Behavioural Science and Public Policy

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August 20th, 2014

I have posted here on a number of occasions about the relevance of the growing literature on behavioural economics and public policy for the Irish context. This post updates this with some new material and I hope people don’t mind if I draw on some from previous posts.

Increasingly, behavioural science is being used as a term to encapsulate the integration of psychological factors into understanding economic decision-making. This is basically an attempt to preserve the phrase “behavioural economics” to refer to explanations with explicit utility-theoretic foundations and also to avoid a lot of work from psychology simply being repackaged as “behavioural economics”. It is not a wholly satisfactory compromise as the phrase “behavioural science” means different things to different people  but it is certainly helping to form a shared set of ideas and methodologies and looks likely to continue as the main way of  describing this work.

There are a number of reasons for the explosion of interest in this area including the award of the Nobel prize to Daniel Kahneman in 2002 and the adoption of the book “Nudge” by the Obama and Cameron administrations. I think also the sense of purely neo-classical microeconomics being bound up with the regulatory failures surrounding the financial crisis is also fueling an appetite for more realistic accounts of decision-making. It is likely that a lot of what is now called economics will increasingly move towards a disciplinary more blurry field in particular in areas like financial regulation.

Some recent very useful overviews of this area include: Shafir’s Behavioural Foundations of Public Policy is excellent; Sunstein’s lengthy “Empirically-Informed Regulation” provides a strong overview; Nudge is obviously important; a recent paper by Brigitte Madrian outlines the behavioural approach to policy; this excellent short paper by Beshears et al makes the case for the limitation of revealed preferences and the need for other mechanisms; one of the researchers in our group has put together a data-base of studies employing what can loosely be called “Nudges” in various areas of policy; Publications of the Behavioural Insights Team in the Cabinet Office are available here;  I have also put together a fairly detailed reading list on behavioural economics and public policy, including legal and ethical issues; The Brookings Institute publication “Policy and Choice: Public Finance through the lense of behavioural economics” is one of the best available introductions to this area.

In terms of why Irish policy-makers should care about this area, below is not intended to be exhaustive but is an attempt to summarise the main areas.

1. The use of “nudges” to encourage saving is the most developed behavioural policy literature. This has reached national policy significance in the roll-out of pension auto-enrolment in the UK. The Irish pension framework  was to see the entire private sector begin to be auto-enrolled in 2014 but subject to an economic recovery that has not yet materialised sufficiently. The psychology behind how people react to default settings in pensions is very interesting with a lot of opportunities and threats, among the latter the possibility that people will anchor too much to the default contribution and under-save as well as the possibility that naive consumers will simply be ripped off by providers who can charge higher fees with this less savvy group.

2. The role of behavioural science in financial regulation is a key question. The Financial Conduct Authority has been exploring this area actively. This excellent FCA occasional paper examines the potential implications of behavioural economics for financial regulation. In the US context, this very interesting report by Barr, Mullainathan and Shafir from 2008 outlines a new approach to consumer regulation based partly on the notion of “sticky defaults” whereby firms would be required to default people into the most desirable option based on their characteristics and only move them if they make choices following being provided with clear information. Such models are discussed in relation to two markets fraught with behavioural bias and consumer exploitation, namely credit cards and mortgages. The document also sets out proposals for changing the incentives of brokers.

As noted in another post, this literature is leading to a lot of very interesting questions for financial regulation that are hard to ask in a neo-classical setting. Below are some examples but obviously a small subset.

Should credit card variable and teaser rates be banned or at least taken out of the regular offers made to consumers?

Should mortgage providers be forced to disclose better deals available to their customers?

Should pay-day lenders be granted full access to the Irish market? If so, how do you regulate them?

Should auto-enrolment proceed in Ireland, what provisions should be put in place so that companies do not exploit naïve consumers by charging fees well in excess of regular rates?

Do behavioural biases prevent annuities markets from functioning optimally?

3. The implications of behavioural science for the design of welfare and taxation policies is another active area with applications across the Irish policy sphere in everything from structuring environmental taxes to design of incentive systems to encourage employment. Cass Sunstein, who is one of the main figures in this area, recently released a new book called “Simpler: The Future of Government“. It outlines an approach to government that emphasises making regulations, laws and taxes less confusing and more robust.

