Wall Street Journal
By: Jonathan Weisman
March 8, 2010
A little more than a year into its ascendancy at the White House, behavioral economics as a key policy-making tool may be on the wane.
The opening weeks of the Obama administration were a coming-out party for economists who hold that incomplete information, subtle obstacles to participation and confusion tend to make people act in economically irrational ways. Economic policy can "nudge" people and institutions into more efficient, economically beneficial behavior without heavy-handed command-and-control measures in regulation and legislation, they argue.
Cass Sunstein, co-author of the behaviorist bible, "Nudge," took up residence at the White House Office of Information and Regulatory Affairs, while behavioral economist Jeff Liebman is acting deputy director of the Office of Management and Budget. Yet another believer, Austan Goolsbee, took a seat on the Council of Economic Advisers.
At this time a year ago, the order of the day was disclosure, transparency and light-touch policy proposals, such as automatically enrolling workers into 401(k) plans and simplifying student-loan forms.
But in recent weeks, President Barack Obama has proposed regulating health-insurance rate increases, separating commercial banking from investing on behalf of their own bottom lines, and prohibiting commercial banks from owning or investing in private-equity firms or hedge funds.
Late last month, Vice President Joe Biden eschewed mere transparency requirements for investment advisers and announced new regulations that would require retirement counselors to base their advice on computer models that have been certified as independent. Otherwise, the advisers would be prohibited from suggesting that workers invest in funds they are affiliated with or receive commissions from. In short, "nudge" has come to shove.
White House budget director Peter Orszag said administration economists haven't given up on behavioral economics. The president's budget for fiscal 2011 again proposes legislation to make it easier for employers to make 401(k) enrollment the default option, since workers tend to take the easiest path on such matters; when employees aren't automatically enrolled in 401(k) plans, many don't sign up.
Work is almost complete on a simplified, online federal student-loan application that allows students to fill in income data from information the Internal Revenue Service has on file from tax returns with the click of a mouse. A study by H&R Block showed such advances could increase completion of student-aid applications by 30%. And late last year, the Occupational Safety and Health Administration began publishing the names of workplaces where deaths have occurred, with a link from the OSHA home page. Shame, the thinking goes, can be a powerful motivator.
But some of the biggest proposals of last year have disappeared without a trace. When the White House turned last spring to financial-industry regulations, it pressed the concept of the "plain vanilla" financial product, believing that overworked, harried Americans do not read the fine print and compare the bewildering choices on offer. Credit-card companies could offer their array of sometimes-baffling products, but they also would have to offer a simple card with a fixed interest rate and unchanging penalty. Mortgage lenders wouldn't be prevented from selling adjustable-rate or interest-only mortgages, but they would always have to offer up a simple, 30-year fixed rate loan upfront.
Those "plain vanilla" offerings aren't included in the financial-regulation legislation making its way through Congress.
" 'Plain vanilla,' however, was a subjective term," said Steven Adamske, a spokesman for the House Financial Services Committee. A product the White House would consider stripped of its bells and whistles wasn't necessarily what others thought the term meant. It wasn't worth the fight, he said.
Even some of the White House's biggest proponents of behaviorism say they have become more prescriptive, in part because they have found the limits of behavioral economics. When Mr. Obama rejected calls to limit executive pay, he believed excesses could be reined in through transparency. A public airing of salaries and compensation would shame corporations into trimming them back.
So far, executives--especially on Wall Street--haven't been particularly influenced by the public outcry. Institutions, especially large corporations, don't behave the way they do because of incomplete information or subtle obstacles. They pay people to deal with such things.
"Institutional decision-making is much closer to a rational economics than individual decision-making, no question," Mr. Orszag said.
The president's proposal to regulate health-insurance rate increases was born of sheer frustration, one senior administration official said. After a year of debate on rising health-care costs, Anthem Blue Cross of California announced premium increases of as much as 39% last month, for example.
White House economists say behavioral economics will continue to play a role in policy making, largely in regulatory matters and small-bore efforts. For instance, administration officials, frustrated that Americans aren't embracing simple, energy-efficiency changes, are looking at economic transactions where the person expected to make a purchase isn't the one who benefits.
Landlords, for instance, have no incentive to replace a 40-year-old refrigerator if the tenants are paying the utility bills. So the Department of Housing and Urban Development, the Small Business Administration and the Energy Department are looking for ways to give property owners more incentives to save energy, possibly through loan discounts or guarantees offered through mortgage brokers. In October, Mr. Biden unveiled a pilot Property Assessed Clean Energy financing program to try it out.
But grander economic policies will reflect more traditional Democratic economics--more push, less nudge.