The Choices Worth Having

On the Economic Stimulus Package: The "Packaging" Counts

Barry Schwartz — Sun, 01 Feb 2009 14:57:20 +0000

As the U.S. Senate prepares to debate President Obama's $800 billion stimulus package, there is broad agreement about three things: we must create jobs to compensate for rapidly growing unemployment; we must put money in people's pockets so that they will start spending again; and we must do whatever we do so that it works fast. But when it gets to specifics, the agreement seems to end. How many jobs will this or that initiative create, and how fast will it create them? How much will people spend if they get a tax rebate, and how much will they put in a mattress as a hedge against uncertain times? Some of the debate is just politics, but a lot of it reflects real disagreement and uncertainty as the nation wanders through unfamiliar territory without a roadmap.

In this article, I want to focus on the possible benefits of tax rebates, and suggest that behavioral economics has something to teach us-not about whether to provide them, but about how to provide them if we do.

It seems obvious that if you want and need people to spend money, the most direct way to achieve this result is by giving them money to spend. And it seems obvious that the most direct way to give people money to spend is by refunding some of their taxes. But when President Bush did this not long ago, people didn't spend. Estimates are that more than 50% of the rebates taxpayers got went into savings, or to pay down debt. So as the Senate contemplates several hundred billion dollars worth of tax relief, there is skepticism about how effective it will be in stimulating the economy.

Behavioral economics suggests that whereas it is certainly important what is in a package, it is also important how the package is wrapped. What do I mean? Economist Richard Thaler made a major contribution by pointing out that people organize their finances into what he called "mental accounts." Instead of having one gigantic balance sheet, with assets on one side and liabilities on the other, we divide our financial lives into categories. To take a personal example, my wife and I recently had the second floor of our house remodeled. It was a large, time-consuming, and costly operation. One piece of the remodel was a new bathroom. As we deliberated about fixtures for the bathroom sink, we saw some lovely ones that were outrageously expensive.

If all we were doing was replacing the fixtures in our bathroom sink, we wouldn't have given them a moment's thought. But we weren't. The fixtures were a small part of a very large expense. What difference would an extra $500 make in the grand scheme of things when it was part of a renovation that cost thousands? Sanity eventually prevailed, but it is amazing that we were even tempted by these high-end fixtures. Such is the power of mental accounting. Considered in isolation, the high-end fixtures were ridiculous. Considered as part of a much larger mental account, they were live candidates.

The same sort of thing happens when it comes to deciding whether or not to add high-priced options when you're buying a new car. You'd never spend $1000 on Walnut trim by itself, but when it's part of a $30,000 purchase, well, maybe you would. Thaler points out that one of the ways in which the replacement of cash with plastic (credit cards) has induced people to spend more than they should is that when we use our credit cards, it doesn't feel like we're spending money until the bill comes. And when the bill does come, the item in question is just one of a long string of expenditures. How different would your financial circumstances have been if you hadn't bought that luxurious sweater?

We can apply the lessons of mental accounting to the stimulus package. Perhaps a major reason why the Bush tax rebate failed to stimulate spending was that it came as a lump sum. Paid all at once, a rebate of $500 is real money. Yesterday you didn't have it, today you do. This substantial windfall might cause you to stop and think about what to do with the money. And when people stop and think, at least sometimes, they choose not to spend. But suppose, instead, it had been paid as a $10/week addition to your regular paycheck? Then, it would hardly be noticeable. One more latte at Starbucks. Steak instead of chicken at the restaurant. The ten bucks would just get absorbed into your weekly wage. You'd live a little better, and your money would go a little further, without you giving it a moment's thought.

What this implies is that if the stimulus package includes tax relief, and if we want people to spend the money they get, we should make sure that the money comes in "spendable" packages. Not as a lump sum, but as dribs and drabs. One simple way to achieve this result in practice is by providing the tax relief in the form of a payroll tax (social security tax) "holiday." Instead of having that 7.65% deducted every week, it just gets added to your paycheck. The worker who takes home $600 week now finds an additional $45 in her pay envelope. That's money that is much more likely to be spent than a one-time, lump-sum payment.

