The Economics of Not Working Out

January 15, 2012

Proposition: Anyone that vows to go to the gym more but doesn’t shouldn’t complain about Congress not being able to pass bills that cut spending.

From Derek Thompson in The Atlantic:

One in eight new members join their fitness club in January, and many gyms see a traffic surge of 30 to 50 percent in the first few weeks of the year. Stop by your local gym today, and the ellipticals will be flush with flush new faces. But next thing you know, it will be April, our gym cards will be mocking us from our wallets, and our tummies will have sprouted, on cue with the tree buds.

Here’s what economics can teach us about fitness and the fitness industry.

WHY CAN’T PEOPLE KEEP THEIR GYM PROMISES?
FOR THE SAME REASON CONGRESS CAN’T PASS DEFICIT REDUCTION.

People are way too optimistic about their willpower to work out, Stefano Dellavigna and Ulrike Malmendier concluded in their famous paper “Paying Not to Go to the Gym.” In the study, members were offered a $10-per-visit package or a monthly contract worth $70. More chose the monthly contract and only went to the gym four times a month. As a result, they paid 70 percent more per visit than they would have under the plan they rejected. Why? Because people are too optimistic that they can become gym rats, which would make the monthly package “worth it.” Silly them.

You might call this behavior “laziness.” Economists prefer “hyperbolic discounting.” This is the theory that we pay more attention to our short-term well-being and “discount” rewards that might come further down the road. Think of a small reward in the distant future, like taking a nap three weeks from now. Doesn’t hold much appeal, does it? But when the small reward is imminent — Take a nap right now? Woo hoo! — it’s considerably more attractive. Given the choice between small/soon rewards versus larger/later benefits, we’ll take the former. Hyperbolic discounting helps to explain why Congress can’t pass deficit reduction, why drug addicts stay addicts, why debtors don’t pay off their bills, and why you keep telling yourself that the right day for exercise is always “tomorrow.”

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Posted by Mark Wegener

The Forty-Seven Percent Solution

April 14, 2010

If it's a small bag, keep it.

David Leonhardt does a nice job today in the NYTimes writing about the recent dust-up over the mid-2009 study that claims that 47% of Americans owe no federal income taxes.

All the attention being showered on “47 percent” is ultimately a distraction from that reality.

The 47 percent number is not wrong. The stimulus programs of the last two years — the first one signed by President George W. Bush, the second and larger one by President Obama — have increased the number of households that receive enough of a tax credit to wipe out their federal income tax liability.

But the modifiers here — federal and income — are important. Income taxes aren’t the only kind of federal taxes that people pay. There are also payroll taxes and capital gains taxes, among others. And, of course, people pay state and local taxes, too.

…

Focusing on the statistical middle class — the middle 20 percent of households, as ranked by income — underlines this point. Households in this group made $35,400 to $52,100 in 2006, the last year for which the Congressional Budget Office has released data. That would describe a household with one full-time worker earning about $17 to $25 an hour. Such hourly pay is typical for firefighters, preschool teachers, computer support specialists, farmers, members of the clergy, mail carriers, secretaries and truck drivers, according to the Bureau of Labor Statistics.

Taking into account both taxes and tax credits, the average household in this group paid a total income tax rate of just 3 percent. A good number of people, in fact, paid no net income taxes. They are among the alleged free riders.

But the picture starts to change when you look not just at income taxes but at all taxes. This average household would have paid 0.8 percent of its income in corporate taxes (through the stocks it owned), 0.9 percent in gas and other federal excise taxes, and 9.5 percent in payroll taxes. Add these up, and the family’s total federal tax rate was 14.2 percent.

To those people who still find it offensive, I suggest they do two things:  1) Contemplate raising their family on $50,000 in gross income, and 2) Contemplate raising their family on $50,000 in gross income then paying $10,000 of it away in taxes.  Doesn’t leave much.  The system is (supposed to be) designed where those with the ability to pay, pay.

Exxon Mobil paid no US federal income taxes last year and few seem disturbed by that. I am not, but then again, this 47% number doesn’t bother me, either.

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Posted by Mark Wegener