The latest government stimulus plan is another disappointing addition to the collection of recent stimulus packages mistakenly trying to fight fire with fire.  The logic of Congress and the White House seems to be that the economy will be revived by giving people more money to spend. Government officials – from Obama to Pelosi – caution us on the importance of regaining confidence to restore the economy.  How quickly they forget what brought the economy to its knees!  We are in this crisis because Americans’ expectations of spending are too high.  We gambled on credit card debt and convinced ourselves to buy houses we could not reasonably afford.  We had too much faith in our government to watch over us, and too much faith that our nation’s companies were playing fair.  I do not claim that the White House or Congress has bad intentions, but sometimes the best of intentions can turn into a nightmare.   The cynicism Americans are feeling toward big company players like AIG and toward Congress and the White House is a good thing.  We are responsible for vigilant oversight of them, too.  Developing a practice of bailouts lessens the expected cost of financial failure – both personal and corporate – which can create dangerous risk analyses down the road.  Furthermore, in the long run, the stimulus package can itself become a part of the problem, as we will sustain the bad habits of over-spending.

Instead of reinforcing bad habits, a perhaps good (albeit painful) solution to the economic crisis is to let Americans go through the pain to set lower spending expectations.  We need to let people go through hard times in terms of lowered consumption (not lowered health, of course) to bring reality to the economy.  The economy will then be built on reasonable expectations, and we will be more prepared for the next inevitable recession.  A good way to accomplish these needed long-term goals while also ensuring that basic necessities are given to struggling Americans is to give people a small, monthly rebate check of $50 or $100 over the next two years.  A small rebate will allow Americans add a little money in the economy without overspending and creating a spending bubble.  My proposed solution is not an electroshock to the economy, but rather a supervised slow recovery process.  In addition, “short-term responsibility” legislation should be put in place to limit financially over-extended individuals and over-leveraged companies from pursuing new lines of credit and leveraging.  People and companies over the limit should be required to report to financial advisers on a monthly basis to verify that they are making sound decisions (Think about it as a parole officer for credit).

Achieving a reasonable level of consumption and returning to full responsibility for our debts will help us return to the optimal level of consumption.   Let’s all acknowledge the elephant in the room.  We cannot return to the kind of spending we once mistakenly enjoyed.

Dr. Brian Wansink, well-known author of Mindless Eating, published an article on the effects of low-fat labeling on eating habits (“Can ‘Low-Fat’ Nutrition Labels Lead to Obesity?” Journal of Marketing Research, November 2006).  He argues that low-fat labeling increases consumption because the labels (1) suggest to us that the products have lower calorie density; (2) influence us to imagine that the serving sizes are larger than those of regular products; and (3) make us feel less guilty about eating the “low-fat” products.  The main source of support for his argument is a study conducted at a university open house in which incoming students and their families were invited to sample either regular or “low-fat” M&Ms (both samples were, in fact, regular M&Ms).  Dr. Wansink and his team measured how many M&Ms were consumed and how many calories the participants thought they consumed.  According to the results, participants who sampled the “low-fat” M&Ms consumed 28% more than those who ate the regular ones, suggesting that we over-consume “low-fat” labeled products.  The participants also grossly underestimated their calorie-intake by 48 percent; those participants who ate the “low-fat” M&Ms were worse at accurately measuring their consumption.

If we disregard the flaws in Dr. Wansink’s study (small sample size, self-reported weight, to name a couple), the results are quite troubling.  Are we really the clueless eating-machines that he makes us out to be?  I don’t think so.  Let’s consider an economic analysis of the eating choices available to Dr. Wansink’s participants who ate the “low-fat” M&Ms:  When consuming the “low-fat” M&Ms, the participants incurred a substitution effect by consuming a product that they believed had less fat density than the regular M&Ms.  When the participants realized the substitution, their guilt associated with eating the “low-fat” M&Ms decreased.  The decreased guilt led to increased consumption, otherwise known as a scale effect.  The decreased guilt also caused the “low-fat” M&M-eating participants to relax and, therefore, to pay less attention to their consumption levels.

A good way to understand the differing consumption levels of regular and “low-fat” M&Ms is to frame the participants as having lexicographic preferences.  A lexicographic preference structure means that, given a set of M&M characteristics (“low-fat”, calorie content, sugar content), the participants prefer them in an established order, where the first preference is preferred infinitely more than the second:  (1) “Low-Fat” (over regular), (2) Lower Calorie Content (over higher), and (3) Lower Sugar Content (over higher).   As long as the participants consider the decision to take “low-fat” over regular M&Ms as the first preference in their set, we can expect them to continue to consume excessive amounts of “low-fat” M&Ms.

Given the economic analysis above, the  solution to our over-consumption of “low-fat” products is simple:  We need to change the default M&M option from regular to “low-fat” if both options are available, thereby eliminating the first preference in our lexicographic preference set.  We are not irrational eaters, as Dr. Wansink describes us.  If we integrate healthier options into our preference structure, we can focus on the calorie content of our products and make better consumption choices.