A payroll tax holiday has other advantages. The payroll tax is the most regressive tax we have, and a holiday will undo some of that damage, even if only temporarily. In addition, it may be good politics. Some legislators object to aspects of tax rebate proposals on the table, because these proposals will include sending checks to people who earn too little actually to pay any income tax. True, these are the people who need help the most, and who are most likely to spend the money, but it strikes some as unfair to "refund" taxes that people haven't paid. But everyone pays the payroll tax.

These issues aside, the payroll tax holiday is probably the most effective way to put money in people's hands that will be spent, not saved. Even if the stimulus plan does end up with income tax rebates, attention should be paid to providing these rebates in installments, to make them more "spendable" and less "saveable."

Some may object to engineering the stimulus plan in a way that manipulates people's behavior. It seems somehow disrespectful-even underhanded. In response to that concern, I just want to point out that every incentive, of any kind, is an effort to manipulate. Yet, incentives are the American way. As Thaler and his collaborator Cass Sunstein argue in their book, Nudge, every policy decision we make pushes people in one direction or another. In that light, we should take some pains to make sure that the nudges we provide in the stimulus package are nudges in the right direction.

Pay Less, Get More

Barry Schwartz — Wed, 28 Jan 2009 16:36:14 +0000

Chief Justice of the Supreme Court John G. Roberts has been on a mission to raise the salaries of judges. Whereas forty years ago, judges out-earned senior law professors and law school deans, they now earn less than half as much. Indeed, the real income of judges has dropped during this period.

The argument for salary increases is not about justice or fairness. Who is to say what a "just" or "fair" salary is? One of the virtues of competitive markets is that they enable us to avoid having to answer tough questions like these. No, the argument is about efficacy: if we want to retain good judges and entice good lawyers to leave their lucrative jobs with firms or their cushy appointments at law schools, and enter the judiciary, we have to pay them more.

This certainly seems like a reasonable point of view. Thus, it is surprising that recent studies of judicial performance suggest that the reduced real income of judges has had almost no effect on retention, productivity, or quality of performance. The authors of these studies were certainly amenable to the argument that judges should be paid more if the evidence, some sort of cost-benefit analysis, warranted it, their conclusions were that the evidence did not suggest that an salary increase was needed.

Not everyone accepts the conclusions of these studies. Judicial quality is a difficult thing to measure, and a few empirical studies rarely settle an issue as complex as this one. Who knows what the final verdict will be as more research gets done. But I want to raise a more fundamental issue. People on both sides of the debate seem to accept that "you get what you pay for." They differ only in their judgment about whether judges are currently paid enough. What I want to suggest is that perhaps "you get what you pay for" is the wrong way to be looking at this issue.

What do we want in a judge? In addition to knowledge of the law, we want honesty, integrity, dedication, and wisdom. Is there any reason to believe that higher salaries will buy us more of these virtues? On the contrary, I think the evidence from our current economic collapse suggests that there is a negative relation between salary on the one hand, and honesty, integrity, dedication, and wisdom on the other. Raising salaries will succeed in getting us judges for whom high salaries are important. But what makes anyone think that these are the kinds of people we want? Instead of putting scarce resources into salaries, we should be spending money to improve the conditions under which judges work (manageable case loads, able assistance, room for judicial discretion, and so on), so that it is actually possible for judges to perform their work virtuously.

The same arguments apply as we try to recruit more and better teachers and more and better primary care physicians. They certainly should be paid enough--enough to lead decent lives and see to the needs of their families. But beyond that, resources should go to making the conditions under which they work adequate for them to do their jobs well. Enticing doctors or teachers with high salaries will get us the kinds of doctors who prescribe the drugs made by companies that give them perks or kickbacks, and teachers who focus their efforts on getting students to do well on the tests that will determine the teachers' compensation.

