Sunday, February 20, 2011

Behavioral Economics and the Next Government

Barring a very unusual set of events, the next Irish government will be a Fine Gael/Labour coalition with Enda Kenny as Taoiseach. The party has put forward its plans for reforming government and addressing unemployment and, as Kevin pointed out, they seem willing to embrace some of the innovative ideas coming out of modern microeconomics, in particular devoting a reasonable amount of space to early childhood education including the PFL project which involves some of our colleagues here.

It would be worth the time and energy of the policy advisors to the new government to look at the literature emerging from behavioural economics for ideas on how to reform key aspects of the tax, welfare and pensions systems of the country. Both the Obama and Cameron administrations have put a lot of energy into taking on board insights from behavioural economics, and a new government will have the advantage of being able to observe successes and failures of countries farther down this road. One advantage of the tight economic situation facing the new government will be that it will force it to address issues head-on rather than ducking issues by handing out money. There is arguably a stronger momentum for real reform of the operation of the state now than in any previous time, with both a dramatic downturn and a substantially more educated population than before.

Some things that would really be worth having a full national debate on in Ireland include:

- The growing literature on the importance of default options in determining behaviour even in important life domains is perhaps the most relevant to policy. The literature on automatic enrolment plans, in part, motivated the current governments decision to move to a system of automatic enrolment for the private sector in 2014. This is one of the boldest moves in this direction anywhere in the world and it is worth examining closely the extent to which this achieves its desired objectives and lessons that might be learned for other aspects of policy. In particular, the design of universal health insurance systems may benefit from the results of these analyses.

- FG plans to move all employment-related services into a single point of contact. At first glance, this would have a lot of advantages from the point of view of reducing complexity and potentially improving the outcomes of unemployed people. Sendhil Mullainathan and colleagues summarise some of the potential insights from behavioural economics in designing the interfaces that uemployed people interact with.

- There is a growing literature on how behavioural economics could be applied to more flexibly design tax policies. I gave a few presentations on this during the last couple of years including here. The Irish tax system is far too complicated and every move the new government can make toward simplifying it will be a victory for common sense.

- I have provided reading lists on this topic before (e.g. here) and my teaching website has a lot of links. The book by Richard Thaler and Cass Sunnstein Nudge provides an accesible overview.

- In general, the financial health and stability of Irish households will be a key concern over the rest of this cycle. The development of the role of the financial regulator as being an advocate for sensible household financial decision making would be bulked up a lot by taking on board this literature as a complement to the traditional financial capability literature.

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