Thursday 10 February 2011

The poor aren't like us

I enjoyed Caplan and Beaulier's paper when it first came out; I'm glad to see it now getting the attention it always deserved.

Their argument (my paraphrase: read the whole paper):
If we take behavioural economics seriously, we've good reason to believe that the anomalies it describes are found primarily among the poor and are exacerbated by the welfare system. Poor people are more likely to exhibit behaviours that reflect more than just high rates of time preference: they demonstrate little ability to foresee the consequences of actions. The poor (and less educated / lower IQ - the two go together) are more likely to be heavy drinkers, to be obese, to smoke, to buy lotto tickets, to take illegal drugs, and to commit even non-economically motivated crimes (theft would not be surprising, but violent crime isn't lucrative). Low IQ amplifies behavioural anomalies. And, the dole makes things worse. If you start out with big self-control problems, you're likely to overestimate your ability to motivate yourself to find work - "I'll go on the dole for now but will look hard for work tomorrow". Absent the income backstop, you'd have to look for work. Worse, if welfare payments are more comfortable than the first year of work, after which work is better as income rises, folks with high discount rates and self-control problems may decide never to leave even though it would be in their long run interest. Consequently, welfare payments may make welfare recipients worse off, contra neoclassical economics.
I love this paper and the reactions to it. Not because I'm a fan of behavioural economics. But because it makes explicit some of the unstated motivations for paternalistic policies and takes the logic of behavioural economics to its necessary conclusion. I think it's hard to accept behavioural economics without also putting a lot of weight on the Beaulier/Caplan argument.

And, it seems that advocates of paternalism implicitly accept a lot of the Beaulier/Caplan argument. Think about the set of paternalistic interventions folks [not Beaulier/Caplan] currently advocate. Work backwards from the regulations to the premises underlying them. Would this summary be too far out?
The behaviours of the lower orders disgust me. They give in to base animalistic sensory pleasures. We need to fix them. Tax and regulate them until they stop being noticeably annoying. We'll say it's for their own good, but we'll really stick to the kinds of things that annoy us. So things like making sure everyone in low decile schools takes a course in basic personal finance so they understand how hire-purchase works and avoid making mistakes with loans, we'll not worry about that. But we'll tax fatty foods because obese people are unpleasant to look at and we'll tax the kinds of booze that the lower orders drink because there's fewer more unpleasant things than a poor idiot who's drunk.
One of the better critiques of policy prescriptions based on behavioural economics is that it requires the modeller to step out of the system and to assume that he and the regulator who implements his policies are less subject to the problems ascribed to the regulation's subjects. Public choice folks worry that the paternalistic regulators suffer from the same behavioural foibles as everyone else but have worse incentives than do individuals who have to suffer the consequences of their own decisions. But if the implicit model is that all of this behavioural stuff really only applies to those people over there - poor dumb people, then there's good reason to keep the modeller out of the system.

If we're in that world, why not just run a national IQ test? Everyone who scores over some score, say 115, gets a card confirming that they're exempt from all the paternalistic regulations. Everyone who scores under a different score, say 70, gets a tattoo warning that they're forbidden from particular types of consumption and can't sign any contract without a state-appointed advocate's consent. And folks in the middle get nudged.

But that would be very impolitic. Instead, we get sets of regulations that achieve similar purpose but less efficiently. Please note that I endorse neither the regulation above nor the ones described below.
  • The kinds of alcohol that poor people like get taxed far more heavily relative to overall price than do the kinds of alcohol that rich people like. That isn't unreasonable where the external costs of alcohol use are proportionate to the pure alcohol consumed, but when we start going for minimum price regulation and specific taxes on RTDs, it looks an awful lot more targeted.
  • Official government agencies ignore the evidence on the J-curve and instead promote an abstinence only line. The only sense I can make of this is the noble lie: dumb people who'd otherwise be tempted to drink too much if they drink at all shouldn't drink; smart people can see through the official line.
  • The war on drugs is more heavily enforced against poor people than against rich people.
  • "Fat taxes" would disproportionately hit the poor. The tax will be a greater portion of the purchase price of hamburger meat compared to scotch fillet, even if the fat proportions are identical. And, the higher the proportion of ingredient cost in total price (as opposed to say the input of a high quality chef), the greater will be the the proportionate burden of an ingredient tax. Any bets on whether the price of a McDonald's burger goes up by more, percentage-wise, than a Ruth's Chris steak if we put in a fat tax?
  • If the point of an "internality" tax like a fat tax is to force the individual to weigh the health costs to himself when purchasing, we'd need to scale those taxes by income if we think that rich people respond less to a small per unit increase in food prices than do poor people but suffer from similar behavioural anomalies; if we think that smart rich people are already weighing up those costs and compensating with increased exercise, then it doesn't matter that the per unit charge has less effect on the that group.
  • There's all kinds of talk of mandating that fast food restaurants prominently display nutritional information and calorie counts. But folks tend to overestimate calorie counts at fast food places and underestimate them at the fancier restaurants where rich people eat. Because everybody expects fast food to have lots of calories.
  • Finally, high IQ folks may be better able to route around whatever regulations are put in place.
The burden of proposed paternalistic regulation isn't that dissimilar to what you might get if you went out and did the IQ testing.

Beaulier replies to one of his critics, a fan of behavioural who didn't like his conclusion:
It's all fine and good for people to have serious cognitive challenges and need nudges when the conclusions point towards more government. But, to dare say behavioral econ pushes us towards less welfare and anti-paternalism--in some cases--probably struck a nerve. (Nevermind that we fully embraced behavioral econ in our paper by also saying there may be a range of cases where more paternalism is needed!)
I do think Beaulier and Caplan are right that the behavioural literature leads to the kinds of conclusions they're finding. I just don't go in for the behavioural lit: I'm not convinced that behavioural lab findings apply out in the real world where folks have recourse to all kinds of useful heuristics for making decent choices; I'm also exceedingly reluctant to call someone's behaviour irrational when it could well be fully rational in pursuit of a goal that isn't mine. I'm nervous enough about making interpersonal utility comparisons; interpersonal rationality comparisons seem even more of a problem.


  1. Very interesting post Eric, especially for a novice in this field. Could you point me to the kind of J curve you had in mind?

    Also, to your final point, I sometimes even struggle with intrapersonal utility comparisons - I'd prefer to not have to choose.

  2. I was thinking of the j curve of total mortality risk with alcohol consumption, which has a minimum around one standard drink per day.

  3. Some lefties accuse anti-welfare folks of being motivated by elitist aesthetics.

    Robin Hanson suggested should-have-been-banned stores with minimum IQ restrictions. He also pondered how the "irrational" public can be relied on to vote in favor of good paternalist policies unless it is restricted to a less foolish subset.