There is no reason to assume that money buys us the things that matter to good judging, teaching, or doctoring. Indeed, there is good reason to believe the opposite, that people who can be enticed by high salaries are just the people we don't want. We should leave the people who are motivated by the prospect of large financial rewards to work in occupations where making money is the point, and seek people motivated by other things for professions that demand qualities of character that are not especially compatible with the pursuit of money.

Lest I be accused of being simplistic, I want to acknowledge that it is possible for people to operate with multiple motives. It is possible to pursue wealth while simultaneously pursuing justice with honesty and integrity. Also, there is no doubt that if someone is faced with two jobs that are equivalent except for salary, the better-paying job will win. But that is clearly not the case when one is choosing between being a lawyer, a judge, or a law professor. My point is only that there is no reason whatsoever to believe that more money will get us more of what we want in judges (or teachers or doctors). And there is good reason to think it will get us less.

Why Bonuses Are Bad

Barry Schwartz — Wed, 21 Jan 2009 15:37:57 +0000

A lot of outrage has been expressed over the possibility that some of the people who greased the financial slide we're on may still get substantial bonuses. How can anyone at Merrill Lynch, for example, merit a bonus when its losses in the last year exceed its profits for the last forty. We should be outraged by undeserved bonuses. But we ought to be thinking bigger. Why are we paying bonuses at all? Why pay people extra-often a lot extra-just for doing their jobs? Pay them a nice salary. Give them a promotion. But a bonus?

What's wrong with a bonus, especially with a culture of bonuses? Consider: you're shopping for a new flat-screen TV and think you've settled on a moderately-priced model. The salesperson is trying to convince you that you'd be much happier with a higher-end TV. Perhaps you would, and the salesperson obviously knows more about this stuff than you do. Can you trust the salesperson's expertise? Are you more likely to trust the salesperson if she's paid a salary or if she's paid a commission on sales dollars?

Or consider: you meet with your financial planner who makes a bunch of suggestions about what you should sell and buy in these volatile times. The financial planner knows more than you do. Do you take his advice? Are you more likely to trust his advice if you're paying him by the hour or if he's earning a commission on every trade?

While there is no guarantee that salespeople and financial planners who do not get commissions will have their customer/client's interests at heart and give good advice, we can be pretty certain that they won't face the conflict between "what's good for me" and "what's good for the customer" that is built into sales commissions.

Well, most bonuses are just commissions by another name. The employee asks herself, "on what does my bonus depend? What will they be measuring?" and then acts in a way that will make what is being measured as impressive as possible. Say yes to any mortgage, no matter how unsound the applicant's finances, because the more mortgages you say yes to, the more mortgages can be securitized, the more fees your firm will earn, and the bigger your bonus will be. Give a high rating to any new bond issue because the more high ratings you give, the more bonds you will be asked to assess in the future, the more fees your firm will earn, and the bigger your bonus will be.

Someone might respond to this argument by saying that the problem isn't with giving bonuses, it's with giving bonuses for the wrong things. We should be giving bonuses for activities that serve the long-term interests and not the short-term interests of the company. And we can add "claw-backs" to bonuses, as some have recently proposed, so that the people who earn big bonuses will have to give them back if the company suffers tomorrow for what they do today. But this is a little disingenuous. Working in a way that serves the well-being of the company is what "doing your job" is all about. The culture of bonuses is there for a reason-as an implicit instruction to employees that one thing matters above all else.

It is a truism that you should "be careful what you measure, for what you measure is what you'll get." Even more true is that "you should be careful what you pay for, for what you pay for is what you'll get." And whether it is traders trying to improve the corporate bottom line, or teachers trying to improve the standardized test scores of their students, bonuses encourage a narrowness of vision and aspiration that results in consequences like the ones we're living through today.

