A Nightmare of a Dream Team
Dec 19, 2011, Vol. 17, No. 14 • By ANDREW FERGUSON
Is it possible that the people who run the Obama administration aren’t as smart as we’ve been led to believe?
If we save our stimulus cash, do we still get cheese?
Stay with me here, seriously. I’m thinking now of the administration’s much-publicized devotion to behavioral economics. Not long after his election, Time magazine noted that Barack Obama had surrounded himself with a “dream team” of behavioral economists, outside-the-box envelope-pushers like Peter Orszag, who became the administration’s first head of the Office of Management and Budget, and Cass Sunstein, whom the president appointed as his “regulatory czar.”
Behavioral economics is très chic. All the coolest economists are into it. It partakes of the obsession with social science that has lately gripped the country’s smart people, who exhibit a grinding need to quantify human behavior so that it will become more predictable, describable, and controllable. To meet demand, a steady flow of “studies” in human behavior passes through the sluice gates of university departments of accounting, psychology, marketing, sociology, business, and of course economics. From these the behavioral economists build vast edifices of theory and now, thanks to President Obama, public policy too.
The most salient of these policies was the Making Work Pay tax credit of 2009 and 2010. It was an essential element of the president’s famous $250 billion “middle-class tax cut,” which was slapped like a defibrillator onto the limp and supine figure of the American economy a couple years ago. The MWP was carefully designed according to the principles of behavioral economics, and now it seems not to have worked the way it was supposed to.
Behavioral economics is based on the belief that we human beings behave irrationally in measurable and predictable ways, and quite often we don’t have the slightest idea why we do what we do, though social scientists can do experiments that will tell us. This point of view contrasts with the working premise of more traditional economics, which assumes that people will pursue their economic self-interest, rationally defined.
When the Bush administration decided on a temporary tax cut to stimulate the economy, in 2001 and again in 2008, they merely sent everybody a lump-sum check, assuming that we’d all spend it and send a good jolt through the ol’ defibrillator.
The Bush administration, as we all know, was not très chic. It was full of fuddy-duddies. They didn’t understand the up-to-date social science experiments with which behavioral economists keep current. The Obama administration, by contrast, decided it would be scientific. Its economists designed what a headline in the New Yorker called “A Smarter Stimulus.”
The New Yorker’s finance columnist quoted Richard Thaler, a prominent behavioral economist (and colleague of Sunstein). He has decreed one of the axioms of his discipline—that ordinary people put money into “mental accounts.” What he means is that we will be more or less likely to spend money depending on how we think of it and how we came by it. If it’s just dropped in our laps, we will think of it as wealth. If it’s given out to us over time in small amounts, we will think of it as income, if we notice it at all. The distinction is crucial in understanding how we humans spend and save.
“People tend to consume from income and leave perceived ‘wealth’ alone,” Thaler told the New Yorker columnist, who went on to explain the policy implications.
In giving a tax cut, he wrote, “you don’t want to give [taxpayers] one big check. . . . Instead, you want to give them small amounts over time.” Why? Because we won’t notice the small increases in income that the tax cut gives us when it’s spread out over many months. Oblivious to what the government has done for us, we’ll just go ahead and treat it like all other income and spend it in marvelously stimulative ways.
Obama’s economists thus designed a tax cut that would give us more money by decreasing the amount of income withheld from our paychecks. It was a way of outsmarting the taxpayers. The behavioralists were tricking us, as it were, into spending money that we might otherwise save. Sometimes such tricks are necessary. Remember: We’re irrational.
Irrational, but also stubbornly uncooperative. Not long after the adjustments in withholding took effect, a trio of economists decided to try to figure out how we planned to spend our new money. They surveyed a “representative sample of households,” 500 in all, and simply asked the question. Their findings were recently released.
“Just 13 percent of households,” they wrote, “said that the 2009 tax credit would lead them to mostly increase their spending.” The other households said they were going to save the tax-cut money or use it to pay off debts. Morons.