Incentivising people to act in a particular way works wonderfully – until you want them to start doing the opposite, writes James Sproule. The government’s good intentions on ‘nudging’ can rebound…
For political policy wonks, theories don’t come much more beguiling than nudge. The idea, first put forward by Richard Thaler and Cass Sunstein, is that rather than regulating a particular course of action you deem to be in someone’s best interest, you incentivise them to do it. It first came to prominence early in the Obama administration and quickly spread. David Cameron even established a ‘nudge unit’ at Downing Street.
Nudge has of course long been popular in business. We have all been nudged, from ‘buy one get one free’, to limited-time sales, to lower parking fines for immediate payment. More recently the government insisted on a plastic bag charge; the response was dramatic, with a reduction in usage by almost seven billion (not million!) bags per annum. Government should, however, be wary of assuming this success is replicable in other areas. Buying a plastic bag or not is hardly a big sacrifice – buying a car or a house is.
For years the government has been telling people it is a good idea to save for a pension. You can certainly nudge people into pensions by requiring them to opt out of a saving programme rather than in, relying on inertia to produce a general rise in pensions savings. Australia has done this and the result is a thriving private sector pension market and a considerable accumulation of savings. You can also make it more enticing by relaxing the rules for what can be put into a scheme.
Government and pensions
Indeed, the UK government broadened the pension rules almost 20 years ago, allowing people to contribute assets as well as cash to their pension pot. The problem was that, in the wake of the credit crisis, many were (understandably) nervous of financial markets and so opted to purchase a buy-to-let flat. Government, however, decided this was driving up house prices (although in our view lax monetary policy bears a much greater responsibility) and so it set about changing the rules to make residential buy-to-let property far less attractive by removing mortgage interest deductibility. For many pension savers, it was a painful lesson in the perils of trusting a government nudge.
Likewise, diesel was deemed more eco-friendly than petrol, so excise duties were lower. Over 12 million people were nudged into buying diesel cars as a result, only for experts to recently change their minds. Now there is talk of the tax rising and diesel cars being banned from city centres or charged more for parking. It is all well and good to say, “When the facts change, I change my mind.” But nudged motorists have every right to feel aggrieved.
We live in an era when political trust is being eroded. Nudging people down one particular path only to reverse course, however well intentioned, will simply exacerbate the problem. Moderation in all things, even for an idea as good as nudge.