How Uncle Sam Uses Behavioral Science
President Obama has issued an executive order urging federal agencies to use behavioral-science insights in designing government policies and regulations. The order argues that such insights have the potential to improve consumer welfare through better policy design.
When most people think of behaviorally informed policymaking, they think of the "nudge" — in which the government doesn't mandate a desired behavior, but instead gently encourages it, for example by making it the default. For instance, some have suggested making retirement savings and organ donation opt-out rather than opt-in.
This may sound innocuous, but there are two major concerns. First, even with a nudge, regulators must assume the role of arbiters in deciding what constitutes consumers' best interests. And second, the president's order is not restricted to nudges; regulators reserve the right to impose choices on consumers, even against consumers' wills, if they deem consumers irrational and unable to make the right decisions.
One can easily see how this may lead to mischief and politically motivated reasoning. The evidence shows that behavioral science is often used to advance political agendas or ineffective policies, rather than consumer welfare.
Consider the Department of Energy, which has been at the forefront of using behavioral science in policymaking. The DOE routinely mandates higher energy-efficiency standards for a wide range of appliances and justifies the regulations using behavioral insights. Specifically, it claims that more efficient appliances are a good buy, making up for their higher prices through energy savings, and blames consumer myopia for the fact that cheaper, less efficient appliances are more popular.
Unfortunately, the evidence marshaled by the agency for consumer myopia is highly dubious. For example, the latest standard for residential dishwashers promises consumers a savings of $3 over 15 years — it takes twelve years just to cover the higher up-front price — while the standard for clothes dryers delivers $14 in savings over 16 years, with the higher price covered after five years.
That DOE would declare consumers irrational for not chasing trivial, long-term savings defies common sense. And when one considers the fact that another objective for energy-efficiency regulations is to reduce greenhouse-gas emissions, it becomes clear that the agency's motivation may have less to do with improving consumer welfare and more to do with hitting its environmental goals. The use of behavioral insights in policy opens the door for agencies to impose more stringent regulations that aim to advance the administration's agenda rather than consumer welfare.
Even when the estimated savings are substantial, the regulations may not benefit consumers. Studies show that DOE’s estimates are typically based on engineering models that overestimate energy savings. In addition, consumers may be rationally concerned about the large up-front costs of more efficient appliances, especially in the face of uncertain future savings. Consequently, what looks like an irrational choice to a regulator could in fact be the optimal choice for consumers.
Importantly, economists Ted Gayer and Kip Viscusi point out that restricting consumer choice is a cost, not a benefit to consumers. The DOE's practice of counting such restrictions as benefits — and therefore fudging the cost-benefit analysis numbers — has no precedent in traditional economics.
Other policies borne out of behavioral insights do not fare better. Health advocates similarly blame consumer myopia for the consumers' failure to choose healthier foods. Consequently, they advocate policies restricting or manipulating consumer choices, even if there is no evidence for the effectiveness of these policies. For example, the ban on large soda containers, proposed under New York's ex-mayor Michael Bloomberg, so infuriated New Yorkers that it produced a backlash against the policy and was rejected by the courts. Another New York City regulation, which required restaurants to post calorie counts on their menus, failed to reduce caloric consumption. Despite that fact, the policy was adopted by the federal government and is now imposed on the rest of the nation. Ironically, proponents of these policies viewed their failure as evidence to justify even more intrusive regulations.
Interestingly, the executive order notes the need to streamline government processes by “removing administrative hurdles, shortening wait times, and simplifying forms.” This certainly sounds like a good idea. After all, who could argue against reducing government bureaucracy? Yet one need not appeal to the newly fashionable branch of social science to come to this conclusion — it's simply common sense. In fact, successive administrations have advocated reducing bureaucratic procedures.
At the same time, bureaucracy only grew larger.
My colleagues Patrick McLaughlin and Oliver Sherouse have measured the number of regulatory restrictions imposed by each administration since President Carter. They found that the number of restrictions has increased by 83 percent since the Carter administration, including an 11 percent increase under President Obama. So while the sentiment expressed in the executive order is laudable, evidence shows that agencies are unlikely to take the directive to heart.
Behavioral insights can lead to better policies, but the government's track record is not encouraging. Regulators are likely to use behavioral science to justify more stringent and intrusive regulations that serve political agenda and not consumers' needs. Thus, any promise of better policies should be taken with a grain of salt.