Brookings’ Cliff Winston on Infrastructure

President Joe Biden is planning a multi-trillion-dollar infrastructure and jobs package to spur transformative change to the economy. Unfortunately, the infrastructure component of his plan will fail to significantly improve the nation’s roads, bridges, and the like because it ignores the vast inefficiencies in current transportation policy that greatly reduce benefits from infrastructure spending.

Let me take you on the journey of a dollar of government spending intended to improve, for example, travel conditions on a highway. This dollar will have a long, perilous trip and encounter many dangers enroute that will divert it from its correct destination and take large, wasteful chunks out of it. By the time it reaches the wrong destination, it will fund much less than a dollar’s worth of highway improvements. The dangers it encounters include inefficient road pricing and investment policy, inflated input and project costs, misallocation of highway revenues, and the slow adoption of technological innovations.

This is from Clifford Winston, “How Federal Infrastructure Dollars Get Nickeled and Dimed,” Barron’s, March 24, 2021.

I highly recommend the whole piece. Actually, everything I’ve ever read by Cliff has been at least good and usually great.

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Great Cowen Interview of John Cochrane

Yesterday, Tyler Cowen published his interview with Hoover Institution economist John Cochrane. It’s a lot of fun and full of insights. I recommend the whole thing.

Some fun highlights follow.

If You’re So Smart, Why Aren’t You Rich(er)?

COWEN: Brazil has very high real interest rates for decades, right? Arbitrage doesn’t seem to work.

COCHRANE: Well, that’s not an arbitrage. An arbitrage is the opportunity to make a sure profit, no risk. You got to invest in Brazil, and you got to take the risks of investing in Brazil, which include, usually, currency risk. The real interest rate is the interest that you get after the expected appreciation or depreciation of the currency. Then there’s the legal risk that they might expropriate your stuff.

It looks like there’s a profitable opportunity to invest in Brazil. Put that way, now it starts to look like everything else in finance. There’s what looks like a profitable opportunity. There’s risk. Are people properly balancing the profitable opportunity and the risks? Why is Tesla stock so high? Why are value stocks so low? There’re opportunities that you and I, as an economist, can’t quite suss out what the risks are, keeping other people from investing in. But if you’d like to buy a Brazilian gold mine, I can arrange it for you, Tyler.

COWEN: Well, but look, we know currencies are very close to a random walk, correct? You’ve seen the countries that have higher real rates of return, higher discount rates. They should have higher expected returns on their market. Brazil is small relative to the world as a whole. There’s a lot of capital that could invest more in Brazil without being systemically much riskier. You would think that simply pursuing higher expected returns — that ought to go away, and real interest rates across the world should equalize, but they don’t seem to.

COCHRANE: Well, all sorts of apparent opportunities should equalize. I urge you to start a hedge fund. [laughs]

 

COWEN: By the way, the only stock I ever sold was Brazil Fund.

COCHRANE: You sold it, and you’re telling me what a great opportunity Brazil is.

[laughter]

 

How Health Insurance Was Making Its Way to Something Sensible Before ObamaCare

COWEN: Healthcare — I’m a big fan of your proposals for what I think you called time-consistent health insurance. You buy health insurance and you buy insurance against your premium going up. If later on, you develop a serious condition, you’re insured against the fact that your insurance costs more, right? Now, why has no one done this? Because it does make sense.

COCHRANE: People did it [laughs] until it was made illegal.

COWEN: Who did it? When? Where?

COCHRANE: God, it was in the 1990s. Which insurance company? A better word for it that Mike Cannon at Cato came up with is health-status insurance, that you can insure yourself against the risk of getting sick in the future. One insurance company started offering the right to buy health insurance in the future if you’re sick now, which essentially, that’s the beginning of the idea.

Also, the good old-fashioned health insurance, starting in the 1990s, was guaranteed renewable, meaning if you bought the health insurance now, you had the right to continue buying that health insurance without your premiums going up if you got sick. That’s essentially the same thing as health-status insurance. So private insurance was working its way in this direction.

