Do Republicans Hate Behavioral Economics?

Josh Wright —  13 October 2010

Ezra Klein has an interesting blog post covering Peter Diamond’s nomination to Federal Reserve Board.  The standard refrain in this debate has been something like: “See! The Republicans blocked Diamond and now he won the Nobel — don’t they look silly now.”  I don’t find the particular issue of comparing Diamond’s qualifications as an economist to those qualifications required of a Board member all too interesting and so I wont comment on that here.  Though I should say here so we can get to the point of the post that I believe Diamond should be confirmed.

But, more interestingly, Ezra raises an issue that I haven’t seen discussed elsewhere: perhaps the objection to Diamond isn’t just about mismatch of skill set to Federal Reserve, or even partisan politics (Klein argues it is clearly at least partially about this), but rather, about Senator Shelby and the Republicans hating behavioral economics.   Though, as noted here, there is a standard political tit-for-tat story that might explain the fight over Diamond just as well.

To be more precise, Klein says that he’s “heard” that this is an important objection the Republicans have raised with respect to Diamond and that what they really want is a hearing about Diamond’s behavioral work.  Klein writes:

And there’s really no other choice. You can’t serve on the Federal Reserve Board before you serve on the Federal Reserve Board. Shelby’s argument against Diamond is cover for his actual objections against Diamond. One of those objections is simple partisan politics. But another, I’ve heard, is odder: Shelby hates behavioral economics.

This White House, as has been endlessly pointed out, is big on behavioral economics. See Peter Orszag, Jeff Liebman and Cass Sunstein for more on that. But the administration’s embrace of the discipline has provoked a response that the White House never anticipated. Republicans have grown suspicious of behavioral economics. And Diamond, it turns out, has done a fair amount of work in the field (for instance, here). Insofar as Shelby’s got an actual objection to Diamond, that’s it, and one of the things he wants is another hearing focusing on Diamond’s behavioral work.

Ah well. For those actually interested in Diamond’s work, here’s a post from Tyler Cowen on Diamond’s academic papers and influence. Diamond has published in many areas, but two particular points of expertise are labor markets and entitlement programs, both of which the Federal Reserve will need considerable knowledge of over the next few years. Without Diamond — or someone like him — on the Board, it’s no exaggeration to say they’ll be learning on the job.

Its certainly true Diamond has done some behavioral work — see his CV here.  Though, I do not think that Diamond is considered a relatively major producer of behavioral economics scholarship.  The value of his contributions lie elsewhere.  But to the point: do the Republicans hate behavioral economics?  And does that explain what is going on with Diamond?

For starters, its a bit odd to see talk about a political party loving or hating a branch of economics.  Its not completely unique either.  But I do not think that what is going on here is Republican political hatred for behavioral economics.  Rather, I suspect that what is really going on here is not that the Republicans (or Democrats, with the exception of Cass Sunstein and Liz Warren) have any real, substantive views on behavioral economics per se.  The idea that the a political party rejects a branch of economics in its entirety is a rhetorical device used to invoke notions that the rejecting party is “anti-knowledge” or “anti-science,” or at a minimum, speaking about a subject they know nothing about.  If Shelby was truly making claims about the substance of behavioral economics, perhaps this explanation would apply to him.  Maybe it does.  But there is, I think, a more powerful reason for skepticism concerning applications of behavioral economics that does not require hatred or anything close to it.

Consider the distinction between behavioral economics and behavioral law and economics, i.e. attempts to apply insights from behavioral economics into law and regulation.  There are real and substantial criticisms of behavioral economics that are out there on both theoretical and empirical economic grounds. Of course. the same is true for other branches on economics — and to some extent, the jury is still out on much of behavioral economics in terms of empirical verification, robustness of results, and surviving a cost-benefit test in real world application.  But in the meantime, the ratio of regulatory proposals to robust empirical findings is incredibly high — and remarkably consistent, the behavioral law and economics literature nearly uniformly applies the insights of behavioral economics to justify paternalistic intervention.  I do think that behavioral economics has been quite unique in the speed with which its insights have been incorporated into policy, the magnitude of the number of proposals involved, and the remarkable breadth of their coverage into nearly every aspect of life.  Again, this is not as much a problem with the behavioral economists with those attempting to translate the insights from that literature into policy.