Several weeks ago, at a press conference, then President-Elect Obama observed, in commenting on the financial crisis, that people need to ask themselves not only "is it profitable," but also "is it right." The culture of bonuses will do nothing to encourage the financiers who hold our futures in their hands to ask themselves that question. And no amount of oversight and regulation can overcome an industry that does not take "is it right" seriously.

And yesterday, President Obama called on us to be hopeful and virtuous. "Virtue" is an old-fashioned word, but Obama evoked it because it is part of our national heritage and because it is "true." We shouldn't be paying people bonuses when they do the right thing. We want a society in which people do the right thing because it's the right thing.

In Defense of Friction

Barry Schwartz — Wed, 14 Jan 2009 19:18:18 +0000

When automobile manufacturers struggle to squeeze as many miles per gallon as possible out of their car designs, any feature of the design that impedes the forward motion of the vehicle--friction, or air resistance--is the enemy. The aim is to design a vehicle that uses every ounce of fuel to move the car forward as efficiently as possible.

And so it is in the world of finance. As historian Niall Ferguson reminds us in his recent book, The Ascent of Money, hard as it is to imagine, people didn't always have money. The invention of money went a long way toward reducing the friction--the inefficiency--in financial transactions. No longer did the farmer have to drag sacks of potatoes to the marketplace to trade for eggs and milk. Money was a medium of exchange that greatly reduced the financial "coefficient of drag."

Arguably, much that has happened in the financial world over the last 200 years can be seen as a continuation of the revolution in efficiency begun by money. Credit, for example, meant that you could go shopping for eggs and milk without even having the money. The farmer could promise to pay it at a later date, after the potato harvest. Nor did the farmer need to save up the surplus from many years of bumper crops before expanding the amount of land under cultivation. It was possible to get the land now, with credit, and pay for it over time, in part with the proceeds from newly cultivated acres.

Much more recently, financial markets have been all about efficiency. This is one way to understand the oft-cited distinction between the "real economy" and the "financial economy." Like point masses moving in frictionless, Newtonian vacuums, financial transactions are so far removed from the material entities that underly them that transactions can occur with lightening speed, with nothing to slow them down. The creation of stock option markets means that you don't have to go to the trouble of actually buying a stock that you are going to be selling soon anyway. You can just promise to buy it and then sell it at a price and date specified by the option contract. And then you can trade the option rather than the underlying stock.

And bundling mortgages into securities reduces the time-consuming, unproductive friction involved in checking the credit-worthiness of each mortgage applicant. You can just let the mortgages of the many work to indemnify the occasional defaults of the few. Similarly, credit card interest rates of 20% or more eliminate the need for credit-card companies to spend time unproductively checking the credit of applicants. High interest rates more than cover the occasional delinquent. Home equity lines of credit mean that homeowners can borrow a big pile of money (or have the potential to borrow a big pile of money), and have it at the ready, even when there is no pressing need. Instead of having to go through red tape to get a loan when your kitchen pipes burst, or your car engine dies, you can just write a check. And A.T.M.'s mean not having to fill out withdrawal forms and stand in bank lines.

Each of these developments has made it easier to do ones business without wasted time and energy--without friction. Each has made economic transactions quicker and more efficient. And that's obviously good. But the current financial crisis suggests that maybe, there can be too much of a good thing. If loans weren't securitized, bankers might have taken the time to assess the credit-worthiness of each applicant. If homeowners had to apply for loans to improve their houses or buy new cars, instead of writing checks against home equity, they might have thought harder before making weighty financial commitments. If people actually had to go into a bank and stand in line to withdraw cash, they might spend a little less and save a little more. If credit card companies weren't allowed to charge outrageous interest, perhaps not everyone with a pulse would be offered credit cards. And if people had to pay with cash, rather than plastic, they might keep their hands in their pockets just a little bit longer. These are all cases in which a little friction to slow us down would have enabled both institutions and individuals to make better decisions. And in the case of individuals, there is the added bonus that using cash more and credit less would have made it apparent sooner just how much the "booming 90's" had left the middle class behind. Credit hid the ever-shrinking purchasing power of the middle class from view.

