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Working by Failing

Back in 2009 Obama famously choose to employ some behavioral economics strategies in distributing the┬ástimulus┬áto citizens. The administration choose to dole out payments in small pieces over an extended period instead of delivering it in one lump sum. The logic went something like this: “By giving people the sense that their incomes had grown, doling out the money paycheck by paycheck was supposed to make recipients more likely to spend it, thereby lifting the economy.”

Except it didn’t exactly work that way and it now looks like lump sum payments work better than the slow drip. A serious blow to behavioral economics? Not exactly …

Traditional economic theory predicts that the design of a tax credit like Making Work Pay should have no effect on its efficacy: A tax cut is a tax cut, whether it comes in a check, reduced paycheck withholdings, or, for that matter, a briefcase full of cash. How money is delivered should have no effect on whether people spend or save.

So the failure of the program actually proves that people are not perfectly rational about the way they spend, otherwise it would have made no difference. A real failure would have been if the Obama approach had the exact same outcome as lump sum.

November 15, 2011 // This post is about: , ,

Comments

  • Brad says:

    Would have been interesting if Obama had let people choose between the lump and drip. My guess is most would have chosen the lump, which may have been better for stimulating spending (though maybe not so good at stimulating saving).

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