Just last month I was discussing Ed Banfield’s work on “present orientedness” and the work it did in getting him to make mass incarceration the platform of the Republican party. I pointed out that his use of thicker psychological descriptions of individuals in justifying longer and more punitive criminal penalties was very consistent with behavioral economics, and wondered why current behavioral economics wasn’t used for more reactionary and conservative ends.
Karl Smith is concerned after reading this paper by Bryan Caplan and Scott Beaulier – Behavioral Economics and Perverse Effects of the Welfare State. It argues the conservative critique that welfare leaves people worse off using behavioral economic rationality, since normal microeconomics argues you can’t make someone worse off by giving him or her more choices. It even quotes Ed Banfield.
None of Smith’s commenters get his question, so I’ll give it a shot. Please kick in comments, as my behavioral economics is not very good and not at all formally learned (disclosure: conceptually I think it’s a dodge from having to make a real social critique). I understand why Smith’s commenters want some formalism, as the behavioral economics is being sprayed everywhere in an aerosol can manner. Take his main example. A lot of what you think about this kind of exercise will derive from what you think about this kind of example:
A simple numerical example can illustrate the link between helping the poor and harming them. Suppose that in the absence of government assistance, the true net benefit of having a child out-of-wedlock is -$25,000, but a teenage girl with self-serving bias [unrealistically optimistic and overconfident] believes it is only -$5000. Since she still sees the net benefits as negative she chooses to wait. But suppose the government offers $10,000 in assistance to unwed mothers. Then the perceived benefits rise to $5000, the teenage girl opts to have the baby, and ex post experiences a net benefit of -$25,000 + $10,000 = -$15,000.
But shouldn’t loss aversion, one of the central pillars of behavioral economics, amplify the up-front costs of having a child? The pain and stress on the body are going to be a sure loss. And since government assistance is spread out over time, shouldn’t a hyperbolically discounting poor person care less about it? It seems a bit pick-and-choose.
As for Karl Smith’s specific worries about the welfare state: shouldn’t loss aversion, overconfidence, time-inconsistent discounting and difficulty following statistical probabilities lead a behavioral person to be made better off by universal health care and old age pensions? The probability of managing an individual investment portfolio as well as estimating the chances and subjective experience of being destitute in old age is difficult to estimate individually and the tail risk of the loss that occurs in poverty would be particularly painful. The same statement should be true for health care.
Same for unemployment insurance. One of the more curious behavioral responses is that people hate unemployment. They hate not being part of their productive community, they hate not contributing, they hate the loss of identity that one gets as someone who works. To an economist that’s b-a-n-a-n-a-s. Unemployment should be a pleasant vacation! But, last time I checked, it wasn’t (is that consistent with the latest frontiers in happiness research?).
That people are bad risks judges and hate losses should redouble our faith in social democratic insurance, not detract.