Nudging the state toward better behavior


The Obama Administration is very impressed by the findings of behavioral economics and its proposed government policies designed to nudge private individuals toward “better" behavior like increased savings for retirement, stopping smoking, controlling weight, and so forth.

We are also told that Peter Orszag, the federal budget director no less, uses a “behavioral" method to get himself to prepare for running marathons so as to overcome his own lack of sufficient willpower. He has somehow arranged things so that if he does not meet his running goals he will automatically donate money to a charity he doesn’t like.

Orszag, as a private citizen, may do what he likes. Perhaps he should write a book of self-help advice.

What I should like to see, however, is the Obama Team come up with nudge-style techniques to make the government engage in better behavior. Whatever mess people make or do not make of their own lives is a matter of some concern to people with strong fellow-feelings. But what government does affects us all, in my view usually for the worse. It affects even those who lead exemplary lives by creating economic difficulties, by engaging in unjustified wars, and by abridging our liberties – just to name a few examples.

Today the United States government is implementing enormous fiscal stimulus and the Federal Reserve has engaged in the unprecedented creation of money. Some economists, including me, have questioned the wisdom of all this. Nevertheless, even among those who support these policies, there is general agreement that they must be reversed once economic recovery is underway.

We are to suppose that, unlike Peter Orszag, those with the power to control these matters will have the (political) willpower to carry through with the less popular side of counter-cyclical policy. Why should we simply suppose this?

If the Obama Team has such confidence in behavioral techniques, they should apply them to this very important case of potential bad behavior: the possible (probable?) failure to implement the contractionary part of the stimulus cycle.

Congress should pass a law right now specifying that when the rate of growth in the U.S. gross domestic product becomes 1% or greater for two consecutive quarters that a certain overall percentage reduction in government spending take place. The law should further require that if Congress does not pass the enabling legislation at the appropriate time later, then 25% of the salaries of all members of Congress will automatically go to a group of organizations that will promote reductions in government spending. This could be arranged to occur automatically through the members’ respective banks. (A similar nudge might be arranged for the Board of Governors of the Federal Reserve System but that would be more difficult because of the supposed independence of the central bank.)

It is true that members of Congress could undo the nudge at the time – just as, I suppose, Peter Orszag could reverse his charity commitment. But then, having taken this extraordinary step, they would have to admit publicly their failure or rationalize it away – costly options.

This is just one possible implementation of the nudge-technique to create better government behavior. Perhaps others, like Cass Sunstein (the nominee for regulatory czar and coauthor of Nudge,) can come up with better ones.

Guest author Dr Mario J. Rizzo is associate professor of economics and co-director of the Austrian Economics Program at New York University. He blogs regularly here.