Is the bloom off the rose of behavioral economics?

Ideas from behavioral economists — sometimes described as libertarian paternalism and popularized in the book Nudge — have inspired much of the Obama administration’s approach to achieving its policy goals.

But the latest Bloomberg Businessweek puts this approach under the microscope, taking special aim at the Making Work Pay tax credit, which was supposed to “nudge” people into spending more.

In 2009 this theory held obvious appeal to the incoming Administration. If the country’s ills were in part the result of poor financial decisions people made unconsciously, perhaps those problems could be fixed through behaviorally informed public policy. The Administration’s first big legislative push, its stimulus bill, presented an opportunity to test some exciting new ideas on a national scale.

It didn’t work. That, at least, is the finding of the first study to look specifically at the behavioral economics element of the stimulus. In a forthcoming paper, three economists—Claudia Sahm of the Federal Reserve, and Joel Slemrod and Matthew Shapiro of the University of Michigan—found that Making Work Pay didn’t get people to spend more money. In fact, it got them to spend less. The study is a prism through which to view both the efficacy of Obama’s stimulus and whether a set of discoveries about the foibles of human decision-making can be translated into effective government policies.

Beyond the problems with particular policy proposals, writer Drake Bennett points to a larger issue for lovers of liberty.

To its critics, the Administration’s interest in behavioral economics reflects a paternalistic, top-down approach to governance in which Washington elites stack the deck to achieve the outcomes they favor.

Mitch Kokai / Senior Political Analyst

Mitch Kokai is senior political analyst for the John Locke Foundation. He joined JLF in December 2005 as director of communications. That followed more than four years as chie...