Today’s Fin op ed follows up on some of the aspects of the fiscal stimulus that a bunch of us economists proposed the weekend before last.
Do it now or pay the price
In the 1980s Joe visited George, who had a temporary appointment in India. A last minute snafu when Joe was leaving led him to leave a box of clothes with George who would post it back to Joe. Thing was . . . whenever the parcel floated into Georges consciousness, his resolve ebbed away.
A few hundred Ill do it tomorrows later, George returned home to the U.S. sheepishly carrying Joes box. George Akerlof, that is and Joe Stiglitz. Odd behaviour, you might think, from two Nobel laureates in economics (they shared the prize in 2001) a discipline obsessed with rationality.
Shortly afterward, Akerlof gave a major speech. Its topic? Procrastination.
The soft siren song of procrastination has a surprisingly large effect on our lives and even more surprisingly, on the economy. In the U.S. huge numbers put off the paperwork of enrolling in tax privileged 401K retirement accounts thus foregoing hundreds, sometimes thousands, of dollars of tax and salary benefits. The paperworks a hassle. And it can always be done tomorrow.
Understanding procrastination, those in authority can improve outcomes without imposing their own will, by carefully designing the default outcome when people do nothing (whilst allowing them to opt out if the default and act on their own behalf if they wish). If youre starting a new job in New Zealand, unless you actively opt out, money gets salted away in your Kiwi-saver retirement account.
In Australia Ive argued that this would be a great way to ratchet up peoples super payments with the default being (say) an extra 1% per year but with people free to opt out.
And were coming to understand what a heavy toll procrastination takes on our environment. While the savings you can make from energy efficiency on things like better insulation and solar hot water heaters are often small beer, their economic benefits build up and often provide a much better return on funds invested than traditional investments. But householders, and even hard headed business managers, continually put off the hassle involved in understanding the issues and making the effort to fix them. To some extent its a rational reflection of the limits of executive attention. But its also because its so easy to put off non-core issues.
Though subtle, the effect is surprisingly pervasive. And, as they say, from little things big things grow. Thats why I recently joined a group of economists recommending that we provide substantial incentives for upgrading the environmental performance of Australias households and businesses.
Here we killed two birds with one stone. Just as one sets a thief to catch a thief, we can use one psychological foible to correct another. In countless experiments people indicate their preference for not losing some amount say $50 over gaining the same amount. Its not strictly rational. Perhaps it became hard wired as bands of follically challenged foragers feasted on freshly killed carcasses on the African savannah, making sure they hopped in for their chop before their confreres finished it off.
Ever since, sales have been temporary. Hop in for your chop, is the message. Act now! Or youll miss out!
In making environmental investment incentives temporary, we not only ensured that their budget impact disappears after the slowdown, we gave people a date by which they must hop in for their chop if theyre not to miss out.
It neednt be much, but if theres some benefit from acting now, theres something to be lost from procrastinating. And weve even suggested upping the ante by encouraging the possibility of future regulation to linger in peoples minds.
We may end up looking back on it as one of the most successful pieces of economic stimulus.
Analysis of simple giveaways in the US suggests that around two thirds of the ten odd billion that the government shovelled into families and pensioners pockets last week will be spent in the next six months. Not bad. But temporary incentives to improve the energy efficiency of our houses and businesses could pull forward far more private expenditure than the budget outlay involved. So even state governments might be able to fund them (often by temporarily increasing existing incentives). And insulation and solar hot water heaters would take just months, rather then years, to install, though theyd leave enduring economic and environmental benefits.
There! Its done now. Ive been meaning to write about procrastination for ages!