Pitfalls of Paternalism

In recent years, advocates of paternalistic policies, such as economist Richard Thaler, argue that government-appointed experts should limit the choices available to consumers in order to prevent them from making poor decisions because of ignorance or cognitive bias. After all, they claim, experts are likely to know better than ordinary consumers which products are too risky for us to use. This kind of “new paternalism” (also known as “libertarian paternalism”) has had a lot of influence in the academic world. It has also caught on in the Obama Administration, which has based major policy initiatives on it such as the proposed Consumer Financial Protection Agency.

In this recent essay, New Zealand economist Eric Crampton points out a serious flaw in the logic underlying the new paternalism. Experts may be better than consumers at figuring out the health risks posed by various products. But they usually have no reliable way to estimate the benefits the consumers get from them. Paternalism can only be justified, if at all, in cases where the risks posed by the product outweigh the benefit purchasers derive from it. Experts who have no way of estimating those benefits are in no position to determine which products should be regulated or banned:

None of us holds health as our only goal. Every time we take a slight risk in traffic, or decide to drive at all, we’re trading the risk of accident against the benefits of getting to where we’d like to go. When we decide to go skiing, we trade off fun against the risks of a broken leg or worse. Even where our children are concerned, we make trade-offs. We could always choose to purchase a little more safety for them than we do. We could spend a little more on the slightly safer car or car seat. We could always expend a little more effort in keeping them from harm. But we don’t make our toddlers wear padded helmets: the child wouldn’t like it and neither would we….

The new paternalists often cite asymmetric information about health risks—in which producers take advantage of consumers’ inadequate knowledge of health consequences or dangers—as justifying taxation or regulation. Often, however, consumers are not ignorant. For example, the best evidence suggests that individuals overestimate the health costs of smoking. If there’s an information market failure, it’s causing folks to smoke too little, not too much….

More recent work by behavioural economists focuses on costs borne internally which individuals have trouble reducing due to self-control problems. A drinker might sincerely wish he could drink only two pints per day, but instead drinks four and he’s not been able to find any way of stopping himself. If taxes were increased to the point where he’d only purchase two pints per day, so the argument goes, he’d be made better off by his own measure of his own wellbeing….

These ‘internalities,’ as they are sometimes called, might matter on the blackboard but it’s difficult to see them as the basis for public policy. Unless a regulatory agency can see into our souls and discern that weakness of will is the problem, we can’t tell that a tax really makes drinkers better off by the drinkers’ judgment.

To put it a different way, a public health expert probably knows more than I do about the risks of drinking or smoking. But only I know how much enjoyment I derive from drinking a beer or smoking a cigarette (in my case the answers are very little and none, but preferences differ). I discuss this point in greater detail in this post.

Paternalism might still be justified if the only options were either going with the experts’ ignorance about benefits or going with consumer ignorance about costs. Fortunately, however, consumers can make use of expert knowledge without government coercion. There is a great deal of expert-produced information on the risks of smoking, drinking, financial products, and so on, that interested consumers can access on the market, or even for free through the internet. True, consumers might make mistakes in choosing which experts to rely on or in deciding to forego expert advice altogether. But those errors must be weighed against the much greater impact of ignorance and cognitive errors in the political process. If consumers sometimes forego expert advice out of ignorance or cognitive errors, similar mistakes are even more likely to plague “rationally ignorant” voters, as I argued here and here.

All of the above assumes that government-appointed experts tasked with formulating paternalistic policies are honestly doing their best to apply their expertise in a disinterested way. In reality, of course, a government agency with the power to ban or restrict important consumer products is likely to be heavily influenced by interest group lobbying. Industry and labor groups are likely to push hard to get the agency to adopt regulations that benefit them at the expense of consumers and competitors. Moreover, government regulators themselves are not always above using their power to pursue their own self-interest or ideological agendas. Crampton gives several examples of such behavior in New Zealand, and American regulators are unlikely to be much better.

CONFLICT OF INTEREST WATCH: Crampton and I are coauthors on another article.

UPDATE: Some commenters claim that Thaler and other “libertarian paternalists” don’t advocate policies that actually restrict choices. This is simply false. They advocate numerous such policies. See here for some examples. The distinctive element of libertarian paternalism is not that it doesn’t restrict consumer choices but that it purports to do so on the basis of what the consumers themselves would prefer if they weren’t influenced by ignorance or cognitive error.