Will Credit Card Law Alter Consumers' Behavior?
STEVE INSKEEP, host:
This week, Congress passed sweeping legislation aimed at reforming the credit card industry. This law bans certain practices and also forces companies to present information to consumers in ways that are calculated to change consumer behavior. Behind that idea: something called behavioral economics. President Obama is a big fan, and David Wessel knows something about it. He's economics editor of The Wall Street Journal, regular guest of this program. David, Good morning.
Mr. DAVID WESSEL (The Wall Street Journal): Morning, Steve.
INSKEEP: Okay, what's behavioral economics?
Mr. WESSEL: Behavioral economics is kind of the intersection of psychology and economics. It holds that we're not really so rational and coldly calculating, as economic textbooks say, that the way choices are presented to us influence the way we behave. So if you put dessert in front of us first, we'll probably have dessert first. If you put the vegetables and fruit before us, we'll probably pick those first. And so it structures choices to get us to do things that someone thinks we ought to do.
INSKEEP: Okay. When it comes to the credit card law, how are they putting the broccoli in front of us first?
Mr. WESSEL: Well, the most interesting thing is that when you get your credit card bill next year, it'll show you what the minimum payment is as it does now and it'll tell you how long it'll take you to pay your bill if you only make the minimum payment.
Mr. WESSEL: A way to show people that you have to pay more than the minimum if you want to really ever get your balance paid off.
INSKEEP: Oh, because people might look at that $25 or whatever it is and think, oh, that's great, I only have to pay $25. But in reality they'll be in debt forever if they do that.
Mr. WESSEL: Exactly.
INSKEEP: And are there other instances where economic policy or legislation is shaped by behavioral economics?
Mr. WESSEL: Yes. The Obama administration is enamored with this approach to things. One of the things the president proposed in his budget is to create a new thing that they call a self and automatic IRA. So that if you work, every employer will be required to offer every employee a retirement plan. If they don't have the one that big companies with like a 401(k) or something, where the employer contributes, they'll be required to enroll you in a savings plan, hook you up with a bank, take some of the money and your check so you have a retirement plan, and you'll have the right to opt out.
But the initial plan, the thing you'll have no choice in, is that you'll get signed up first and you'll have to opt out if you don't want it.
INSKEEP: So you won't be a victim of inertia, because the government is going to do it all for you.
Mr. WESSEL: It's actually using inertia to help you do what the government thinks you ought to do.
INSKEEP: So where else might the Obama administration deploy that kind of thinking?
Mr. WESSEL: Well, there are a number of people in the administration who wrote about ways to use this in academic and policy papers before the election. So for instance, one thing they might do is if you got a tax refund and you didn't have a bank account, the IRS would open one for you, so you'd a bank account. Or you might create some kind of approach to mortgages, where you would have to be shown what a 30-year fixed rate mortgage would cost, even if you got some different newfangled mortgage as a way - so you'd be able to make the comparison.
INSKEEP: Some of this sounds like just good consumer information. It all seems well intentioned. But does the word paternalistic come up ever in discussions of this?
Mr. WESSEL: Yeah, it does. I think the difference is that you still have a choice in - it's not like the government is forcing you to do something, it's not like they're creating some rule and saying no matter what you have to have a savings account. It's structuring the choices in a way that you're more likely to make a decision that the government thinks is in your interest.
So that's the difference. And it makes people more comfortable that they - that you have the right to opt out. And they think that that will make it more acceptable to people. But the outcome will be people will do things like save more money for retirement.
INSKEEP: Well, David, I'm glad we structured the choices so that you would talk with us this morning.
Mr. WESSEL: You're welcome.
INSKEEP: Economics editor of The Wall Street Journal, David Wessel.