It’s not just liberals who are enthralled by behavioral
economics. Since it appears to be science and since its inventors have received
multiple honors, many conservatives have happily touted the new discipline.
What could be wrong with using public policy to induce, to
nudge, even to force people into making better decisions about their finances?
Critics of behavioral economics have suggested that its
proponents, especially those who want to apply it to policy, suffer from a puppeteer
complex.
Those who possess great minds see their inferiors as
marionettes are awaiting the arrival of a better puppeteer. The proponents of
behavioral economics do not respect what happens when free individuals make free
decisions in free markets. They believe that markets are fundamentally
inefficient because they are prone to speculative bubbles provoked by
irrational actors. Some question whether there really is such a thing as free
choice.
Surely, there is value in behavioral economics, but it still
seems to be the latest attempt to allow an oligarchy of great minds, what Plato
called a guardian class, to control the economy.
Last month, economist Allison Schrager wrote an excellent
column about the limitations of behavioral economics.
As she wrote:
Even if
we can understand why people don’t always act rationally, it’s not clear if
that can lead to better economic policy and regulation.
What, after all, makes anyone think that regulators will
always act rationally? Doesn’t behavioral economics assume that government
officials, unburdened by the profit motive, will always do what is in the best
interest of the collective? Isn't there a name for this?
And then we need ask who decides what constitutes irrational
behavior. What is the difference between irrational behavior and a mistake? Is there
a difference? Surely, different people assess risk differently. If a high risk investment works out, who is to say that it is irrational?
Clearly, some people do act contrary to their best interest.
But if someone decides that thrills are more important than economizing, who is
to say that he has made an irrational decision?
And, Schrager continues, what gives anyone the right to
change someone else’s behavior:
Mixing
behavioral economics and policy raises two questions: should we change behavior
and if so, can we? Sometimes people make bad choices—they under-save, take on
too much debt or risk. These behaviors appear irrational and lead to bad
outcomes, which would seem to demand more regulation. But if these choices
reflect individuals’ preferences and values can we justify changing their
behavior? Part of a free-society is letting people make bad choices, as long as
his or her irrational economic behavior doesn’t pose costs to others.
Of course, this is the crux of the debate.
We know that people who do not save for retirement may
become utterly destitute. So, we have a Social Security program that forces them to save for retirement.
No one objects to the program.
And, if someone smokes or drinks to excess we know that he may need
more health care, paid for by the state. So, we institute sin taxes to
discourage such behaviors and, in principle, to pay for the medical cost of
such behaviors.
No one has a problem with that, either.
Strictly speaking, neither instance involves nudging people
toward better behavior. It imposes a discipline. Neither involves rigging markets to produce desired
outcomes.
We did not need behavioral economics to institute Social Security. Behavioral economics has been more ambitious, in one sense, and more restrained in another. Many of its policy proposals have seemed to be innocuous.
Schrager reports:
But the
limits of these policies are apparent in a new OECD
report on the application of behavioral economics to policy. The
report gives examples of regulations adopted by different OECD countries that
draw on insights from behavioral economics. Thus it’s disappointing that, with
all economists have learned studying behavioral economics the last ten years, the
big changes in regulation seem limited to more transparent fee disclosure, a
ban on automatically selling people more goods than they explicitly ask for,
and standard disclosures fees and energy use. These are certainly good
policies. But is this a result of behavioral economics (helping consumers
over-come behavioral bias that leads to sub-optimal choices) or is it simply
requiring banks and merchants to be more honest?
Here, she could have mentioned Obamacare. After all, the policymakers
who dreamed it up believed that no one would mind being lied to about keeping their
plans or their doctors because they would easily accept that the new plans were cheaper and better.
Under the aegis of behavioral economics President Obama and
the Democratic Party decided that people would not care about being deprived of
their freedom. As of today, it appears that they do.
Do people really not care about being deprived of the right to make
a mistake? Again, who decides what is or is not a mistake?
Economists frame the question in terms of the relative
efficiency or inefficiency of markets. Some believe that markets are
inefficient and need to be strictly regulated. They know that human beings are
capable of speculating and making bad investments. They believe that these
excesses must be prevented by the intervention of government authorities.
Defenders of free markets believe that markets produce rational results,
but are capable of becoming irrational. Markets tend to correct speculative bubbles.
It might not be pretty but it does happen.
