Advancing America’s Assets Agenda: Pysch 101 trumps Econ 101?

Yesterday in the opening plenary of the 2008 Assets Learning Conference: Advancing America’s Assets Agenda, Peter Orszag, director of the Congressional Budget Office (CBO), stood before a crowd of 1200 delegates from 49 states and around the world and declared with conviction that we can no longer depend upon economic theory to create policies intended to expand opportunity and promote prosperity for America’s low and moderate income individuals and communities. Quite clearly, he argued that public policymakers need more Psychology 101 training if their take create effective policy that advances asset building for all.

In other words, rationale economic theory cannot explain the large scale irrational behavior that has impeded individuals from nabbing their piece of the American Dream – behaviors like spending too much, saving too little, borrowing more than they can possible afford to payback, using predatory financials services, and not taking advantage of services and benefits available to them that can boost their wealth, help them save and invest and protect their assets. Obviously, we need to better understand the other psychological and social determinants of behavior if we are to create policies that truly help people save, invest and take ownership of their lives and futures.

Recent research in behavioral economics suggests that small and inexpensive changes in program and policy design can yield large differences in participation and impact in asset building financial services. For example (as given by Orszag yesterday), study after study has shown that nothing increases participation and contribution to tax-benefited 401(k)s as defaulting participants into the program and allowing them to opt-out. Against all economic logic, being defaulted into the account was even more important than employer match, regardless of the match rate. The lesson: defaults and norms matter in financial decision-making of individuals. This supports some of our earlier positions, that policies should be created that provide the incentives and structures that “nudge” individuals in the right direction.

Yesterday, 350 delegates from the Assets Learning Conference descended on Capitol Hill to lobb their representatives and senators to support prospoed legislation that would provide these nudging incentives. One example, the ASPIRE Act (HR 3740) – a bipartisan, bicameral proposal that would open savings accounts that provide seeding and match incentives for all children in America – encourages savings behavior, promotes financial literacy, long-term wealth creation and human capacity building. Another proposal, Saver’s Bonus (S. 3372), is an incentive program that opens the door to increased savings for low-income families by providing a match for low-income tax filers who contribute their Earned Income Tax Credit (EITC) to designated savings products (IRAs, 401(k), 529s, etc). These are just two of the innovative proposals advocated yesterday by delegates whose experience within their own programs and non-profits have shown real and significant impacts on the economic and social outcomes of their constituents.

Judging by the standing-room only, spill-over-into-the-halls session on behavioral economics at the conference this morning, these1200 delegates fully get it and are hungry to learn more about how to use the lessons of behavioral economics to create more effective and high impact programs and services. According to Peter Orszag (yesterday) and Michael Barr (today), our policymakers need to start getting it too. Hopefully the presence of 350 enthusiastic delegates from 49 states on Capitol Hill yesterday will serve as another ring of the long wake-up call.