COWEN: But why did it take so long? It wasn’t dominant back then, right? This is another example of market inefficiency?

COCHRANE: Come on.

[laughter]

 Technical innovation takes a remarkably long time to spread, and this is a technical innovation. One thing is, it takes time for institutional — especially an incredibly regulated industry where you have 50 state regulators who have to bless every single contract — it takes a long time. Then it was made illegal under Obamacare, which is why it wasn’t happening. United Airlines still hasn’t figured out that Southwest knows how to get people on planes faster. [laughs] That service stuff takes time.

Why wasn’t this in health insurance to start with? When health insurance first started up, there wasn’t this thing of a pre-existing condition, of something that we get news that’s going to make you really expensive. You either died or you didn’t die, and that was the end of that. A very expensive health that is very persistent, and where you need insurance against ongoing future expenses — that can’t be done in a one-year contract. That’s also something that we didn’t have until the 1960s or ’70s.

Institutions take a while to adapt. You got to take a longer-run view here, Tyler. But I do want to advertise it for listeners who haven’t heard about it. We’re still in the pre-existing conditions as the original sin of markets, whereby the government must completely screw up your and my healthcare. That is not true. Free markets can handle the question of pre-existing conditions, your need for long-term insurance.

Term life insurance has had it forever. If you buy term life insurance when you’re young and healthy, you get to keep that insurance, no matter how sick you get as time goes on. There’s no failure of insurance markets that means we can’t have it.

 

On Regulation of Hang Gliding

COWEN: How good or bad is the government’s regulation of gliding?

COCHRANE: [laughs] An uneasy truce. Pretty bad, but just enough to let it survive. The government regulates —

COWEN: What’s the main inefficiency?

COCHRANE: The FAA.

COWEN: What should they do that they don’t? What should they allow?

COCHRANE: They have killed the domestic industry that makes gliders. There’re only a couple left in Europe. Certification of aircraft under the FAA is a disaster. This is more visible in general aviation power. Go down to your local airport, and you will see what looks like a Cuban car lot full of designs from the 1950s.

It’s just incredibly difficult to certify a general aviation airplane. Their standards for pilots’ licenses are ridiculously too high. America is one of the best places in the world. When you go around the world, you will notice — if you’re a pilot — how empty the skies are because everywhere else has regulated general aviation completely to death.

 

 

I love the Cuban car lot metaphor. That’s what I’ve noticed among flying friends: small planes made in 1958 (just before the Cuban revolution) or in the 1960s that are still used today and sell for high five figures.

Personal note: I remember John’s hang gliding well. In academic year 1982-83, John was a junior economist at the Council of Economic Advisers when I was a senior economist. (Marty Feldstein made me an offer to stay an extra year, 1983-84, and I accepted.) We were decompressing from the process of drafting, rewriting, rewriting, rewriting again, and checking for typos in the 1983 Economic Report of the President. That’s the one that Paul Krugman claims to have written most of, a claim that would surprise a number of his fellow chapter writers. John asked me if I would be willing to drive out to a corner of Pennsylvania one weekday with his friends. We would drive to the top of the mountain and he and his friends would hang glide down, catching thermals along the way, while I would drive down the mountain to the rendezvous point. It was fun, except that one of his friends stayed up way longer than agreed and my wife-to-be was pretty upset at how late I was getting back to Arlington, VA. (Good outcome, though: I was never that late again.)

 

 

 

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How the Feds Gave a Competitive Advantage to Conservative Radio

This point is obvious once you think about it. It’s basic economics. It’s just that I had never thought about it.

It is also worth noting that talk radio in the 1980s was a much more ideologically diverse industry than it is today, with many hosts from both the political left and right. Contrary to conservative talk radio hosts who explain their dominance by the existence of a silent majority of average Joe listeners, ironically it was the federal government that boosted right-wing dominance of talk radio.

