Obama Adopts Behavioral Economics

Peter R. Orszag, the White House budget director, plans to resign this summer, the first member of President Barack Obama's Cabinet to do so. He leaves behind an indelible mark on two of the President's signature issues: the $862 billion economic stimulus plan and the $940 billion health-care reform law, both of which he had a major hand in drafting.

In another, less visible arena, Orszag's imprint could be just as big. He was one of the Administration's most prominent devotees of behavioral economics—the study of what drives consumers to part with their money as they pick one product, retailer, or provider over another. If you give consumers better information and subtly push them in the right direction, the thinking goes, they can be coaxed, not commanded, into buying healthier foods, consuming less energy, and taking out more affordable mortgages.

At the Office of Management & Budget, Orszag, 41, created a team of like-minded adherents, including Cass R. Sunstein, Obama's regulatory czar and the co-author of Nudge, a behavioralist manifesto. They have quietly established a beachhead, influencing major sections of the health-care reform law and the financial regulation overhaul Congress is about to complete. Their handiwork can be seen in proposed rules ranging from mine safety to retirement savings, tire durability, and food labels.

Despite criticism from conservatives like Glenn Beck of Fox News, and even some apprehension from the political and communications teams at the White House, the behavioralists could be influencing regulations long after Orszag leaves. Their ideas have been seeded in numerous initiatives, just as the regulatory state is poised for a dramatic comeback following decades of retrenchment. Other promoters include Michael S. Barr, the Assistant Treasury Secretary for Financial Institutions, who helped draft Obama's Wall Street reforms. National Economic Council Director Larry Summers and economic adviser Austan Goolsbee are sympathetic, though they don't consider themselves behavioral economists.

Even before Obama was sworn in, his advisers spoke excitedly about plans to reregulate business, in part by adapting the emerging theories of behavioral economics. Then came the ridicule. Republican lawmakers said Obama was creating a nanny state by manipulating American lifestyles with voodoo economics. Fox's Beck launched a crusade against Sunstein, calling him "the most dangerous man in America."

The behavioral adherents lowered their profile. White House advisers made sure of it by rarely allowing them to speak on the record. They've managed to be influential nonetheless. To avoid a partisan fight, Obama's advisers are urging that regulatory proposals not be based on abstract academic theory. Instead, they say, new rules should stress real-world experience and scientific data. The biggest bet will be in health care.

The reform law's premise is that young, uninsured workers can be persuaded to enroll in insurance plans even though it would be cheaper to flout the law and pay a fine as low as $95 in the first year. The behavioralists believe they can use salesmanship and social pressure to make the law's grand bargain work, in which insurers cover everyone and, in return, millions of new, low-cost customers pay premiums to subsidize the sick. In Massachusetts, a similar insurance mandate gained 97 percent compliance with an aggressive enrollment campaign that included promotions by the Boston Red Sox.

Already, Obama has adopted behavioralist ideas to encourage more businesses to enroll employees automatically in 401(k) plans and to simplify college financial aid forms. A little-noticed March ruling from Sunstein on a proposed set of tire durability standards is also instructive. The standards were fine, Sunstein concluded, but he demanded more work on labels "to promote easy comparison shopping."

Behavioral economics research stresses the importance of the clarity and salience of disclosures in shaping consumer behavior; the old-fashioned, neoclassical view is that consumers will make use of disclosed information if it's important to them.

White House advisers have clashed with the food industry in pressing for clear, front-of-package nutrition labeling such as rankings on a scale of one to three stars to show whether a product is healthy or not. A provision in the health reform law to require nutrition information on chain restaurant menus was a brainchild of behavioral economists. Health-care adviser Ezekiel J. Emanuel, housed within OMB, is scouring academic and marketing research to figure out how to assure that consumers focus on nutrition information as readily as they do prices."Where's it likely to impact people, and what's most likely to do it?" Emanuel asks. The thinking has even entered the White House's response to the Massey Energy (MEE) mine disaster: Among the ideas under consideration is a name-and-shame website that would clearly compare individual mine safety records.

The consumer financial protection agency in the Wall Street reforms is another vehicle. "Behavioral economics is an impetus for creating the agency," says Harvard economics professor David Laibson. The Treasury Dept. document laying out the Administration's vision for the agency says it's supposed to assure communications with customers are not just truthful but "balanced," and that costs, penalties, and risks are "clear and conspicuous."

Generations of college economics students have been taught that consumers are rational creatures who make financial decisions by weighing price against usefulness. The alternative view, seeping into the Obama Administration, argues it's not just about money. Social pressure and the way choices are presented can be just as important. It's a new role for government: Pennsylvania Avenue as counterweight to Madison Avenue.

The bottom line: Behavioral economists in the Administration are leaving a subtle imprint on many regulatory initiatives.

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