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A Nightmare of a Dream Team

Obama’s intellectuals.

Dec 19, 2011, Vol. 17, No. 14 • By ANDREW FERGUSON
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Perhaps most shocking to the behavioralists, a similar survey of Bush’s 2008 lump-sum tax cut found that 25 percent planned to spend more in response to it. Neither cut was very stimulative, in other words, but the lump-sum was twice as stimulative as the incremental tax cut. People were not responding the way they were supposed to.

It’s hard to imagine a more thorough repudiation of the behavioralist thesis. And the longer you look, the more the new findings appear to undercut the entire enterprise of behavioral economics. 

The behavioral economists were in no mood to concede any essential points, however. Thaler told Businessweek that the new study was fraught with methodological problems.  

“The work is certainly worth doing,” he said. “But you can’t do it by asking people to remember what they did with the money.” He listed two other problems that Businessweek paraphrased like so: “People are .  .  .not very reliable sources of information about their own .  .  . future spending; and they’re often blind to the things that actually shape their financial decisions.”

This last point is just question begging; Thaler simply reasserts the premise of behavioral psychology​—​that we’re irrational and don’t know quite what we’re doing or why at any given moment. His other criticisms are keener. As he notes, “self-reporting”​—​that is, people telling researchers what they’ve done or what they’re about to do​—​is notoriously unreliable, imprecise, and misleading.

Yet self-reporting is also one of the cornerstones of social-science research, and hence of behavioral economics. Indeed, in gathering the scientific evidence for why their incremental tax cut would work, the behavioralists relied on a study of withholding adjustments made in 1992. The study’s findings rested completely on self-reporting.

How did the behavioralists know their design would work? On what basis did they believe that human beings would behave the way they insisted they would? 

Why, science, of course. The study most often cited by behavioralists was undertaken in 2007 and published in 2008. Two researchers at Texas A&M Corpus Christi decided to test the mental-accounting theory. They recruited 141 students and asked them to pretend that they had received a tax refund. Then the researchers​—​one an accounting professor, the other an economist​—​gave them all a questionnaire (or “the instrument,” as social scientists call it, sounding scientific). The questionnaire asked the students how they would use the rebate if it was given in a lump sum. Would they invest in stocks, pay off their credit cards, use it for monthly bills, buy furniture or some other durable good, or save it up so they could blow it on a vacation later? 

Then the students were asked to pretend the refund had been given them in monthly increments. How would they spend the money then?

And there the experiment ended. The two researchers pored over the answers their students gave and concluded that they had established a truth about the behavior of the human animal. People will spend different kinds of income differently. They keep mental accounts!

They got up a paper and published it in the Journal of Economic Psychology. “Results confirm,” they wrote, “that monthly refunds stimulate current spending significantly more than yearly refunds.” 

And so the Obama administration designed its tax cut accordingly. “It’s a policy that works with people as they are,” the New Yorker columnist wrote, “rather than as we imagine they should be.”

This is a key conceit of behavioral economics. Its practioners like to contrast themselves with traditional economists, who are caught in airy, purely theoretical conventions of their own devising​—​the idea that people behave rationally in their own self-interest, for example. The behavioral brand of economics, on the other hand, is about “how real people behave in markets.” 

In reality, it’s about how college students behave in psych labs. And it turns out that college students, even those fine young men and women at Corpus Christi, are not very good proxies for humanity in general. 

The question for the behavioralists is whether people are behaving irrationally in refusing to respond to the tax cut as they were supposed to. You could argue that the rational thing for a person to do when he comes in for a windfall in times of economic stress is to save it or pay off his debts. And that’s what Americans did, apparently, whether the stimulus came in a lump sum, as in 2008, or in increments, as in 2009. 

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