Behavioural economics and manipulating the savings rate

http://farm1.static.flickr.com/151/430474358_f69ab82351.jpgRight now we’re trying to reduce savings (increase consumption) in the short term before doing the opposite in the long term.  So far so good.  How might one use the tools of ‘behavioural economics’ to help.  Here are a few ideas – none of which will surprise readers of this blog. 

  • Green Christine Milne is reviving the idea of stamp scrip – which is effectively money that depreciates in value if you don’t spend it.  (When these things were used in the Depression, you had to get your money ‘stamped’ regularly to keep it valid, and the cost of the stamps gradually drove the value to zero – alternatively the coupon can just be worth less value with each passing period. Aparently the Obamanaughts thought of this and then decided not to go ahead.  It’s easy to point out that the rational consumer would just substitute spending the stamp scrip for their own money and then go back to spending their own money.  In effect they’d save the extra amount they’d been given but they’d ‘spend’ the specific dollars they were given. Anyway, as Joshua Gans has argued maybe presentation makes a difference.  I have no doubt that it would, though who knows how much?  Given modern technology I expect one could come up with some reasonable makeshifts.  But I doubt one could get them sorted in time.  Still a pretty useful halfway house I would have thought would be paying the money into people’s credit or debit card accounts.  This way there would need to be a deliberate decision to pay money elsewhere for it to disappear from the consciousness of their inner consumer and as a result it would likely be spent, if not immediately then via the process by which extra cash lying around ends up burning a hole in one’s pocket. 
  • We could also lean on banks (and make any necessary regulatory changes) to reduce mortgage repayments in line with reduced interest payments.  Some banks will do this automatically, but it depends on their procedures.  You’d want them to do it ASAP and we should require them to do so except where they have obtained an explicit instruction from their client not to do so.  Naturally they’ll have to put them back up when rates rise – which would, at that point, also be healthy. 
  • Then there are the old tricks with super I’ve referred to in the past.  I’d like to see ‘default’ salary sacrifice super payments fall to the compulsory level of 9% right now, and for this to be reversed to ratchet savings up again when we return to what should be regarded as normal for all but recessionary periods in the forseeable future.   Of course employees should be informed of this in advance and given some administratively easy means of opting out. 

Any other similar ideas out there?

This entry was posted in Economics and public policy. Bookmark the permalink.
Subscribe
Notify of
guest
16 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
observa
observa
12 years ago

‘Green Christine Milne is reviving the idea of stamp scrip – which is effectively money that depreciates in value if you dont spend it.’

Been there, seen that, done that! It’s called deliberately targetted central bank inflation and it’s what drove us to try and seek refuge in this negatively geared, margin borrowing, leveraged mess, albeit those asset prices fooled us all for a helluva long time that noone was regularly stamping our money.

Patrick
Patrick(@patrick)
12 years ago

Still a pretty useful halfway house I would have thought would be paying the money into peoples credit or debit card accounts. This way there would need to be a deliberate decision to pay money elsewhere …

Isn’t this what is going to happen anyway? Where else does it usually get paid?

I actually like your idea of super rates as a fiscal lever. In this context too I like my idea of a law that where surplus exceeded 1% of GDP there was automatic pro-rated topping up of low-income earners super. Reversed, if you were automatically topping up people’s super now they would be less inclined to save elsewhere. Moral hazard being the key risk.

NPOV
NPOV
12 years ago

I do wonder how many people have mortgages where repayments are not automatically reduced every time the interest rate is cut – ours is like that, and every time there’s a cut we have to send an e-mail to the bank to ask them to reduce the payment amount, which would otherwise only be revised on an annual basis.
Our payments be would be several hundred dollars more a month otherwise by now, and while we recognise this means we’re paying off the principal more slowly, at this point in our lives that is the logical position to take.

Patrick
Patrick(@patrick)
12 years ago

Well, I agree with everything but the partisanship. I don’t think any government is inclined to such random distributions of wealth. And I don’t think the government underestimates the public as much as the inverse both ways – ie the public overestimates the government’s intelligence.

observa
observa
12 years ago

I’m only as silly as these people Nicholas- http://www.news.com.au/business/money/story/0,28323,25033958-5017313,00.html

They’ve woken up that deliberately targetting 2-3% annual inflation, while taking our eye off the ball with rising asset prices can fool a lot of people into thinking they’re saving when they’re actually not. When the penny finally drops they start salting them away in big numbers which is a nasty economic problem of composition.

