Archive | Libertarian Paternalism

Wright and Ginsburg on Behavioral Law & Economics

GMU law professor (and FTC commissioner nominee) Joshua Wright and Judge Douglas H. Ginsburg have a new paper in the Northwestern Law Review, “Behavioral Law and Economics: Its Origins, Fatal Flaws, and Implications for Liberty.” Here’s the abstract from SSRN:

Behavioral economics combines economics and psychology to produce a body of evidence that individual choice behavior departs from that predicted by neoclassical economics in a number of decision-making situations. Emerging close on the heels of behavioral economics over the past thirty years has been the “behavioral law and economics” movement and its philosophical foundation — so-called “libertarian paternalism.” Even the least paternalistic version of behavioral law and economics makes two central claims about government regulation of seemingly irrational behavior: (1) the behavioral regulatory approach, by manipulating the way in which choices are framed for consumers, will increase welfare as measured by each individual’s own preferences and (2) a central planner can and will implement the behavioral law and economics policy program in a manner that respects liberty and does not limit the choices available to individuals. This Article draws attention to the second and less scrutinized of the behaviorists’ claims, viz., that behavioral law and economics poses no significant threat to liberty and individual autonomy. The behaviorists’ libertarian claims fail on their own terms. So long as behavioral law and economics continues to ignore the value to economic welfare and individual liberty of leaving individuals the freedom to choose and hence to err in making important decisions, “libertarian paternalism” will not only fail to fulfill its promise of increasing welfare while doing no harm to liberty, it will pose a significant risk of reducing both.

Definitely worth a read. […]

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Steven Levitt’s “Daughter Test” for Paternalistic Policies

Famous economist Steven Levitt, coauthor of Freakonomics, recently described his “daughter test” for assessing paternalistic policies:

Most of the time there is broad agreement as to which activities should be made criminal. Almost no one thinks that theft or violence against innocents is socially acceptable. There are, however, a few activities that fall into a gray area, like illicit drugs, prostitution, abortion, or gambling. Reasonable people can disagree as to whether it is appropriate to prohibit such activities… A common feature of these gray-area activities are that they are typically “victimless” in the sense that, unlike a theft or murder, there is no easily discernible victim of the activity…..

I’ve never really understood why I personally come down on one side or the other with respect to a particular gray-area activity….

It wasn’t until the U.S. government’s crackdown on internet poker last week that I came to realize that the primary determinant of where I stand with respect to government interference in activities comes down to the answer to a simple question: How would I feel if my daughter were engaged in that activity?

If the answer is that I wouldn’t want my daughter to do it, then I don’t mind the government passing a law against it. I wouldn’t want my daughter to be a cocaine addict or a prostitute, so in spite of the fact that it would probably be more economically efficient to legalize drugs and prostitution subject to heavy regulation/taxation, I don’t mind those activities being illegal.

It’s easy to poke holes in Levitt’s “daughter test.” If I had a daughter, I wouldn’t want her to not go to college. Does that mean college attendance should be mandatory for anyone with the requisite academic skills? I wouldn’t want my daughter to advocate racism or communism. […]

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Broccoli, Slippery Slopes, and the Individual Mandate

Opponents of the constitutionality of the individual mandate have emphasized that upholding the mandate would give Congress the power to mandate virtually anything, including forcing people to eat broccoli. Northwestern law professor Andrew Koppelman appears to agree, but argues that this slippery slope is nothing to worry about:

One of the most rhetorically effective arguments that has been made against President Obama’s health insurance mandate is that it places us on a slippery slope to totalitarian government. If the federal government can make us buy insurance, what can’t it do?…

The Broccoli Objection, as I will call it, rests on a simple mistake: treating a slippery slope argument as a logical one, when in fact it is an empirical one.

This basic point was made long ago in Frederick Schauer’s classic article, Slippery Slopes, 99 Harv. L. Rev. 361 (1985). Schauer showed that any slippery slope argument depends on a prediction that the instant case will in fact increase the likelihood of the danger case. If there is in fact no danger, then the fact that there logically could be has no weight. For instance, the federal taxing power theoretically empowers the government to tax incomes at 100%, thereby wrecking the economy. But there’s no slippery slope, because there is no incentive to do this, so it won’t happen.

Similarly with the Broccoli Objection. The fear rests on one real problem: there are lots of private producers, including many in agriculture, who want to use the coercive power of the federal government to transfer funds from your pockets into theirs. But the last thing they want to do is impose duties on individuals, because then the individuals will know that they’ve been burdened. There are too many other ways to get special favors in a less visible way.

Koppelman […]

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Does the Supposedly Superior Expertise of Regulators Justify Libertarian Paternalism?

Some of the commenters on my last two posts criticizing libertarian paternalism accuse me of ignoring the possibility that such paternalism is justified by the supposedly superior expertise of government regulators. Actually, I have addressed this point in several previous posts, such as here and here. However, readers can’t be blamed for not taking the time to collect bits and pieces from previous posts scattered over a three year period. Therefore, it may be helpful to collect my thoughts on this point in a single post. To summarize, I think that the regulators’ superior expertise applies at most only to one-half of the relevant equation, that even with respect to that half it has serious drawbacks, and that consumers who need expert advice can usually do better by relying on the private sector.

I. Regulators Lack Expertise on the Subjective Benefits of Risky Activities.

Regulators may have greater knowledge than consumers about the health or safety dangers of risky activities. But they lack comparable knowledge of the benefits that consumers derive from those activities. 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 having a beer or puffing on a cigarette. This is especially true when we remember that preferences about such things vary widely. I get zero utility from smoking and (unusually for a Russian) very little from drinking alcohol. Many other people have very different experiences. With respect to the subjective benefits they get from risky activities, consumers actually have vastly greater expertise than regulators do. In a classic 1945 article, F.A. Hayek emphasized the importance of this constraint on expert knowledge:

It may be admitted that, as far as scientific knowledge is concerned, a body of suitably

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Richard Thaler Responds to Critics of Libertarian Paternalism

Economist Richard Thaler, a leading advocate of libertarian paternalism, has briefly responded to some of the points I made in my most recent post on that subject. In that post, I argue that advocates of libertarian paternalism implicitly rely on the assumption that regulators and voters are rational, while consumers and other private sector actors are not:

Ilya Somin gets the discussion off to a unhelpful start by claiming (a) that we consider regulators to be perfectly rational, when again we repeatedly say in the book that regulators are human just like everyone else and (b) that “regulators have no reliable way of estimating the benefits and costs that consumers derive from potentially risky products.” If he means “perfectly reliable” then fine, but that is not a sensible standard. Suppose that a crib is found to strangle babies that sleep in it, as happened to the child of friends of mine. I think it is pretty easy to guess that parents would not want to buy a crib that has strangled a dozen kids. Don’t you?

Thaler’s response, I think, misinterprets my argument. Of course I am well aware that Thaler and other advocates pf libertarian paternalism realize that regulators are “human just like everyone else.” Indeed, in my post I linked some important articles on regulatory irrationality by Thaler’s coauthor Cass Sunstein. The problem is that this recognition of regulators’ “humanity” gets lost in libertarian paternalists’ policy recommendations, where the implicit assumption of regulator rationality plays a crucial role. If the libertarian paternalists built in to their theory the fact that regulators cannot be expected to be more rational than consumers (and, for reasons, I indicated in my post are often likely to be less rational), then it is unlikely that they would continue to advocate government […]

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The Double Standard of Libertarian Paternalism

Cato Unbound has an excellent symposium on “libertarian paternalism,” the theory that argues that government should intervene to protect people against cognitive biases that lead them to make decisions that ultimately reduce their ability to achieve their own objectives. Advocates of libertarian paternalism argue that their approach is different from and superior to traditional paternalism, which imposes the paternalists’ own values on those subject to regulation. Overall, I largely agree with the criticisms of libertarian paternalism in the Cato symposium by Glen Whitman (here and here) and Jonathan Klick. However, I wish to focus on a different weakness of libertarian paternalism: the implicit assumption that voters and government regulators are not subject to serious cognitive biases of their own.

It may well be that private citizens acting in markets and civil society often make decisions that they later regret because of cognitive errors. However, regulators and voters are people too. They also might make bad decisions because of cognitive errors. Libertarian paternalist scholars generally ignore this possibility by implicitly comparing perfectly rational regulators with often irrational consumers. But there is no a priori reason to believe that the former are more rational than the latter.

I. The Cognitive Biases of Regulators.

Indeed, there are good reasons to believe that regulators are likely to be more susceptible to cognitive biases than private sector consumers. This is so for at least three important reasons. First, regulators are making decisions for others, not for themselves. As a result, they have less incentive to get them right. If regulators in the proposed Consumer Financial Protection Agency ban financial products that are of great value to consumers, the regulators themselves won’t suffer (unless they happen to want to purchase those products themselves). The less people have at stake in the decisions they […]

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Welfare Evaluation, Behavioral Agents and Rational Agents

A reader sends me the following comment, further to the several VC posts on behavioral economics (initially occasioned by Andy Ferguson’s Weekly Standard essay):

One basic issue that this whole-“behavioral econ– good-or-bad?”
discussion seems to have neglected the following simple point: welfare
evaluation is much harder with “behavioral agents” than “rational
agents.”

With “rational” agents we know that subject to tons and tons of
asumptions markets are great (first welfare theorem).  And we have a
pretty good idea of what constitutes a market failure (externalities)
and when a “social planner” can help.  Thus, there is a principled
econ case for certain forms of “social planner” intervention that we
know will raise welfare (whether a government can act as an optimal
social planner is another question).

With “behavioral” agents, the basic issue is that people’s preferences
are at some level time-inconsistent.  My self of today wishes that my
self of tomorrow would put money in to a 401(K) but my self of
tomorrow wishes it to be the next period’s self and etc.  Thus, the
person sitting at today does *not* have the same preferences as the
person sitting at tomorrow.   If you make the person of today put
money into a 401(k) *today* you make them worse off (since they wanted
to put money in a 401(k) tomorrow), but you make their yesterday’s
self happy.   As a social planner, whose utility do you maximize?

It’s not obvious how you do this.  There are some attempts to work
this out in the literature (e.g. http://www.nber.org/papers/w13737)
but it’s not settled.

I guess the main take-away is that claiming policy implications from
behavioral research is *much* harder than from other kinds of econ
research, so at some level behavioral people are jumping the gun a bit
in claiming that they have a

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Further to Andrew Ferguson on Behavioral Economics

Todd’s right, Andy Ferguson’s Weekly Standard piece is excellent – whether one agrees with his ultimate take on it or not.  The bottom line of the piece, however, is not simply a skepticism about the powers of social science – behavioral economics as the New Social Engineering.  It is, rather, a broadly libertarian point, going to a crucial apparently methodological, but ultimately moral, difference between traditional economics and behavioral economics:

You can see how useful the notion of irrational man is to a would-be regulator. It is less helpful to the rest of us, because it runs counter to every intuition a person has about himself. Nobody sees himself always as a boob, constantly misunderstanding his place in the world and the effect he has upon it. Surely the behavioral economists don’t see themselves that way. Only rational people can police the irrationality of others according to the principles of an advanced scientific discipline. If the behavioralists were boobs too, their entire edifice would collapse from its own contradictions. Somebody’s got to be smart enough to see how silly the rest of us are.

Traditional economics has always been more modest. Assuming the rationality of man was a device that made the discipline possible. The alternative—irrational people behaving in irrational ways—would complicate the world beyond the possibility of understanding. But the modesty wasn’t just epistemological. It was also a democratic impulse, a sign of neighborly deference. A regulator who always assumed that man was other than rational was inviting himself into a position where he could exert a control over his fellow citizens that wasn’t proper for a true democrat. Self-government demands this deference. It won’t work otherwise.

“Ultimately,” the economist Brian Mannix wrote not long ago, “we insist that our regulators start from a presumption of rationality for

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Rational Ignorance Alert! Rational Ignorance Alert!

I hereby respectfully draw Co-Conspirator Ilya’s attention to Alan Wolfe’s witty and insightful book review in today’s New York Times of Derek Bok’s The Politics of Happiness. In particular to the following two sentences; should we call this rational political ignorance or not?

