (87 percent favor a constitutional amendment requiring one), it was a superficial reading of polls to believe that this would swing their purchasing behavior. People were much more ambivalent about the balanced budget than indicated by simple runs based on answers to one question. People did want less government spending in general (84 percent said so), but also more government spending on their favorite programs, with majorities saying there was too little spending on halting crime (67 percent), improving and protecting the nation's health (57 percent), and improving the nation's educational system (54 percent). I also maintained that general beliefs are not linked directly to specific behavior. Hence, catering to an article of faith will not modify purchasing behavior immediately or directly. Most important, I suggested that people will take into account their own personal experiences. Once they discover that hyperinflation continues, despite a balanced budget, they will not go back to saving, cut back on their loans, and buy less, just because Washington has promised to blot out red ink in the next federal budget.

There was an alternative, I argued: work on the behavior side, not merely on expectations; pull in the credit. If considerably less loan monies were available, a step which could be achieved within weeks if not days, and not in the next budget year, people's actual capacity to buy would be curtailed; they would buy less by fiat. This would bring prices down in short order, which, in turn, would curb inflationary expectations, removing this secondary cause of the inflation. In discussions of this point, most economic policy makers in the White House originally took the position that credit controls are an anathema; they constitute an intervention in the market; they might scare the international business community; what we need is less government intervention, not more. As G. William Miller said, "The distortion which such wide-ranging credit controls would produce, both during and after the period when they were in effect, makes them unacceptable except under the most exigent of circumstances." Thus, on March 4, 1980, it was still being reported by the press that "senior economic officials have ruled out any use of credit control powers," and that the "centerpiece of the new [anti-inflationary] package is to be spending reductions," leading to a balanced budget. A secondary measure would be "strengthening" the voluntary wage-price guidelines.

I continued to argue for the second option. I further pointed out that one need not introduce credit controls in the sense of passing specific rules as to what people can buy. (It was suggested, by Alfred Kahn, that downpayments on purchases would be increased and repayment periods shortened for items such as appliances, and, perhaps, autos and houses.) Instead, one could simply require banks to increase their reserves and limit new loans to a set limit, and let them decide to whom to loan what. This would not be credit control (in the sense of a detailed government program, requiring the filing of forms, checking of compliance, etc., etc.) so much as credit limitation. When I feared I would not be heeded, I wrote (on March 7, 1980) a memo directly to the president (a violation of proper procedure) to make my case.

A major new input to the intra-White House dialogue came from an unexpected source: the Congressional Budget Office (CBO) and its director, Dr. Alice Rivlin. The CBO report stated that a $20 billion cut in government outlays in fiscal year 1981 would only reduce the inflation rate by 0.1 percent--after two years. Rivlin herself said, "One shouldn't expect that restrictive budget policies will provide a 'quick fix' of the inflation problem . . . Past experience suggests that such policies aren't likely to have a large impact on inflation in the first year." Another voice of dissent came, though for a different reason, from the Speaker of the House, Tip O'Neill. He called a balanced budget "absolutely a symbol" that would have little effect in curbing inflation, and then said it would "dismantle the programs that I've been working for as an old liberal." Alfred Kahn, the inflation fighter, was more supportive of the credit limitation option, as The New York Times reported: "Mr Kahn has been interested in credit controls ever since becoming President Carter's anti-inflation adviser ... but has had problems selling his ideas to other Administration economic officials and the President."

On March 14, 1980, the president revealed his final decision: it combined both suggestions, though the balanced budget was played up a bit and credit limitation was somewhat played down. Then came the test. Within less than a month, there were dramatic results. The speculative bubble in commodities was punctured. Prices, which had skyrocketed, came down in a hurry. The price of gold fell from above $850 and ounce to $550; copper, from above $1.45 a pound to around 950; silver, from around $35 an ounce to $15; and lumber, from $207 per 1,000 board feet to $160. Even the price of new houses fell a bit. Short-term interest rates fell within six weeks, by roughly 3.5 percent. By April 27, the news was out: "The latest New York Times/CBS News poll makes clear that the psychology of inflation--buy now, it will only cost more later--is giving way to a more cautious, even fearful mentality: buy less, we don't know what will happen later." The polls cited showed that while 81 percent of the population thought the economy was getting worse, only 19 percent said they owed more money at that time than a year earlier, while 33 percent owed less. "In the last couple of months, we've seen the speculative buy-in-advance phenomenon dry up," said F. Thomas Juster, who conducts the purchasing surveys at the University of Michigan. In past months, people had focused on "rising" prices he said; in April, they perceived them as "high," followed by a sharp decline in those who believed April to be the right time to buy major household appliances. (Autos and houses were already in a slump.) The Conference Board's index of consumer buying plans for a wide variety of goods fell in April to 86.3, down from 116.4 in March. By May 19, the Wall Street Journal reported that "consumers have put the brakes on spending--finally. Until just recently, to the surprise of most experts, consumers had continued on a year-long buying spree ... then in March the Fed really lowered the anti-inflation boom with tough restrictions on consumer and business credit. Now consumers are feeling the pinch, so much so that many experts think that the consumer confidence has been severely shaken."

