Behavioral economics meets politics

Last week, a pair of leading behavioral economists almost took down the whole field. Just kidding. But it sure seemed like it given some of the chatter in the blogosphere about the New York Times op-ed “Economics Behaving Badly”. There were a number of lines of criticism about behavioral economics in the piece, but the most damning was that the field is ill-equipped to handle huge social problems now that politicians have gotten their hands on it.

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.

Politicians get their hands on lots of things that they then use for political expediency. Behavioralists are now in good company with their traditional economics brethren. Welcome to the club.

People try to avoid pain (that’s a behavioral economics lesson). People also elect politicians, who promise to give people what they want. Politicians get reelected and people get to avoid hard truths. Painless all around. To expect politicians and voters to behave otherwise requires overcoming a lot of cognitive dissonance and mental jujitsu.

It’s not as if traditional economists are exempt from this reality. Take one of their biggest sticks: Taxes. Over the last 30 years, politicians from both parties have been promising to lower all kinds of taxes and balance the budget by getting rid of “government waste.” Not many traditional economists think this qualifies as sound fiscal policy.

Just because a political solution seems to rely on traditional economic tools, no one should automatically think it’s bound to be effective. Remember two summers ago when politicians from both parties were promising to lower gas prices by suspending the gas tax, even though most every economist, traditional or otherwise, said it wouldn’t have much effect? Corn subsidies constitute such a small piece of the price of a can of soda that ending them isn’t a panacea for obesity. Capping medical malpractice payouts isn’t the silver bullet to reining in medical costs that some believe it to be.

Just because one behavioral intervention, say calorie counts, doesn’t appear to be effective, doesn’t mean others won’t be. Small changes in the behavioral design of cafeterias have led to significant increases in healthy choices. And just because a percentage change is small, doesn’t mean the substantive size of the effect isn’t large. OPower is an energy efficiency software company experimenting with informational cues on utility bills. It’s best known for putting the smiley faces on utility bills. According to its own figures, the decreases in energy consumption, which average around 2 percent, have led to consumer savings of $16 million among the 2 million households the company serves. That’s potentially more than $800 million if expanded to everyone in the U.S. From smiley faces!

The bottom line is that fixing America’s biggest problems – getting people healthier, helping them save more money, boosting their knowledge and economic productivity – will be much more complicated than a few nudges or a few traditional incentives. Any one problem will likely require a solution that blends behavioral insights with traditional ones. And it will have to be cognizant of humans, including politicians. Far from dooming the field, behavioral economists’ recent work and their psychological insights should be a cause for more invitations from both parties, and more collaboration with traditional economists working on public policy. It seems to be the politicians who are behaving badly with economics.