As historian Brian Rosenwald argues, left-wing talk radio hosts had to compete for listeners with government-subsidized, center-left NPR affiliates, while right-wing hosts had a clearer competitive field. Station owners could guarantee a larger audience to advertisers simply by picking right-wing instead of left-wing talk radio programs. Talk radio’s conservative bent is the unintended product of the government’s halfhearted attempt to create a nationalized broadcasting system in the 1970s. (Though I wouldn’t expect a “Rush was Made Possible By Listeners like You” slogan to appear on a complimentary NPR tote bag any time soon.)

From Paul Matzko, “The Fairness Doctrine Was the Most Deserving Target of Rush Limbaugh’s Rage,” Reason.com, February 19, 2021.

 

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Free trade and free labor markets

This caught my eye:

[Arindrajit] Dube responds that “one has to be honest about not knowing what would be the impact in every place.” But he points to 2019 research by Anna Godoey and Michael Reich of the University of California at Berkeley, who found that increases in state minimums didn’t hurt employment even in low-wage counties where the new floor equaled 82% of the prevailing median wage. And even if a high minimum wage does kill some jobs—as many studies, though not Dube’s, show it would—it can still be worthwhile if it raises incomes of low-wage families overall, he says. Some experts say that as with free trade, which helps more people than it hurts, any losers could be made whole with government assistance.

Yes, free trade is an excellent analogy for labor market policy, but not for the reasons cited by Peter Coy in this Bloomberg article.

Economists typically evaluate issues from both an equity and efficiency perspective.  Many economists favor policies that maximize efficiency (making the pie as large as possible), combined with some redistribution to compensate the losers.  Thus they favor free trade, combined with a program to help workers that lose their jobs due to import competition.

Oddly, Peter Coy seems to think this analogy points in the direction of boosting the minimum wage.  Exactly the opposite is true.  If we wanted to match the standard economic approach to international trade, we’d abolish the minimum wage and replace it with some sort of subsidy for low wage workers.  Even if that were politically impossible, you would definitely not want a $15 minimum wage.  A much superior policy would be a $10 minimum wage combined with a $5/hour wage subsidy, where the subsidy phases out at the rate of 50 cents/hour for each $1/hour pay raise, ending entirely when pay reaches $20/hour. (Teenagers could be excluded from the subsidy, if they are not living independently.)

I’m not saying this would be ideal (I’d prefer no legal minimum), but it would be much more in the spirit of the “free trade plus compensating the losers” analogy that Coy uses to justify a higher minimum wage. It would be aimed at making the pie as large as possible, while compensating the less fortunate.

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Romney’s child allowance proposal

Mitt Romney has proposed a child allowance of $4200/year for children under age 6 and $3000/year for children age 6 to 17, which is gradually phased out for people making over $200,000 (depending on the child’s age.) It is to be paid for without boosting the budget deficit, by reducing certain other poverty programs and also eliminating certain tax deductions, such as what’s left of the SALT deduction. (This last element is one of my favorite parts of the plan.)

I don’t know enough about the plan to have a firm opinion, but from a utilitarian perspective it seems to have some positive features:

Equity: The net effect is to shift money from the affluent to the poor, which probably results in a significant gain in aggregate utility.  (Yes, we can’t measure utility, but it seems likely that this factor is a net plus.)

Efficiency: It’s hard to say whether Romney’s plan improves or reduces efficiency, and that’s where I’ll focus the rest of the post.  But the mere fact that “it’s hard to say” is a sort of plus for the plan, because the equity considerations seem to be pretty clearly utility improving. With most welfare proposals, greater equity comes at a cost of lower efficiency.  I think it’s fair to say that either Mitt Romney is a very clever guy, or he has smart advisors, or both. At the end I’ll suggest a modification that would boost the equity of the plan, without any clear loss in efficiency.

1. Some conservatives like the fact that these child benefits would boost the birth rate, pointing to the fact that people say they want more children than they actually have.  I don’t share their worry that the birth rate is too low, and I don’t trust polls.  Some conservatives worry that paying poor people to have kids would cause so-called “inferior” people to reproduce.  I also don’t share this worry.  For me, the effect on births is a non-factor.