Comments on the cause of these results are instructive. The Wall Street Journal said "analysts attributed the market movement almost entirely to the prospect of higher U.S. interest rates, rather than the other aspects of Mr. Carter's program." Frederick Demling, senior economist for the Chemical Bank said, "Traders are paying more attention to the immediate impact of monetary restraint than to the prospective impact of budget cuts." Indeed, by the time many of the effects of credit curbing were felt, and concern had shifted from the fear of excessive inflation to fear of recession, Congress had not yet decided to balance the budget. While a resolution was later passed, there was wide agreement that the budget would not actually be balanced. By the end of May, the president and his secretary of the treasury were in a position to tell consumers that their job was done and they could go back to spending as usual.

Indeed, by the end of May, some observers argued that the government may have engaged in "overkill," that the country was heading into a recession anyhow, and the credit-tightening cure in effect made things worse by driving the economy into a deeper recession than otherwise would have taken place. Some of this criticism was made by candidates running against the president both within and outside his own party; they were not to be expected to grant that the White House was effective in a major way. What they disregarded was that in late February the issue was exploding inflation, with the thrice-predicted recession not in sight. Action had to be taken to stop inflation from spiraling to 25 percent, stirring up major new demands from labor, creating a still higher inflation, and so on. A measure of recession succeeded in achieving this purpose by curbing inflationary expectations.

There are those who argue for radically different approaches, such as mandatory wage-and-price controls and major tax cuts (" supply-side" economics). This is not the place to settle the economic arguments between these approaches and the one the White House chose. The only issue here, once the diagnosis was to break inflationary expectations, was which steps would be effective. Having made the first decision, the use of credit limitations--and not merely or mainly relying on a balanced budget--was clearly the effective course.

Social Science Advice

What did I base my advice on? Could I cite a cardinal experiment, a major finding, or a study to prove my point? No and yes. No, there is not a single psychological work I am familiar with which demonstrates that lower credits will have a better effect on purchasing behavior and inflationary expectation than will balancing the budget. Indeed, we have not had such high inflation in the United States since modern psychology has been practiced as a science. But there is a cumulative body of knowledge, pieced together from scores upon scores of studies and theoretical work. While it does not deal directly with the behavior at hand, it does deal with the relationship between belief and behavior in many other situations, from race relations to psychotherapy, and it deals clearly with the dynamics of the relations between those two. For instance, studies of desegregation show that hotel owners who said they would refuse space to interracial couples, did not refuse admittance when actually faced with such a couple (i.e., attitude and behavior divergence). Moreover, the actual desegregation of an army base was followed by acceptance of desegregation (i.e., an instance where attitudes followed behavior).

Can these generalizations be safely applied to any specific issue not itself studied? No and yes. No, I could not state with full assurance that inflationary expectations--during March 1980--in the United States would follow a path other attitudes did. (Nor is there anything like full agreement among social scientists as to what or how attitudes changed on other occasions.) However, a good knowledge of psychology and the workings of mass psychology provided me with better insight into what might happen on this front than that provided economists, lawyers, and politicians by their training and experience. True, I did some interpreting and projecting--but it was based on empirical evidence, unlike the conjectures about mass psychology made by others who lacked such a base.

For more than fifteen years, there has been a debate within the social science community, and among a few interested members of Congress, as to whether there should be a social science adviser to the president, or social scientists added to the Council of Economic Advisers, or development of some other method to systematically add social insight to presidential considerations. By and large the answer was that social scientists are not ready, are too internally divided, politically exposed, and weak. I had felt that the matter was really not that important one way or the other. Lengthy deliberations on the subject struck me as a kind of narcissistic preoccupation with the social-science self rather than with society, the appropriate subject. After a year in the White House, I see the situation differently. While I still do not care much how the president might be systematically provided with social science input, I am confident that he needs it--badly. Advice based on amateurish notions about psychological (and other social scientific) factors serves the president and the country poorly. It nearly torpedoed the March 1980 anti-inflation drive.

Amitai Etzioni was Senior Adviser in the White House during the period covered by this article. He is the founder and director of the Center for Policy Research and the author of numerous books, including A Comparative Analysis of Complex Organizations, Modern Organizations, Political Unification, The Active Society, Genetic Fix, and Social Problems.

The Communitarian Network
2130 H Street, NW, Suite 703
Washington, DC 20052