4. The search for alternative measures of welfare and social progress is a big concern of the emerging literature (see summary and readings from recent conference on this). The Stiglitz-Sen commission is becoming a standard reference on this topic and it is pretty comprehensive. Understanding how we go from the empirical literature in this area into meaningful indicators is an important direction for this literature. As well as interest in measuring well-being, there is growing interest in the bidirectionality of well-being and economic activity with a lot of recent work looking at impact of mental health in particular on economic functioning. (See Layard: Mental Health: The Frontier of Labour Economics). Related to this, an increasing literature has been examining the economic importance of ensuring good child mental health. This literature is helping us to understand better the interplay between poor child mental health and later economic outcomes. A recent PNAS paperby Goodman, Joyce and Smith gives a good indication of the type of research being conducted in this area. This is an extremely important area of research at the interface of psychology and economics.

5. A lot of recent research has begun to examine more closely the mechanics of what happens during job search from a more psychological perspective. Some of this research is explained in accessible form in this Brookings Institute publication. There is no question that traditional labour supply models are not a complete guide for understanding the behaviour of people who have been laid off and the literature on job activation needs badly more cross-disciplinary work to understand what is shaping behaviour and what environmental changes people might respond to.

6.  James Heckman and colleagues have been working on a large programme to integrate personality psychology and a theory of human development into economics. This is extremely important in terms of providing a theoretical and empirical basis for allocation of spending in health and education. Many of these papers are available on Heckman’s IDEAS webpage. Colleagues in Geary are involved in a collaboration looking at early childhood development. Some of these ideas are presented in accessible form on this website.

There are clearly several empirical, ethical and legal issues with the development of this agenda across all of these areas. The enthusiasm for randomised controlled trials in this area clearly has to be tempered with an awareness of their limitations (e.g. here). Furthermore, the extent to which interest-groups constrain the types of policies that emerge will be interesting to observe.

Along with colleagues, I have organised an annual workshop on economics/psychology in Ireland and it will take place again on October 31st in the Geary Institute (sign-up page here). Anyone interested in this area is welcome to attend.

Disturbing Equilibrium

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August 19th, 2014

A tangled though remarkable story behind the proof in the mid-1950s of the existence of a competitive general equilibrium (Arrow-Debreu, as it is known) is summarised in a recent posting on economicprincipals and revised (rather drastically, it must be said) here (scroll down to ‘A correction’).

There are strong echoes of the controversy over the proper academic credit for the discovery of the double helix structure of DNA. In the Economics case, the problem was compounded by a very slow refereeing process while rivals worked on a related research paper.

Economic Principals is itself an interesting website reporting on topical issues as well as presenting non-technical interpretative overviews of controversies in economics, often disentangling the intellectual, institutional and personal issues. One example, amongst many, relating to the 2011 Sargent-Sims Nobel Prize, is here. The full archive is online.

 

Irish Society of New Economists

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August 17th, 2014

The conference programme for the Irish Society of New Economists conference, taking place in Galway on 4th and 5th of September, is available here. Well done to the organisers Michelle Queally, Aine Roddy, Patricia Carney and Aoife Callan for putting together an extensive programme of 74 speakers.

Should Scotland be an independent country?

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August 17th, 2014

On 18th September, Scottish residents will vote on the question “Should Scotland be an independent country?“.

There has obviously been a vociferous debate in Scotland on the pros and cons of both options. As well as national identity arguments, the Yes campaign has pointed to such advantages as being able to set an independent defence policy, more competitive business taxation policies, fairer social welfare policies, retaining universality of policies such as personal care and student fees and many others (see details of the case for Independence here). The No campaign, in particular, has highlighted the benefits of being part of a larger union of countries and the risks involved in transition including potential for a lengthy readmission process to the EU and NATO, prolonged currency uncertainty, loss of shared institutions and so on (See the Better Together website).

Prof John Curtice has been keeping track of all opinion polls on the issue on this website

At present, the favoured outcome from pollsters and bookies is a No vote. I have co-authored a couple of reports on the potential for risk aversion to be playing one key role in the decision (here here and here).