2.  Work disincentives can come from either the income or the substitution effects.  The substitution effect in Romney’s proposal is small, as parents don’t lose the child allowance until their income rises to well above $200,000.  So on that basis it won’t discourage poor people from getting a working class job.  There is a very mild work disincentive for upper middle class people experiencing the phase-out of the benefit.  The income effect refers to the fact that poor people might no longer work because they feel they can live on the child allowance without working (perhaps combined with other programs like food stamps.)  It seems to me that this disincentive would be quite modest for the size of benefits proposed by Romney.  Still, in net terms there’s probably a mild work disincentive from the issues I’ve discussed thus far.

3.  Many of the other provisions actually boost efficiency.  Several other (inefficient) poverty programs are either reduced or eliminated.  Furthermore, there’s a substantial gain from reducing the complexity of both the welfare system and the income tax system.  Eliminating the SALT deduction also discourages wasteful state and local spending.  So the various provisions that pay for the benefit have a significant positive impact on economic efficiency.

Combining points #2 and #3, I see no clear evidence of either an overall gain or loss of efficiency.  And again, the equity benefits seem pretty clear to me.

One final comment.  Why not make the child allowance fully universal, and then slightly boost the payroll tax (on wage income only) on people making over $200,000 a year to pay for it?  On an equity basis, that would redistribute money from the very rich down to the upper middle class, as people with very high wage income would pay more extra tax than they’d gain from the child allowance, while the opposite is true for the upper middle class—those making modestly above $200,000.

On efficiency grounds, my proposed modification would make the income tax system much simpler, so that’s a net gain.  The increase in the payroll tax rate would be smaller than the implicit marginal income tax during the phaseout range of Romney’s proposal (which mostly applies to people in the $200,000s), so extremely affluent people would face slightly higher MTRs while modestly affluent people would face significantly lower MTRs.  Overall, I doubt there’d be much change in economic efficiency, maybe even an increase.

 

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Yglesias’s Reasonably Strong Case for Way More Integration

As a long-time advocate of expanded immigration, I am delighted to have left/liberal Matthew Yglesias as an ally. Yglesias, who helped found online magazine Vox, is one of the rising stars in journalism and, especially, economic journalism. His latest book, One Billion Americans, advocates what the title says: we should change institutions so that we have 1 billion Americans. This book is particularly needed now. Yglesias’s major argument for more population, though, is not mine: he wants the United States to continue to be the world’s dominant power and worries that if we do not greatly expand our population, China will dominate.

In making this case, he advocates changing several government policies beyond immigration. In fact, he writes much more about those policy changes than he does about changing immigration policy. So, for example, we learn more about his proposals for government-funded childcare, housing, and transportation policy than we do about how many new people and what kinds of people he wants to let into the country each year. He does say he does not want open borders, but he does not say what immigration reform he wants instead.

On the non-immigration issues, he vacillates between intolerance of other people’s choices and great tolerance: he is intolerant of voluntary contracts between employers and employees that do not include paid parental leave, but he is highly tolerant of people’s decisions about what kinds of dwellings to live in. Where he is tolerant, he makes a good case. Where he is not, the book fails. Still, the big picture he paints is good: he shows that we can relatively easily triple the U.S. population without making our country too crowded or overly stressing most of our institutions.

These are the opening three paragraphs of David R. Henderson, “A Reasonably Strong Case for Way More Immigration,” my review of Matt Yglesias, One Billion Americans: The Case for Thinking Bigger, 2020.

Another excerpt:

Yglesias points out that in 2018, the U.S. fertility rate fell to an all-time low of 1.72 births over the lifetime of the average woman. He argues, probably correctly, that an important factor causing women to have fewer children is the increasing cost of raising them. Whether the primary caretaker is a woman or a man, the persistent growth in real wages is raising the opportunity cost of rearing children. The law of demand rears its ugly head: when the price of something rises, then, all else equal, people buy less of it.

