How behavioral economics could show up in the new stimulus package

The conventional wisdom of tax rebates has been to give them in one big chunk. It gets more money to people faster and cuts down on administrative costs. The problem is people don’t seem to spend the money. Why?

(B)ecause people don’t treat all windfalls as found money. Instead, in the words of the behavioral economist Richard Thaler, people put different windfalls in different “mental accounts,” which in turn influences what they do with the money…The key factor in these kinds of distinctions, Thaler’s work suggests, is whether people think of a windfall as wealth or as income. If they think of it as wealth, they’re more likely to save it, and if they think of it as income they’re more likely to spend it.

So what does this mean for making a rebate work? If you want people to spend the money, you don’t want to give them one big check, because that makes it more likely that they’ll think of it as an increase in their wealth and save it. Instead, you want to give them small amounts over time. And you want the rebate to show up as an increase in people’s take-home pay, because an increase in steady income is more likely to translate into an increase in spending. What can accomplish both of these goals? Reducing people’s withholding payments.

According to behavioral economics principles, the withholding, which is expected to be $500, could be handed out in small chunks, perhaps $50 at a time, rather than a single, large rebate.

That’s James Surowiecki in the New Yorker.

About these ads

Tags:

3 Responses to “How behavioral economics could show up in the new stimulus package”

  1. Gavin Andresen Says:

    If we REALLY want people to spend it, then send out cash. I bet cash in the wallet gets spent more quickly than checks deposited into a bank.

    That’d trigger a huge amount of mail theft, though. Is there a simple, secure way of getting cash to a couple hundred million people?

  2. Art Campbell Says:

    If people save money in a financial institution, it is available for loaning to people who will spend it. What difference does it make whether people spend or save?

  3. Jeff Says:

    These are the types of slap-in-the-forehead findings of Behavioral Economics that I’m so excited for with Dr. Sunstein working as the Regulatory Czar. It’s an exciting time for Behavioral Economists and the field at large.

    Anyone who is interested in talking about Behavioral Economics issue come chat about then at http://www.economixt.com

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


Follow

Get every new post delivered to your Inbox.

Join 61 other followers

%d bloggers like this: