Thursday, August 11, 2011

Another Edition of Good Reads

It has been the culture of this blog to post what we think might be good reads (books) for the readers of this space. In this edition we have one book that might challenge the dogmatists view economics of poverty (Easterly-Moyo Vs. Sachs-ProBonos). And the other book has enabled liberals and conservative to embrace "libertarian paternalism" view and argue that we are all choice architects at one point. The contents of these books are valuable for public policy makers who are bold and are looking for different ways to achieve their causes. The reviews that are posted below have been borrowed (without permission) from various credible book reviewers. Enjoy!

Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty. By Abhijit Banerjee and Esther Duflo. PublicAffairs; 336 pages; $26.99. (The Economist Review)--One of the Author (Esther Dufflo) was also featured in this blog sometime in the past.

“Poor Economics” should appease some of their critics. It draws on a variety of evidence, not limiting itself to the results of randomised trials, as if they are the only route to truth. And the authors’ interest is not confined to “what works”, but also to how and why it works. Indeed, Ms Duflo and Mr Banerjee, perhaps more than some of their disciples, are able theorists as well as thoroughgoing empiricists.

They are fascinated by the way the poor think and make decisions. Poor people are not stupid, but they can be misinformed or overwhelmed by circumstance, struggling to do what even they recognise is in their best interests. The authors recount (with grudging admiration) how nurses in rural Rajasthan outwitted the two professors’ efforts to stop them skiving off work. They also describe how borrowers in south India exploited a contractual loophole to avoid taking out health insurance, which their microlender insisted they buy for their own good.

The poor, like anyone else, can also succumb to inertia, procrastination and self-sabotage. The authors discovered it was quite normal for poor women in the Indian city of Hyderabad to take out a microloan charging 24% interest only to deposit it in a savings account that paid 4%. This seems mad, except that the obligation to repay the loan ensured the women did not squander the money. Farmers in western Kenya miss out on the benefits of fertiliser because, by the time the planting season arrives they have often spent their earnings from the previous harvest. But farmers far-sighted enough to buy the fertiliser straight after the harvest, when they do have money, do not sell it, despite facing all the same demands on their resources. In other words, farmers cannot save the money to buy fertiliser, but they can save the physical fertiliser itself.

Poverty is often linked in the public mind with dependency. But, as the authors point out, the poor bear more responsibility for their lives than the rich, who coast along, enjoying chlorinated water, drawing a regular salary, paid directly into a bank account, perhaps with contributions to their pension and health care automatically deducted. The rich can indulge their weakness for cigarettes and alcohol without fear of financial ruin. The poor, in contrast, have to watch every cup of sugary tea. Mr Banerjee and Ms Duflo recommend a variety of nudges, props and subsidies that will make it as easy for poor people to make the right decisions as it is already for the rich.

If it is a mistake to equate poverty and dependency, it is equally mistaken to believe the poor will lift themselves up by their bootstraps. The book crosses swords with the business gurus and philanthropists who project their own enthusiasm for Promethean entrepreneurship onto the poor. Yes, the poor are more likely to run their own business than the rest of us. But that is because they have no other choice. When asked, most of them aspire to a government post or a factory job. Developing countries are not full of billions of budding entrepreneurs; they are full of billions of budding salarymen. Read the rest here.

Improving Decisions About Health, Wealth, and Happiness By Richard H. Thaler and Cass R. Sunstein. 293 pp. Yale University Press. $26

As a result, Thaler and Sunstein argue, many of the familiar arguments for why people should simply be left to make choices on their own, and especially for why government should stay strictly out of the way, have little practical force. In many important areas of choice that matter both to the individual and to the rest of us (for example, when overuse of medical care drives up our insurance premiums and our taxes), the operative question is not whether to bias people’s decisions, but in which direction.

Thaler, a professor of economics at the University of Chicago, and Sunstein, a law professor formerly at Chicago but now at Harvard, apply this line of argument to a wide array of familiar areas: saving, borrowing, energy consumption,smoking, teenage pregnancy and many others. Along the way they present fascinating findings about how people actually make decisions, together with lots of personal advice: save more, diversify your investments, don’t invest much in your employer’s stock, don’t pay points on mortgages, buy insurance with the biggest deductible you can afford, don’t pay for extended warranties. But their main objective is to reshape public policy (Sunstein is an informal adviser to Barack Obama, who has advanced some “Nudge”-like policy ideas), and it’s clear that the suggestions they care most about apply to ways in which governments can do a better job of guiding the choices made by their citizens. The goal, in part, is to nudge people toward healthier, safer, more prosperous lives while also addressing pressing issues like environmental damage and the rising cost of health care.

If all this sounds paternalistic, that’s because it is. Thaler and Sunstein adopt the deliberately oxymoronic label “libertarian paternalism” to describe their general approach. It’s libertarian in that people retain the right to make their own choices: they’re free to select the savings plan with the lowest projected return if that’s what they really want. But the govern­ment — or an employer, or the person in charge of laying out the food in the cafeteria — is nonetheless nudging people in the direction that somebody thinks will make them better off.

The conceptual argument is powerful, and most of the authors’ suggestions are common sense at its best: Set up 401(k) programs so that employees have to opt out if they want, rather than making them opt in. (At present, roughly 30 percent of employees eligible for 401(k)’s don’t sign up, despite the enticement of employer matching contributions.) Do the same for organ donation. Make credit card companies offer an automatic full-payment option. Offer investment vehicles that provide automatic portfolio rebalancing. Most of these ideas work because of the human tendency, widely documented, toward what Thaler and Sunstein call “inertia.” Most of us just call it laziness.

In the end, however, “Nudge” is somewhat thin on practical ideas for public policy that follow from the authors’ core insight. Many of the suggestions Thaler and Sunstein make, in contexts like savings and mortgages and credit cards, amount to calls for greater disclosure (what did all of those credit card fees total last year?) or for presenting information in a clearer way (to make price comparisons for mortgages easier). Surely no one except the companies making the profits would oppose more disclosure and clearer information. But we don’t need behavioral economics, or libertarian paternalism, to think such proposals might be helpful.

And the authors occasionally strike a false note. Their recommendation to allow patients to sign away the right to sue doctors for malpractice, for example — presumably in return for lower medical bills — doesn’t resemble the argumentation elsewhere in the book. The threat of lawsuits, they reason, gives doctors little incentive to be more careful because malpractice insurance isn’t “experience rated”; in other words, the premium charged doesn’t depend on the doctor’s past record as it does for, say, drivers. (Oddly, they accept the seemingly conflicting view that the threat of lawsuit is expensive because it leads doctors to prescribe unnecessary tests.) Why don’t they suggest that malpractice insurance be experience rated too? Read The Rest Here.

1 comment:

salama said...

Thanks thuwein,
I heard the authors interview in the radio about this book, seems like it's quite an interesting read particularly this time around when the most popular spoken word and the least powerful password is "Economy"