June 14, 2011


The hidden behavioral tax from a tight budget: Lessons from late night Walmart (Nudges Blog)

On the eve of each new month, a consumer ritual unfolds at Walmarts around the country.

At around 11 p.m. “customers start to come in and shop,” Walmart’s CEO of U.S. Business Bill Simon told a conference of investors last year. Shoppers fill their carts with staples. Baby formula, milk, bread, and eggs. They browse until midnight when their government electronic benefits cards activate. Walmart’s dead-of-night sales zoom well above its monthly average.

Retailers have long known about this phenomenon, commonly called the “paycheck cycle,” in which cash-strapped consumers make big purchases when they get paid and are forced to cut back to the bone later in the cycle until the next paycheck arrives. In this tough economy, said Simon, the paycheck cycle is “extreme.” It can affect Americans at all income levels, but at the end of the month, that extremity is most crushing to the poor and the working class.

When money is tight, people buy less. When money is really tight, less means a smaller package. Retailers are now meeting that demand. Walmart has adjusted package sizes, stocking large pack sizes early in the month, and small pack sizes late. To compete with super discount dollar stores, it is offering micro-size items for under $1; a single paper towel roll, a four-pack of toilet paper, or a box with a handful of garbage bags. On a transaction basis, these goods are dirt cheap. As any good Costco member will tell you though, on a per unit basis, they are not. Walmart is not the only business adjusting; Heinz, Con-Agra, and Coca-Cola are going small too.

When you’re caught in the paycheck cycle, it’s one thing to have to cut back on movies and meals out at the end of the month. It’s another when you have to cut back on essentials. Or pay more for less. Ultimately, the penalty hits the poorest Americans the hardest. The Nudge blog calls it the Public Benefits Cycle Tax, and the implications for policymakers are still evolving. Right now, it’s a tax whose full financial and psychological costs researchers are trying to add up.

The paycheck cycle seems so avoidable. Spend smarter. Budget better. These common refrains sound so reasonable and simple, yet for anyone, rich or poor, who’s ever deposited a fat check on a Friday payday, the temptation to treat yourself just a little bit is tough to fight off. Wallets have a lot in common with waists.

When most economists look at us, they overestimate our financial discipline and underestimate our urge to splurge. In economics, the main doctrine for understanding consumption patterns is an idea called the Permanent Income Hypothesis, developed by economist Milton Friedman. Basically, it says people should take all of the income they expect to receive and smooth out their consumption evenly. Generally, this hypothesis has been used to explain spending over one’s lifetime, but the idea can apply over much shorter time frames like a month.

...and The Wife is a doctor. They just happen to get paid once a month.

Posted by at June 14, 2011 5:48 AM

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