Essentially we binged on credit because of false monetary signalling and we’re correcting that. Now Keynesians everywhere want us to binge publicly on credit to solve the problems of the past. It’s not working and it won’t work because we know it’s just further pain down the track. We blew it big time and Keynesians need to get over it, learn the lessons and move on. Their problem is they don’t want to tell it like it is- ie that we’ll need downwardly flexible prices, wages and conditions to share the pain. They can only see the obvious with financial CEOs remuneration, but for some unfathomable reason want to continually prop up that bloated marketplace that sustained such profligacy.

observa
observa
12 years ago

Actually it’s not unfathomable but simply human nature that you’d expect the Louis Leeches to want to protect their patch and blame the Gordon Geckos for stopping their gravy train.

observa
observa
12 years ago

One small step for Glenn, one giant step for mankind-http://www.news.com.au/business/money/story/0,28323,25039030-5016110,00.html
We’ll make a decent Austrian out of him yet.

melaleuca
melaleuca
12 years ago

Nick, Steve Keen thinks your ideas aren’t quite so peachy:

“However my Kosciuszko mate Rory Robertson seems to be saying that we would be economically better off if banks changed their practice so that payments were cut when rates were reduced, because this would increase spending (and Nicholas Gruen apparently made a similar observation)

Ahem. We got into this crisis by reckless debt-financed spending (on both assets and consumer durables); at its peak, the increase in debt (at A$259 billion in 2007) provided almost 20% of aggregate demand in the economy. Deleveraging from this level of debt is inevitable and painful, but delaying it is hardly an alternative. Just look at Japanstill in Depression 18 years after its debt-financed speculative Bubble Economy burst.”

http://www.debtdeflation.com/blogs/2009/02/18/some-curious-neoclassical-rumblings/

Again I must say that I’m not sufficiently confident about my economic knowledge to have a definitive view on the issues raised, but having said that Steve Keen strikes me as a sharp and erudite fellow so I’m not prepared to write off what he says. Another point in Keen’s favour is that Jason Soon has practically banned any mention of Keen’s ideas over at Catallaxy :)

Do you have any thoughts on Steve Keen and in particular his thoughts on the importance of Minsky’s theories about debt?

NPOV
NPOV
12 years ago

Am I correct in assume that the “paradox of thrift” phenomenon only matters if there is a measurable collective drop in spending? That is, the fact that savings rate has jumped from 0% to 4% in 18 months isn’t necessarily a problem as long as spending hasn’t dropped too much?
And yes, the debt has to be deleveraged eventually, but you don’t want it to deleverage in a manner that stalls economic growth. Ideally, everybody would keep on spending, the recession would end, and once normal growth rates were restored, everyone could start gradually deleveraging.

Baltic breeze
Baltic breeze
12 years ago

I think it is time for policy to target the specifics of what obstructs the flow of money. It is time to look at reality. For example if people are paying of on their credit cards then we know they do this because paying $100 off on their card today means they keep the card alive to spend $10,000 tomorrow to survive to better times and then declare bankruptcy if they fail. Better to roll the dice and fail later than to give up today and fail today.

In Europe many households have not benefitted at all from interest rate reductions. If a loan has a 6 month interest period then it will be June, July and August before many housholds will see a reduction in their mortgages. Meanwhile businesses fail because these households know they are going through their most dangerous financial period this year right now.

As for spending – How do aussies start businesses and spend online when you have one of the slowest take up rates of domain names and the most slow adopters for purchasing online for advanced economies. Aussies are kept so much in the dark from lack of low priced fast broadband that you don’t realise how this is crippling Australia and stiffling small business survival. If the government spent on braodband then the people would spend omline and distribute money to a multitude of employees and business owners. In Europe we get broadband in the park, we listen to podcasts on our mobile phones and our websites are mobile enabled so that people can purchase from their mobile phone. In Australia you are kept in the dark you don’t know what is the benefit of podcasting and you don’t have a website to be mobile enabled.

Baltic breeze
Baltic breeze
12 years ago

If people do not have the tools, knowledge or motivation to start a business then they will turn to property to try to make money. As we know – property does not generate export income, it is speculative and does not improve the skills of the owners as good as running a business does.

The focus for the future lending patterns has to include an obligation on lenders to ensure they lend to a base percentage of businesses. Only then would GDP figures and country ratings have any real value.

In Sweden there are Innovation centres that generate $10 to $14 taxable for the regional economy within 4 years for every $1 invested. These are not just start ups but companies like Husqvana that hive of special purpose teams to put to use idle capacity and technological opportunities in cooperation with experts from the local innovation centre.

Australians need tools like broadband to have the chance to not be staring at property as a financial vehicle like a rabbit stares at headlights of a vehicle. Cash is King especially right now and businesses with low overheads targetting the long tail with a good internet position built up over years are rich in cash.

I for one expect to have more cash in these bad times than I ever had before. I know I am not alone as many people and companies that remove the obstructions for the flow of money are reaping the rewards.

It is like the game of Musical Chairs. People spend when cash flows. When you stop the music by obstruting the flow then people sit on their cash.