Thread by @econnaturalist

My UNDER THE INFLUENCE: PUTTING PEER PRESSURE TO WORK will be published a week from tomorrow by Princeton University Press. In this thread I describe an example of how behavioral contagion distorts our spending patterns. 1/
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The example starts with a simple thought experiment: If you were society’s median earner, which of the following two worlds would you prefer? 2/

WORLD A: You save enough to support a comfortable standard of living in retirement, but your children attend a school whose students score in the 20th percentile on standardized tests in reading and math... 3/

Or WORLD B: You save too little to support a comfortable standard of living in retirement but your children attend a school whose students score in the 50th percentile on those tests. 4/

Because the concept of a good school is inescapably relative, and because better schools are invariably located in more expensive neighborhoods, this choice captures the dilemma inherent in the savings decision confronting a middle-income family. 5/

If others bid for houses in better school districts, failure to do likewise will consign your children to inferior schools. Yet no matter how much each family spends, half of all children must attend bottom-half schools. 6/

It’s a choice that most parents would prefer to avoid. But when forced to choose, most pick the second option. The incentives they face share all the features of a military arms race. 7/

This observation helps explain why, as President George W. Bush discovered, attempts to privatize Social Security have proved so politically unpopular. 8/

Since its inception, the Social Security System has required universal participation. Revenue from the payroll tax is used to finance pension checks to retirees. You can’t opt out. 9/

Under Bush’s privatization proposal, people would instead be free to decide for themselves how much to save each month and how much to spend. But to his surprise, the proposal proved deeply unpopular. 10/

Few people could explain why they didn’t they welcome the additional freedom. But as psychologists tell us, we know more than we can say. If parents had access to their entire retirement savings, some would use those funds to bid for houses in better school districts. 11/

Rather than see their own children fall behind, many other parents would feel compelled to follow suit. But their increased bidding would serve only to drive up the price of houses in better school districts. 12/

As before, half of all children would attend bottom-half schools. But when the dust settled, many parents would end up with inadequate savings to support themselves in retirement. 13/

Mandatory participation in Social Security eliminates this dilemma. The money paid in payroll taxes, which is out of reach to bid for houses in better school districts, remains safely available for pension checks. 14/

Adam Smith’s modern disciples celebrate his invisible hand principle, according to which, they say, rational actors seeking only their own gain will produce the greatest good for society as a whole. 15/

But Smith himself was more circumspect. It was remarkable, he thought, that self-serving actions OFTEN lead to socially benign outcomes. And indeed it is. 16/

But exceptions abound, as in the savings dilemma just described, or as in the familiar stadium metaphor, where all stand to get a better view, only to see no better than if all had remained comfortably seated. 17/

Behavioral contagion produces spending patterns that waste at least several trillion annually in the US alone.
In UNDER THE INFLUENCE, I describe how relatively simple policy changes could redirect more than enough of this waste to finance the Green New Deal. 18/

It’s available for preorder now:
amazon.com/Under-Influenc…