Back in 2006, enough people in Washington agreed on a behavioral economics principle to pass a law about it (Pension Reform Act). It gives employers the authority to automatically enroll employees in 401(k) plans. The intent is that many people don’t enroll in retirement accounts because they are simply lazy. The idea works, and companies that adopted automatic enrollment saw an increase in employees saving for retirement.
Washington again looked to behavioral economics with the 2009 stimulus package. In this bill was the Making Work Pay tax credit which put a few benjamins in the pockets of Americans. Unlike the Bush stimulus, which was a one-time boost, the Making Work Pay stimulus trickled in as just a small amount in every paycheck. The idea behind this is that people would be more likely to spend an extra $30 a month than if they’d just gotten the big check up front like last time.
But some new research indicates it didn’t work. Traditional economists really wouldn’t care if the money came instantly or trickled in, stimulus is stimulus. Behavioral economists argue the delivery is just as important as the amount. People saved the Bush stimulus, so maybe they would spend the Obama one. They did not.
At least that’s what a survey indicates. Only 13% of us expected in increase our spending based on the tax break. 25% were expected in the Bush stimulus. Does behavioral economics have a counter-argument to this then? Of course.
For one thing, people are terrible at reporting exactly how their spending habits would change based on such a relatively small increase in income. This is the same reason I don’t much weight into reports of consumer confidence. And you can ask someone what they expect to spend on Christmas shopping this year, but how many people actually live up or down to that magic number? 13% may intend to increase their spending, but 50% may actually do it.
But, for the sake of argument, assume the Obama version was a failure from a behavioral economics hypothesis standpoint. Is there still something to be learned? Of course. The lesson would be that consumers are more likely to spend a lump sum. Still good to know.
I’m skeptical that’s really the case, but behavioral economists may have an infallible profession so long as they don’t draw hard lines defining exactly what the behaviors will be, just that they are irrational. This is one of the problems with economics in general too; it’s too hard to test. The Obama and Bush stimuli seem similar, but between 2008 and 2009 consumers likely had vastly different plans for a few hundred bucks. A classic example of comparing Blood oranges to Cox-Orange-Renette apples.
What’s the real lesson here? Behavioral economics is finally making its way into policy. What was once a niche in economics is now influencing Washington, and the results are either mixed or difficult to measure. This is a common problem with bringing any idea grown in a lab into law. The rational eye is keeping an eye on this while the irrational one is doing something unexpected.
Photo: The White House