The Nagging Nanny State

[This Thursday Re-Run first ran November 4, 2009.]

There is a movement amongst earnest policy wonks that might be called Nanny State Light. It’s a compromise position between full-on centrally  planned we-know-what’s-best-for-you Toddler Cart Crop - Remi  Jouancontrol and you’re-on-your-own-kid libertarianism.

The idea is that instead of making people do the right thing or hoping that they do what’s best on their own, you give them a little nudge and hint in the right direction. This is, I am told, the topic of a clever and popular book, Nudge, which I haven’t yet gotten around to reading. (But I bought a copy a few weeks ago.  That’s something, isn’t it?)

The latest scheme along these lines to hit the media is in today’s Wall Street Journal. Apparently, all we need to do to get people to save more money is to send them a text message reminding them to save more money.

A new study by a group of economists looking at why people save money found that simply sending out cellphone reminders increased savings balances by 6%.

The study challenges the idea that people don’t have enough self-control to save. Instead, the problem may be that they just aren’t paying attention, said Dartmouth University economics professor Jonathan Zinman, one of the study’s four authors.

"Savings isn’t at the top of their mind," said Mr. Zinman. "Basically all we did was remind them."

Brilliant! So it turns out that all we need to reverse multiple decades of Americans saving less than other countries is systematically nag, I mean "remind" them to save. That’s a relief. I guess we just have a reminder shortage.

I had thought we saved less than other countries for other reasons.  Like because we have a hyper efficient retail system that delivers consumer goods more cheaply than anywhere else and that we don’t have a VAT tax on those goods.  We also have a peculiarly high level of home ownership, which tends to skew the numbers. And, of course, optimistic assumptions about future wealth is ingrained in the national character.

Oh, and one more thing I used to believe. I used to think that saving for retirement was confusing and scary and that most people who spent too much and saved too little did so because they didn’t know any better.  Come to think of it, I still believe this.

The nudge crowd loves to bring up the well documented phenomenon that if you make enrolling rather than not enrolling in a 401k the default for new employees, enrollment will go up.

I think that increasing 401k enrollment is basically a good thing and that this is a good policy, but let’s be honest about what is going on here. There is a group of consumers too ignorant, intimidated, confused, and/or lazy to change their 401k participation status. For their own good, we are rigging the system to get them to fall into the right choice. That’s better than the other way around, but we’re still ignoring the core problem.

Our money lives are very complicated and getting more so. A lot of us don’t really know what we are supposed to be doing. Nor is it easy to find out. Much of the available advice and instruction on money is unhelpful or just plain wrong. Text messages aren’t really much help here.

Nudging people in the right direction is probably, mostly, a good thing. But when it comes to the Personal Finance Problem, we need more than nudges. There are only so many simple topics to nudge on. And we quickly get into the problem of the nudgers not knowing the right answer either.

No, like it or not we have a you’re-on-your-own-kid society and little hints from nanny aren’t going to get us anywhere. What we need is a better way to teach the kids what to do.

[Photo: Remi Jouan]


  • By Mr. West, November 26, 2010 @ 3:46 pm

    Every trade requires someone else to be on the other side … if everyone started saving and investing and got really good at it … then we could not make any money investing, could we? Since the dumb money is now being forced into 401(k) plans they have no or little investment management control over and that have excessive fees … the smart money will opt out of 401(k) savings, pay the additional income tax, and buy stock in money managers.

  • By mc, November 26, 2010 @ 5:42 pm

    The Nagging State was part of WWII culture and persisted well into the 1960s. I’d hate to see it come back.

  • By Lee, November 28, 2010 @ 2:50 am

    Nudges may not solve problems entirely, but when they are a free-lunch (like SMS), then why not?

  • By Stagflationary Mark, December 11, 2010 @ 6:53 pm

    This is a followup to one of your previous posts.

    “So I will cautiously amend my advice from a year ago. The payments you get at 70 are still the best deal going, but if you can manage the risks involved, you might just be able to have it both ways. Get checks starting at 62 and then start over at 70.”

    The risks were too great apparently.

    Here’s the followup.

    “Retirees will no longer be able to get an interest-free loan from the Social Security trust fund, the Social Security Administration announced today. Effective on December 8, retirees will not be able to pay back benefits already received in exchange for higher Social Security payments going forward.”


  • By Mr. West, January 7, 2011 @ 5:14 pm

    I don’t think Frank will back. Why? 1) He basically told you everything he knows; 2) He got tired of posting; and 3) He went for some job interviews and they said, “Frank, why do you waste your time on this blog stuff?”

  • By welbilt bread machine, January 20, 2011 @ 12:59 pm

    We need prized linked savings accounts to be legal. People need an incentive to save besides the 1% interest rate they can earn on typical savings accounts or CDs. Most people can’t wrap their heads around even basic investing concepts, like compound interested, let alone 401k.

    But, people understand the lottery. Now, if you combine that with the fact that your can’t lose your principal. (Yes, you lose the opportunity cost… but remember, most people don’t understand basic investing concepts) Then I think this will really take off.

  • By krantcents, January 27, 2011 @ 10:17 pm

    My suggestion to nudge people in a better direction that may help them take care themselves better. I suggest the financial literacy be required for high school and college graduation.

  • By Mr. West, February 9, 2011 @ 5:49 pm

    “All advice in this blog is guaranteed to be worth at least what you paid for it, or double your money back.”

    Frank had to give refunds … went broke.

  • By Levon, March 26, 2011 @ 12:50 am

    First, the study you cited in the beginning DID find that texting increased savings rates. If the study was done properly, the conclusion has some weight. However, in the same study it said that the savings rate increased by 6%, not a very large amount. So, texting people (or reminding them) will help at the margin, but won’t change things drastically.

    Second, if everyone saves a lot, the Paradox of Composition is invoked: if you save a large portion of your income, you do yourself something good, but if everyone in the economy does it, chaos can ensue and a recession is likely. The last recession definitely didn’t happen because people saved to much, but if everyone saved a large portion of their income, consumption (the largest part of GDP) would decrease and affect the economy negatively (at least in the short and medium run).

  • By Simon, May 7, 2011 @ 12:33 pm

    Thats rather interesting. To be honest, I am not sure if I entirely agree though. But hopefully we do avoid a nanny state

  • By شات بنات مصر, October 12, 2011 @ 2:54 pm

    thanks f u

  • By Jerry, November 17, 2011 @ 4:54 pm

    I don’t totally agree. I think that the nudges can be out there, but we shouldn’t have people “fail into saving.” I think that this level of hand-holding is ridiculous. If you do not know by now that you need to save, after all that has happened in our economy, even if you’re only saving in a regular savings account that is accruing almost no interest; its your fault and no one can push you into making the successful decisions needed to retire, etc.

  • By Den, December 14, 2011 @ 3:49 am

    Typical sentiment Jerry. Except we’re all in this economy together, and shaking our finger in someone’s face because they don’t know any better won’t help if the economy collapses. A nanny is necessary until the children learn how to manage themselves. The children do not currently know how to manage themselves, ergo we need a nanny. Don’t like it? Get out there and start educating instead of being a whiner.

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