March 5, 2015

The Yin and Yang of Scarcity
If necessity forces us to be inventive, then scarcity forces us to be efficient, right? Yes, scarcity can do that, but it also causes us to do some other things that aren’t so good, according to Sendhil Mullainathan and Eldar Shafir, the authors of Scarcity: The New Science of Having Less and How it Defines Our Lives (2013). Scarcity is as much about psychology as it is about economics. (Mullainathan is a Harvard economics professor, Shafir is a Princeton psychology and public affairs professor, and both conduct research in behavioral economics.) “Scarcity captures the mind” as “the mind orients automatically, powerfully, toward unfulfilled needs,” they wrote.

Lacking time, money, and other resources to fulfill all of our needs affects our thinking, for better and for worse. In capturing our minds, scarcity “focuses our attention on using what we have most effectively,” generating a “focus dividend.” But this dividend comes with a hidden, cognitive price tag. “The power to focus is also the power to shut things out.  Instead of saying that scarcity ‘focuses,’ we could just as easily say that scarcity causes us to tunnel: to focus single-mindedly on managing the scarcity at hand.” Consequently, “focusing on something that matters to you makes you less able to think about other things you care about.”

For example, many small businesses quickly cut their marketing budgets when times are tough. The sharp focus on the bottom line blocks out other important considerations. According to a business adviser the authors quoted, “lean times are exactly the times your small business most needs marketing.” Why? Because “consumers are restless and looking to make changes in their buying decisions. You need to help them find your products and services and choose them rather than others by getting your name out there.”

Can the same be said about policy makers trying to balance a budget? A recent OLR report on the steps California, Massachusetts, New York, and Rhode Island took to address 2008 budget deficits cited policy analysts who claimed that prior tax and spending policies, coupled with long-term structural change, made them especially vulnerable to recessions and undermined their ability to become fiscally solvent when the economy recovered.