So perhaps now the time is right to stop worshipping the god of efficiency and bring a little friction back into our lives. One way to do this is to reintroduce transactions that are real transactions--person-to-person and face-to-face. A second is to rekindle certain social norms that serve to slow us down. For example, no one goes bankrupt on purpose, but if bankruptcy became a little more of a disgrace and embarrassment and a little less of a financial strategy, people and firms might do more to forestall it. And if people thought about their homes less as investments and more as places to live, full of the friction of kids, dogs, friends, neighbors, and community organizations attached, there might be less speculation with an eye toward house flipping.

We'd all like a car that gets 100 miles to a gallon. The forces of friction and air resistance that slow us down are an expensive annoyance. But the thing is, when we're driving a car, we know where we're going and we're in control. Fast is good, though even here, a little bit of friction can forestall disaster when you encounter an icy road.

Life is not as predictable as driving. We don't always know where we're going. We're not always in control. Black ice is everywhere. A little something to slow us down in the uncertain world we inhabit may be a life saver.

Pay More Attention to "What" and "How"

Barry Schwartz — Fri, 09 Jan 2009 13:28:02 +0000

[This post was written in collaboration with my colleague, political scientists Kenneth E. Sharpe]

When the acute phase of the current financial crisis has abated, what steps will we take to make sure it doesn't happen again? Policy makers are already talking about better regulation and smarter incentives-sticks and carrots-that are aimed at changing how bankers and brokers do their work. Understandably so. But some caution is in order. The financial industry has found clever ways to dodge all sorts of regulations in the past. And the "perverse" incentives that generated the most egregious recent behavior in the financial world were hailed only a few short years ago as the "smart" alternative to what had gone before. Something more is needed. Instead of simply worrying about engineering the "how," with rules and incentives, we would do well to pay attention to the "what."

If, thirty years ago, you casually asked a banker you'd just met at a cocktail party "what do you do?," a common answer might have been "I make loans so people can buy or improve houses, or expand their businesses, or start new ones" or "I help people save for retirement." If you'd asked a few months ago, the answer to the "what" question might more likely have been: "I make money. By any means possible. Let me tell you about this great scheme of slicing and dicing risky loans into marketable securities." You might once have asked a steel manufacturer "what do you do," and been told "I manufacture girders that provide the infrastructure for office towers." Now, if you could find a steel maker, he'd tell you "I make money. I just made a great deal, closing my steel plant in Indiana and buying shares in a Korean steel company." A pharmaceutical executive who might once have said, "I make drugs that prevent and cure disease and ease suffering" might now say "I make money. Let me tell you about this great line of ‘copycat' drugs we've developed to protect us from patent expiration." A newspaper-publishing conglomerate CEO who might once have said "I contribute to democracy by keeping citizens well enough informed that they can be intelligent participants in the political process" might now say "I make money. I've just finished trimming down our news division, and channeled the savings into our ‘first-person-shooter' game division."

When the "what" involves aims that are appropriate to banking, steel making, drug making, publishing, or anything else, the "how" is more likely to take care of itself. But when the "what" is only about making money, the "how" becomes "by any means possible." As long as we focus on the how, we have only two flawed tools at our disposal. We can try to turn the greed that we just take for granted as "human nature" to our advantage by using incentives to leverage behavior in a better direction-for example, tying CEO pay to long term performance so that they will at least be greedy about the right things. Or we can try to overwhelm greed with fear (Thomas Hobbes' advice to us in The Leviathan), by reaching for the stick of regulation and punishment.

Sure, we need to regulate financial industries better, and we need to eliminate perverse incentives. But what is left out of this mix of carrots and sticks is character: the commitment and knowledge to aim at the right thing. A critical purpose of banking is to serve others. And far from being a sacrifice, dedication to such service will probably make bankers much more satisfied with their own lives too. Carrots and sticks don't teach character; they substitute for it. Worse, over-reliance on carrots and sticks can have the perverse effect of eroding the motivation to do our work well.