Worse yet, Schrager continues, what makes anyone think that
regulators, who are human beings too, know what is best for everyone and have
the capacity to engineer it.
In her words:
According
to [Robert] Shiller, markets are inefficient and misprice assets because of
behavioral biases (over-confidence, under-reaction to news, home bias). This
leads to speculative bubbles. But it’s not clear what financial regulation can
do to curb this behavior. According Gene Fama, Shiller’s co-laureate who
believes markets are rational, … it’s
not possible to systematically separate “irrational” behavior (that distorts
prices) from healthy speculation, which aids price discovery. If speculators
(who have an enormous financial interest) don’t know better, how can we expect
regulators to?
As I understand it, the Federal Reserve policy of
quantitative easing is one of the most grandiose efforts to save the financial
system by controlling the bond market.
One day we will know whether these activities have
simply put off the inevitable, even made it worse, or whether they have saved
the world.
Will the bond market find an equilibrium that promotes
economic growth and fiscal stability or will the forces of correction rear their
ugly head once more.
Free marketeers like Jim Grant believe that a market denied
will take revenge on those arrogant souls who believed that they knew better.
Today, we read this story in Business Week:
When
the Federal Reserve raises interest rates, it will probably cause a
financial-market convulsion similar to the “tantrum” that occurred last year
after the Fed said it was considering trimming its bond purchase program,
economists said in a warning to policy makers.
“Whenever
the decision to tighten policy is made, then the instability seen in summer of
2013 is likely to reappear,” said the economists including Michael Feroli, the
chief U.S. economist for JPMorgan Chase & Co. in New York, and a former Fed
economist. “Risks of instability have not been eliminated.”
The
warning coincides with a Fed debate on whether to give more weight to concerns
over financial stability when changing so-called forward guidance or monthly
bond buying known as quantitative easing. Feroli and his coauthors presented
the paper to a gathering including Fed Governor Jeremy Stein and at least six
other Fed policy makers at the U.S. Monetary Policy Forum in New York.
“Our
analysis does suggest that the unconventional monetary policies, including QE
and forward guidance, create hazards by encouraging certain types of
risk-taking that are likely to reverse at some point,” said Feroli and his
co-authors Anil Kashyap of the University of Chicago, Kermit Schoenholtz of New
York University’s Stern School of Business and Hyun Song Shin of Princeton
University.
It's not so easy to ride a tiger.
3 comments:
II assert that all our modern politicians and elites suffer from the "puppeteer complex," and they have found in behavioral economics the latest, greatest rationalization for their megalomania. The key question is: Do THEY use this new science to root out their own inconsistencies, excuses, superstitions, etc.? The answer is no. It's easy to be a critic.
Tip
I saw the cult of "Leadership" blossom in the military since the 80s. I even wrote a highly-praised (and plagiarized) speech on the subject.
Oddly enough, I also saw careerism, corruption, and moral cowardice blossom during the same period. Also megalomania. And incompetence.
Hair-brained schemes like "Total Quality Leadership".
I don't feel the need to prove my bona fides as a patriot & veteran. My life speaks for itself.
Now, self-entitled Elites with good grades from the Ivy League have established themselves as our Guardians. As such, they feel entitled to control most aspects of our lives.
Freedom? That means the privilege of obeying their ukases. -- Rich Lara
re: "One day we will know whether these activities have simply put off the inevitable, even made it worse, or whether they have saved the world."
I don't think this can be answered, and "saved the world" is especially ambiguous since everyone had a different idea what needs saving.
Certainly the Federal reserve is trying to save the Status Quo of U.S. Power in the world, and we all benefit by that, and if our days of "last global superpower" are numbered, then what they've done is "extend and pretend" that things make sense to keep resources flowing for everyone to get their own best chair before the music stops.
In regards to "sin taxes" I suppose carbon taxes, whether based on climate change, resource depletion, or national security, using less one-time energy resources and putting more attention to alternatives that can still power society in 50 or 100 years is an open question that won't be faced as long as we need to reward our carbon-pushers by giving them everything they want, and not planning for tomorrow.
It looks like Americans are willing to double down every bet on fossil fuels, and roll the dice that something better will come along the instant we really need it. And then I guess The Fed policy will make sense, and we can grow the world population to 100 billion people on cold fusion, and pay off the debts with ease. You never know, but it seems a fool's bet to me.
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