In my view, this translation exercise has gone demonstrably beyond what is justified by the behavioral economics literature.   The legal literature contains hundreds, if not a thousand, policy proposals purported to be based on the insights of behavioral economics.  I’ve noted before the rush of the legal literature to make use of the endowment effect before the results were “in.”  I’ve argued before that the attempts to incorporate insights of behavioral economics into consumer protection law, and especially in the context of the CFPB and the regulation of consumer credit, have gone much further than warranted by theory and evidence.  Similarly, in the antitrust context, regulatory proposals concerning more interventionist antitrust grounded in behavioral economics have, as the saying goes, written checks that the literature cannot cash.   As behavioral-economics-based regulatory proposals continue to mount that uniformly favor greater intervention, and increasingly go beyond what economic theory and robust empirical evidence warrant, a concern arises that, as Federal Trade Commissioner Rosch describes it “behavioral economics was simply liberalism masquerading as economic thinking.”  The suspicion in these cases is based on economic theory and empirical evidence, cost-benefit analysis, error costs, and standard economic decision making tools.

Perhaps the distinction between behavioral economics and behavioral law and economics is semantic.  I don’t think so.  Now, I don’t pretend that Shelby or anybody else has read the literature and is offering a nuanced critique of particular experiments or models.  But I certainly do not discount the notion that a group might object to behaviorally-informed regulation when regulatory proposals invoked in its name have systematically and consistently outstripped the available evidence, occasionally ignore it, and are remarkably consistent in their support of paternalism.  The idea that the Republicans (in this case) are somehow against an entire branch of economics seems to be a not-so transparent attempt to play the familiar “anti-science” card.  Perhaps an effective rhetorical move.  But I don’t think it fits here on the merits unless one takes the truly odd position that regulatory proposals that play fast and loose with (or flat out ignore) the theory and evidence from the behavioral economics literature to implement preferred policies have a claim to scientific superiority.

One response to Do Republicans Hate Behavioral Economics?


    Is the question here about behavioral economics, or misapplication of behavioral economics as a justification for market intervention? After 25 years as a portfolio manager, I have no doubt that not all economic actors behave as profit maximizers, and that not all markets are efficient. Efficient market theory, especially in its stronger forms, as a justification for laissez-faire, is as unrealistic, and potentially destructive, as Marxism or the mercantile theory. Markets can be inefficient for years at a time, as we have seen with the mortgage-bond market of 2002-2007. Yes, eventually, inefficiencies usually correct, but by the time they do, the process can be terrifying, can cause inordinate damage, and can lead to inefficiencies on the other side: witness the economic situation since the 2008 crash. (If you don’t think there are still major inefficiencies in the marketplace today, you are probably in the unusual economic position of having a tenured academic post and life savings composed mostly of bonds.)

    If you use the arguments of behavioral economics, however, to justify constant and politically-motivated intervention in markets, you are almost certainly ignoring the obvious corollary to behavioral economic research: government actions are at least as likely to be swayed by irrational and non profit-maximizing prejudices (including those of the body politic) as are the actions of market participants. Accordingly, the Platonic guardians of economic probity should be doubly careful before intervening if they place any credence in the findings of behavioral economics. Yes, there may be times when the craziness of mass behavior has gone so far that intervention is justified. But more often, it will be the irrationality of political behavior that is being manifested, against the muddled and inarticulate, but real wisdom of the marketplace.

    I don’t know where Prof. Diamond falls on the spectrum of limited vs. over-enthusiastic intervention, and I’m pretty sure Sen. Shelby doesn’t know, either, or care very much. What has happened, I’m afraid, is that an economic theory whose weaknesses long ago became manifest (efficient-market libertarianism) has become intimately associated with a political position opposed to market intervention in general, and even more strongly opposed to those who believe in constant market intervention in principle. I would normally be much more likely to come down on Sen. Shelby’s side of economic issues than on, say, Cass Sunstein’s. But in any case where economic theory is brought into the picture, or one is questioning the fitness of any candidate for a position of responsibility who is likely to be strongly swayed by economic theories, I don’t trust either side of the argument.