I am opening this thread for people who want to comment on the referendum perhaps in particular the relevance of the last 100 years or so of Irish experience for Scotland.

Outward-oriented economic development and the Irish education system

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August 16th, 2014

 

Irish Educational Studies recently published a special issue to commemorate the landmark report Investment in Education (which was commissioned in 1962 and released in 1965).  The report’s finding that half of all children were leaving school by the age of 13 generated newspaper headlines and created the environment for Donogh O’Malley’s ‘free education’ initiative of 1966.  An appendix to the report provided information on the educational attainment of the population in 14 European countries (including seven in Eastern Europe) as well as in the US, Japan and Israel.  No equivalent statistics could be produced for Ireland.  Questions relating to educational attainment were included in the Irish Population Census from the following year.   This issue of Irish Educational Studies includes two witness accounts by key players, Áine Hyland, an RA to the report team, and Seán O’Connor, first head of the Development Branch of the Department of Education.  The issue, entitled Investment in Education and the Intractability of Inequality, also contains four academic papers.  Mine is available here.  The abstract reads as follows:

Most studies of the relationship between education and economic development focus on the line of causation running from the former to the latter.  The present paper studies how the pattern of Irish development has influenced the structure of the Irish education system.  The first section sets out the economic context of late industrialisation within which Investment in Education was commissioned and which determined the reception that the report received.  The report’s release would be followed shortly thereafter by a series of policy measures that would expand secondary-school enrolment and graduation rates and massively increase the demand for third-level places.  Later sections analyse the subsequent evolution of Ireland’s binary system of tertiary education and the recent attention devoted to science, technology and innovation policy and the ‘fourth level’ (postgraduate) sector.  Concluding comments focus on the continuing relevance of the perspective embodied in Investment in Education for the surprisingly high numbers who continue to leave the Irish education system without a Leaving Certificate qualification.

 

Global Imbalances and External Adjustment After the Crisis

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August 13th, 2014

The IMF WP version of my paper on this topic (joint with Gian Maria Milesi-Ferretti) is available here.

Summary: This paper has two objectives. First, it reviews the recent dynamics of global imbalances (both “flow” and “stock” imbalances), with a special focus on the shifting position of Latin America in the global distribution. Second, it examines the cross-country variation in external adjustment over 2008-2012. In particular, it shows how pre-crisis external imbalances have strong predictive power for post-crisis macroeconomic outcomes, allowing for variation across different exchange rate regimes. We emphasize that the bulk of external adjustment has taken the form of “expenditure reduction”, with “expenditure switching” only playing a limited role.

 

ECB Stress Test Manual

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August 11th, 2014

Manual here and press release here.

Vote Rotation at ECB Governing Council

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August 10th, 2014

The entry of Lithuania into the eurosystem in 2015 will trigger the long-planned vote rotation system at the governing council:  see ECB FAQ here,  the 2002 press release here that explains the change in the ECB voting system to cater for enlargement (as envisaged in the Treaty of Nice) and the revelation in today’s Sunday Independent here.

The Economic Recovery is Most Visible in the Labour Market

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August 9th, 2014

Today’s Irish Times has my two cents on Ireland’s economic recovery here

 

Patricia Clavin on the origins of international economic institutions

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August 8th, 2014

The fifth in the VoxEU series of articles on the economics of World War I is available here.

Justin O’Brien Interviews Patrick Honohan

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August 8th, 2014

here.

NYT: The Muddled Road to Overhauling Corporate Taxes

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August 7th, 2014

The political economy of reforming the US corporate tax code is reported here.

New research from Central Bank and ESRI

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August 7th, 2014

Central Bank Letter:

Mortgage Repayments after Permanent Modification – Anne McGuinness
Economic Letter – Vol 2014, No. 7

ESRI new releases:

07/08/2014
07/08/2014
06/08/2014
01/08/2014

 

International Financial Crisis: Seventh Anniversary

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August 7th, 2014

This Saturday marks the seventh anniversary of the international financial crisis (see, for example, the ECB’s crisis timeline here), at least in terms of the initiation of crisis management policy initiatives (the ECB liquidity injections of 9th August 2007).

 

Where are the pots and pans?

