Consumers Would Pay for a Smoother Economy
Contrary to economic theory, survey respondents say they will trade off some spending in return for not having to deal with recessions.
- By
- June 17, 2025
- CBR - Economics
A common theme in some recent research is that what the rational economic theory presumes is often out of step with what consumers say and do. In the latest salvo, a team of researchers including Chicago Booth’s Michael Weber delivers evidence that while the theory says consumers aren’t willing to pay anything to avoid economic booms and busts, consumers themselves say otherwise.
The late Robert E. Lucas Jr., a Nobel laureate, made a theoretical case that even if consumers prefer a smoothed-out economy, they won’t pay to get one. “The potential gains from improved stabilization policies are on the order of hundredths of a percent of consumption,” Lucas explained in a 2003 address to the American Economic Association. His findings have been used to focus policy away from managing short-term economic cyclicality and toward driving long-term economic growth.
But Weber and his coresearchers surveyed more than 35,000 consumers in 11 European countries, as well as South Korea and the United States, about their appetite to forgo spending in return for less volatile business cycles. On average, they find, respondents were willing to sacrifice nearly 6 percent of their lifetime consumption in return for not having to live through volatility. Also, they were willing to forgo 5 percent of their consumption, on average, in return for an inflation rate they deemed acceptable.
Macroeconomic theorists often contemplate “impossible worlds,” and their inferences (in this case, that business cycles and inflation aren’t a big consumer worry) can make sense based on a given set of assumptions, the researchers write. “But recommendations on making the world a better place should perhaps occasionally be cross-checked against the views of the people whose welfare is being optimized,” they add.
The researchers surveyed consumers in mid-2004, adding their own questions into the European Central Bank’s monthly Consumer Expectations Survey, as well as to surveys sent out to participants of the NielsenIQ Consumer Panel (the data for which are housed at Booth’s Kilts Center for Marketing), and the similar Macromill Embrain Panel in Korea.
The tradeoff for stability
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.
- Dimitris Georgarakos, Kwang Hwan Kim, Olivier Coibion, Myungkyu Shim, Myunghwan Andrew Lee, Yuriy Gorodnichenko, Geoff Kenny, Seowoo Han, and Michael Weber, “How Costly Are Business Cycle Volatility and Inflation? A Vox Populi Approach,” Working paper, February 2025.
- Robert E. Lucas, Jr., “Macroeconomic Priorities,” American Economic Review, March 2003.
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