Don’t nudge; reform Social Security

My sister-in-law taught me to do the “Dallas nudge.” It’s sort of a dance, like the Texas Two-Step, except it’s a tactic for getting onto one of Dallas’ many twelve-lane expressways. So you floor the gas pedal to match the speed of the traffic you want to merge with and then look away. The other drivers think you can’t see them and make room for you.

Behavioral economists have been pushing the government to nudge us since some of their own won the Nobel Prize. Like CS Lewis’ “do gooders,” we’ll never be free from their needling and meddling. The latest comes from the Chicago Booth School of Business in an article “Why policy makers should nudge more" by Alex Virkhivker. He wrote,

In one case, the researchers looked at a nudge by the tax-preparation firm H&R Block, which offered clients assistance in filing college financial-aid paperwork, and compared that approach with subsidies and tax incentives offered at the state and federal levels. The nudge produced 1.5 additional college enrollees per $1,000 spent—making it 40 times more effective than the next most effective intervention the researchers analyzed.

Likewise, nudging turned out to be the most cost-effective way of encouraging energy conservation. One program to nudge consumers into lower electricity use, sending letters comparing a household’s energy consumption to that of its neighbors, saved 27 kilowatt-hours per dollar spent. In contrast, a rebate offered by California utility companies produced savings of only 3.4 kWh per dollar, and other demand-management policies that relied on a combination of consumer education and monetary incentives averaged 14 kWh per dollar.

The dismal science gets morality

Several authors want to make an honest woman of dismal science. Among them are Nobel Prize winner George Akerlof and Rachel Kranton who wrote Identity Economics, and Sam Bowles who penned The Moral Economy. Project Syndicate posted a quick review by Ricardo Hausmann who wrote, “Two recent books indicate that a quiet revolution is challenging the foundations of the dismal science, promising radical changes in how we view many aspects of organizations, public policy, and even social life. As with the rise of behavioral economics, this revolution emanates from psychology.”

Cognitive psychology spawned behavioral economics and its proponents have grabbed six Nobel prizes for telling us that humans are not always rational. Behavioral economists tried to corral the older Efficient Market Hypothesis (EMF), which actually said that in the long run professionals make the market behave rationally. EMFers always knew that in the short run people could act irrationally and often did. Behavioral and EMF economists talked past each other for the most part because the first dealt with the short run and the latter with the long run.

The new economics proposed by Akerlof and company want to improve behavioral perspectives by adding morality to the dismal science, which hasn’t been a part of mainstream economics since Adam Smith. Behavioral economics led to calls for the state to nudge people in the direction economists thought best for them,

such as forcing them to opt out of rather than into better choices....The new revolution assumes that when we make choices, we do not merely consider which of the available options we like the most. We are also asking ourselves what we ought to do.”

Akerlof and Kranton propose a simple addition to the conventional economic model of human behavior. Besides the standard selfish elements that define our preferences, they argue that people see themselves as members of “social categories” with which they identify. Each of these social categories – for example, being a Christian, a father, a mason, a neighbor, or a sportsman – has an associated norm or ideal. And, because people derive satisfaction from behaving in accordance with the ideal, they behave not just to acquire, but also to become....In the process, we may understand that we vote because that is what citizens ought to do, and we excel at our jobs because we strive for respect and self-realization, not just a raise.