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August 5th, 2014

From Barry Cannon and Mary Murphy, this article examines an important question I’m sure many people have wondered about–given the scale of the macroeconomic downturn, especially in 2008 and 2009, why were there not more mass protests in the Irish case?

The article, published in Irish Political Studies is free for the moment. The abstract is below, and it seems the authors conclude we just didn’t have enough of a crisis to warrant mass demonstrations.

Update: Thanks to Michael Hennigan here is a slide deck of the paper (.pdf)

Since 2008, Ireland has experienced a profound multi-faceted crisis, stemming from the collapse of the financial and property sectors. Despite enduring six years of neoliberal austerity measures in response to this situation, popular protest has been muted. Using Silva’s [(2009) Challenging Neoliberalism in Latin America (Cambridge and New York: Cambridge University Press)] framework of analysis of popular responses in Latin America to that region’s debt crisis of the 1980s and 1990s, this article seeks to investigate why this has been the case. We assess how the crisis is being framed among popular and civil society groups, and whether increased associational and collective power is developing. In doing so, we look at processes of intra-group cooperation, cross-group cooperation and framing and brokerage mechanisms. We then ask, where such processes exist, if they can lead to a comprehensive challenge to the neoliberal policies currently being implemented, as happened in much of Latin America. We conclude that the crisis has not yet reached sufficient depth or longevity to foster a more robust popular response, but propose that analysis of similar processes in Latin America can help us understand better why this is the case, not just in Ireland, but in other countries of Europe experiencing similar situations.

Inequality in the Irish Context

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July 30th, 2014

John FitzGerald’s ESRI piece has added to the debate on income inequality in the Irish context, with some reaction from TASC’s Cormac Staunton, the Irish Times’ Chris Johns, and some other guy giving the flavour of the exchanges from right and left.

Edit: I think David’s forthcoming ESR piece (.pdf) is a real contribution to the debate and should be noted up here, too.

 

Inversion: UK versus Ireland

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July 29th, 2014

This WSJ article explains why UK can be more attractive than Ireland as an inversion location.

Record-Low Bond Yields

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July 29th, 2014

Bond yields continue to decline for now -  FT update here.

 

 

Survey on Economy in Ireland

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July 22nd, 2014

Seamus Power, a PhD student at the University of Chicago, is conducting a short survey on the economic situation in Ireland. The link is here if you are willing to fill it out. There is also an email address for the study if you have questions or comments.

“You will be asked to read a very short narrative and asked some questions based on it. Participation is voluntary and is expected to take 5 minutes.”

Interest-only mortgages in Ireland

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July 16th, 2014

Economic Letter from the Central Bank here.

Mody: Did the German court do Europe a favour?

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July 16th, 2014

Here.

Finance in the run-up to WW1

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July 9th, 2014

Harold James provides the latest addition to the VoxEU series on WW1, here.

Orphanides: the Eurozone crisis is political

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July 8th, 2014

Here.

Money quote:

European Institutions also face the risk of political capture by the governments of specific member states that could misuse the crisis for local political gain.

 

IGEES paper: Structural Reform

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July 8th, 2014

See here.

Welcome to the Everything Boom, or Maybe the Everything Bubble

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July 7th, 2014

Neil Irwin writes in the NYT here.

Irish Times: New Finance chief told junior official to disregard property crash fears

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July 4th, 2014

Interesting short article in today’s Irish Times.

 

 

Reminder: Labour Markets During Crises Conference on Wednesday

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June 30th, 2014

The Labour Group at NUI Maynooth is holding a one-day conference on Labour Markets During Crises on Wednesday, July 2. Here is a link to updated information that now includes links to all five papers.

All are welcome, but please email if you plan to attend.

SME Market Report

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June 29th, 2014

I was, rather lazily, waiting for someone else to post this, but the SME market report by the Central Bank is an important new resource, complete with data and tables in usable formats. The report is good collage-type work that deserves an airing. Let’s hope we see follow up reports in the same manner to give us a better picture of how the sector is evolving post-bailout.

Summer 2014 Issue of ESR

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June 28th, 2014

CSO: Implementing New International Standards for National Accounts and Balance of Payments Statistics

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June 27th, 2014

Required reading here.