Americans are most certainly misinformed.  Dumb they are not.

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How Markets Make Us More Rational

Advocates of “libertarian paternalism” cite experimental evidence showing that people often make irrational decisions, and argue that we need government regulation to guard against such problems. Economist Richard McKenzie challenges part of this rationale by citing experimental evidence showing that markets actually give people incentives to act more rationally than they would otherwise, thus undercutting claims of irrational behavior based primarily on surveys or experiments that don’t mimic the incentives and other conditions of real-world markets:

People, including economists, are imperfect decision makers because of their mental limitations. But this fact does not mean that markets fail. Indeed, markets do far more than induce improved allocation of resources, given wants and resources. Markets induce market participants to be more rational than they otherwise would be because they must pay a price for being irrational. Thus, markets allow—no, require—economists to assume that people are more rational than they are likely to be found to be in laboratory settings, absent meaningful information and incentives and absent market pressures.

One underappreciated fact about the experimental and survey evidence relied on by advocates of the new paternalism is that it models voter decision-making far more closely than market decisions. Unlike market participants, voters have little or no incentive to either acquire information about the issues they decide, or to analyze the information they do have in an unbiased fashion. The same is true, to a lesser extent, of libertarian paternalist policies established by expert regulators insulated from democratic control (the “rule of experts” is often proposed as a means by which paternalist regulation can be enacted without being influenced by voter ignorance and irrationality). Such regulators may be more knowledgeable than voters. But unlike consumers, they do not have their own money at stake, and therefore don’t suffer any penalty if they […]

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Paternalism and Slippery Slopes

Advocates of the “new paternalism” (sometimes also called “libertarian paternalism”) argue that carefully calibrated government interventions can help consumers avoid mistakes caused by their own cognitive biases. In this interesting new article, economist Mario Rizzo and legal scholar Glen Whitman argue that new paternalist policies are vulnerable to slippery slopes that will extend them far beyond the areas where they might be genuinely need to correct consumer errors. Here is the abstract:

The “new paternalism” claims that careful policy interventions can help people make better decisions in terms of their own welfare, with only mild or nonexistent infringement of personal autonomy and choice. This claim to moderation is not sustainable. Applying the insights of the modern literature on slippery slopes to new paternalist policies suggests that such policies are particularly vulnerable to expansion. This is true even if policymakers are fully rational. More importantly, the slippery-slope potential is especially great if policymakers are not fully rational, but instead share the behavioral and cognitive biases attributed to the people their policies are supposed to help. Accepting the new paternalist approach creates a risk of accepting, in the long run, greater restrictions on individual autonomy than have been heretofore acknowledged.

I have myself previously criticized the new paternalism here, here, here, and here. Rizzo and Whitman argue that the danger of slippery slope effects is greater if policymakers themselves suffer from cognitive biases. In this post, I pointed out that the voters who elect the policymakers also suffer from ignorance and cognitive bias, often to a greater extent than the consumers whose biases new paternalist policies are intended to correct. Giving more power to cognitively biased government officials elected by rationally ignorant and cognitively biased voters is likely to exacerbate the effects of cognitive error more […]

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Hayek on the Use of Superior Expert Knowledge as a Justification for Paternalism

In my most recent post on paternalism, I criticized claims that paternalistic policies can be justified on the grounds that government-appointed experts have greater knowledge than consumers and are less likely to be influenced to cognitive error. Among other points, I emphasized that government experts have no way of determining how much benefit consumers get from potentially risky products and therefore no good way of deciding which products should be banned or restricted on the grounds that their costs outweigh their benefits. In a recent e-mail, NYU economist Mario Rizzo (himself a leading academic critic of paternalism) points out that F.A. Hayek made a similar point in his classic 1945 article, “The Use of Knowledge in Society”:

It may be admitted that, as far as scientific knowledge is concerned, a body of suitably chosen experts may be in the best position to command all the best knowledge available—though this is of course merely shifting the difficulty to the problem of selecting the experts. What I wish to point out is that, even assuming that this problem can be readily solved, it is only a small part of the wider problem.

Today it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge. But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are

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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

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