Decades of research in behavioral psychology has shown that rewards and punishments can be very effective in changing behavior. But, at the same time, they create an addiction to rewards and punishments. Behavior that might once have occurred for other reasons (for example, because it's the right thing to do) will now only occur when the reward or punishment dispenser is watching. Even if the rules and incentives for bankers could be designed exactly right-which is highly dubious-how can we trust that bankers won't find a way game the system, discovering shadows that the regulators' flashlights don't illuminate? The banking system, as we've painfully seen, only works when there is trust, and when the system depends entirely on regulation and incentives, "trust" becomes an empty word. The problem with the slogan "trust but verify" is that ever increasing attention to verification gives the lie to the notion that there is any trust.

If people were reminded that there is a point to what they do, in addition to making money, regulation would be ever so much easier, incentives would be less important, and "how" would be not be as much of a problem. If people could be reminded that what they do has, and is meant to have, a significant effect on the lives of others-that virtually every form of work has an essential moral component-then making money, by any means possible, might stop being the only thing that guides people's conduct. Encouraging this kind of character will not be achieved with ethics courses. Proper attention to appropriate "whats" will only happen if it becomes a norm that suffuses the daily practices of our business leaders and the organizations they run.

primary aim of all these money-making and profit-driven corporations has to be a dedication and service to others. Built into decision making algorithms, risk models, business plans, and spread sheets must be this question: how can we do well by doing good, by serving our customers, clients, patients, and students as they are meant to be served. Better regulation and smarter incentives will perhaps protect us from really bad bankers (and drug makers, steel makers, and newspaper publishers), but it will never get us good ones.

A New Council of Psychological Advisors for President Obama?

Barry Schwartz — Wed, 07 Jan 2009 13:40:20 +0000

After President Barack Obama figures out how to bring the economy out of recession, stabilize financial institutions, end two wars, and get every citizen health insurance, there is something else that he should consider: The United States needs a Council of Psychological Advisors.

This new body would parallel and complement the Council of Economic Advisors. When economists have the president's ear, all their whispers concern incentives and self-interest. We need psychologists whispering in his other ear, about the economy, education, healthcare, and more.

On the Economy—Understand the "Irrational" Where did our financial institutions go wrong? Many accounts focus on greed, fear, and lack of trust. And why did things get so out of hand? Why was there a housing "bubble"? Somehow, "irrational exuberance" (Robert Schiller) or "animal spirits" (John Maynard Keynes) overwhelmed rational calculations of risk and reward. And it isn't just that irrational optimism, or even blindness to market fundamentals, gets the better of our rational faculties. Rather, as George Soros has pointed out, these psychological phenomena can become part of a feedback loop that actually changes market fundamentals. "Reflexivity," he calls it. The housing bubble was not the first such phenomenon, nor will it be the last.

Economists offer little that helps us understand why such bubbles occur or how they might be prevented. They also have little to tell us about how to prevent a "downward spiral of negative expectations" that makes fear of an economic downturn self-fulfilling. Economists largely make assumptions about the rationality of human decision-making and proceed from there. Witness Alan Greenspan's recent admission that he was mistaken in assuming that markets operate rationally and efficiently. The current crisis makes it clear that ignoring the real psychology of greed, fear, trust, and irrational enthusiasm (0r pessimism) can be perilous. Economists offer little that helps us understand why such bubbles occur or how they might be prevented. A Council of Psychological Advisors could help.

