Behavioral Economics and Public Policy

From “Economics Behaving Badly” by George Loewenstein and Peter Ubel in the NY Times:

IT seems that every week a new book or major newspaper article appears showing that irrational decision-making helped cause the housing bubble or the rise in health care costs.

Such insights draw on behavioral economics, an increasingly popular field that incorporates elements from psychology to explain why people make seemingly irrational decisions, at least according to traditional economic theory and its emphasis on rational choice. Behavioral economics helps to explain why, for example, people under-save for retirement, why they eat too much and exercise too little and why they buy energy-inefficient light bulbs and appliances. And, by understanding the causes of these problems, behavioral economics has spawned a number of creative interventions to deal with them.

But the field has its limits. As policymakers use it to devise programs, it’s becoming clear that behavioral economics is being asked to solve problems it wasn’t meant to address. Indeed, it seems in some cases that behavioral economics is being used as a political expedient, allowing policymakers to avoid painful but more effective solutions rooted in traditional economics.

The “more effective solutions rooted in traditional economics” end up including the elimination of corn subsidies, a gas tax, and a carbon tax.  I don’t have the expertise to comment on the relative merits of these policy proposals.  Additionally, I’m in principle supportive of politicians making hard and unpopular decisions that are nonetheless right decisions (I suppose “in principle” so is everyone else).  My sense is that policies informed by behavioral economics are attractive in part because they attempt to nudge rather than coerce and in so doing appear to mediate between free markets and government interventionism.

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