Tuesday, January 20, 2009

A stimulus by any other name

James Suroweicki on psychology and framing policy:

It may seem odd that framing the same policy in different ways will change the way people respond to that policy. But it’s well established that the way choices are framed often has a huge impact on the decisions people make. In a recent experiment, Valrie Chambers and Marilyn Spencer found that, just as Obama’s proposal suggests, people were more likely to spend a tax refund when it was handed out in monthly installments than in one lump payment.

There’s even some history to draw on in this regard. In 1992, the first President Bush temporarily reduced people’s withholding payments. He didn’t cut taxes—people still owed the same amount at the end of the year—but the move made people’s take-home pay look better than it was. In textbook economics, this should have had no impact on spending. Yet one survey suggests that almost half of the people planned to spend most of their rebate. If the effect was that large with a tax cut that didn’t even exist, it should be significantly bigger when the government is handing out real money. On its own, Obama’s rebate plan isn’t going to resurrect the economy. But it’s a policy that works with people as they are, rather than as we imagine they should be. And that’s a stimulus in itself.

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