On Education—More than Just Carrots and Sticks: One of President Obama's top priorities is to improve the quality of American education. This will require recruiting and retaining excellent teachers and finding ways to motivate students. How can this worthy goal be achieved? At the moment, we're pointing in the direction of school choice and competition to produce better schools, higher pay to produce better teachers, big tests to monitor their performance, and financial incentives to motivate students. A bunch of carrots and sticks. Will these kinds of measures be enough? Research in psychology suggests not. More important than pay (as long as it is adequate) are working conditions that allow teachers to be flexible, autonomous, and creative in their work with students, and that provide teachers with a sense that they are working in a community that has a common purpose. From this perspective, the regimentation of instruction ushered in by big-test accountability is actually counter-productive. And so is the move, now being tried in pilot projects around the country, to pay students for showing up to class and for getting good grades. A Council of Psychological Advisors could help design environments that encourage students to pursue mastery rather than money and teachers to view their work as a calling.

On Health Care—Understanding Efficacy and Managing Chronic Conditions: Everyone should have health insurance. This is necessary, but not sufficient. The cost of health care must come down. Computerized medical records that produce coordination of care will help bring down costs, but it also isn't sufficient. We need to help patients (and their doctors) understand how to think about the efficacy and the risks involved in various medical procedures, so that fewer unnecessary, but costly procedures are undertaken. There is plentiful evidence that patients make serious mistakes in thinking about risks and efficacy, and that their doctors make the very same mistakes! Moreover, most medical care in a developed country like the U.S. involves management of chronic diseases (hypertension, heart disease, diabetes, asthma). Managing these conditions effectively demands that patients be partners; they need to make lifestyle changes (eg., diet, smoking, and exercise) that are often difficult to adhere to. A Council of Psychological Advisors can help in designing formats for presenting evidence about the efficacy and risks of various treatments that will reduce misunderstanding and thus reduce unnecessary procedures. And it can help develop interventions that will make patients healthcare partners more effectively.

On the Environment—Do It Because It's Right: Traditional economic incentives like investment tax credits, energy taxes, and pollution credits might help us reduce our environmental footprint, but focusing exclusively on these neglects the extraordinary opportunity to call on citizens to do the right thing because it's the right thing. Indeed, there is even evidence that incentives can undermine people's desire to do the right thing. In a Swiss study of citizen-willingness to have a nuclear waste dump located in their communities, researchers found that whereas 50% of citizens agreed (reluctantly) when no incentives were involved, only 25% agreed when substantial incentives were involved. Each of us can take responsibility as citizens to contribute in small ways to solving the big environmental problems we face. A Council of Psychological Advisors can help in crafting appeals to citizens to do their duty.

Moving Beyond GDP: Finally, let us ask the most fundamental question: what is public policy for? We aim to increase collective welfare, but just what does welfare consist in? For the most part, under the sway of economic thinking, our aim has been to make the country more prosperous-to increase per capita GDP. The appeal of this goal is two-fold. First, we assume that if people are richer, they will be freer to choose as individuals the objects and activities that serve their welfare. We (the state and its technocrats) don't have to choose for them. So wealth serves as a proxy for everything else. And second, GDP can be measured. But like a drunk looking under a lamp post for his car keys, even though he dropped them someplace else (because "that's where the light is"), it doesn't help much to pursue what you can measure if what you're measuring is the wrong thing. It doesn't help to get better at achieving goals if you're achieving the wrong goals. Much research in the psychology of well being suggests that some wealth-enhancing policies improve welfare, but others do not. Indeed, some of what it takes to get more prosperous may be counterproductive when it comes to well being. A Council of Psychological Advisors can help here too, in the design of a system of national "psychological accounts" that does a better job of measuring well being than per capita GDP ever could.
Many of us hold out the hope that the coming Obama administration will mark a return to respect for knowledge and expertise. Agencies will be run and staffed not by political cronies, or by people who "just know in their gut" what needs to be done, or by ideologues, but by people who actually have respect for evidence. It would be a shame to bring experts on board in existing agencies, only to have them have to rely on personal intuition rather than knowledge in formulating policies and making decisions that could benefit from psychological expertise. A Council of Psychological Advisors is long overdue. This would be an excellent time to create one.