In a book that advocates massive increases in immigration, a natural next step to take would be to argue for reducing the cost of child rearing by allowing millions of immigrants, probably disproportionately women, into the United States from the poorest countries in Latin America, such as Guatemala and El Salvador, the poorest countries in Africa, such as Zimbabwe and the Congo, and the poorest countries in Asia, such as India. It would not be hard to get 50 million immigrants from those places in a period of, say, five years. They would benefit and many current U.S. families would benefit from a dramatic fall in the cost of childcare.

But that is not where Yglesias goes. Instead, he advocates massive new government programs to subsidize the provision of childcare. He writes that “the United States has been shamefully slow compared with some peer countries to provide subsidized child care.” But the closest he comes to explaining why U.S. policy is shameful is to argue that because other countries are doing it, we should too.

Read the whole thing.

 

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(Un)Orthodox economics

Politics can be very depressing, but a recent Bloomberg article discussing my home state kind of made me smile.  I hope you enjoy it as well:

And then there are backers like Derek Orth in Lancaster, Wisconsin, who are sticking by the president. Orth, a 34-year-old dairy farmer, appreciates the financial help Trump has channeled to the agriculture industry.

“I can’t think of a single close friend in agriculture that is voting for Biden,” Orth said this month. An active follower of social media posts who doesn’t have cable television, he worries that Biden would institute socialism.

I’m going to put this in my “Keep the Government’s Hands Off My Medicare!” file drawer.

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Is progressivism a scam?

Terms like “progressive” can be defined in a variety of ways. One common theme is that progressives are relatively optimistic that governments can solve economic problems.

We normally think of conservative Republicans as being on the other end of the spectrum, opposed to government meddling in the economy. President Trump is a bit unusual in that he is a Republican who is skeptical of the free market. He used a combination of subsidies, bullying and tariffs to try to bring back manufacturing jobs.

Overall, this approach was not successful. Some manufacturing jobs were created (in 2017-18) in companies supplying the booming fracking industry, but large subsidies given to firms like Foxconn were not effective, and the trade war negatively impacted manufacturing in 2019, even before Covid-19.

None of this was a surprise to a Chicago school economist like me. But what did progressives expect to come out of the Trump administration’s industrial policy”? After all, progressives believe that activist governments can solve problems.

This Ezra Klein tweet caught my eye:

I’m sure that progressives would deny any responsibility for failures such as the Wisconsin Foxconn plant.  They might argue that Trump didn’t know how to do industrial policy.  That’s a fair point; Foxconn is not their fault.  But a similar fiasco occurred under the Obama administration.

Governments simply are not very good at creating economic growth.  Some of the more famous cases of industrial policy are not what many people assume.  The most successful parts of the Chinese economy are the private firms, not the big state-owned enterprises.  Some of the most successful Japanese firms got that way by ignoring the recommendation of government bureaucrats.  Germany has one of the world’s most successful manufacturing sectors, without relying heavily on subsidies and tariffs.  (They do have good technical training programs.)

When I first heard that the Trump administration planned to bring back jobs though a mix of subsidies, bullying and tariffs, I was immediately skeptical.  The fact that many progressives seemed nervous that he might succeed tells us a lot about the way they believe that economies work.  There was no need for them to be “nervous” that Trump would bring back manufacturing jobs with subsidies.

This also explains why I’m not a progressive.

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What does the UK want from Brexit?

When the UK voted to leave the European Union, many Brexiteers argued that this would allow Britain to move toward free market policies, free of burdensome EU regulations.

Today, the two sides are still engaged in difficult negotiations. Contrary to the arguments made by prominent Brexiteers back in 2016, it’s not at all clear that the EU will agree to a free trade agreement. Interestingly, the sticking point seems to be Britain’s reluctance to follow free market policies:

It is safe to say, though, that any Brexit deal will not fail over fish. The really big issue is what the EU refers to as the level playing field. Within that category, the state aid regime is one of the toughest elements. The EU wants the UK to adopt a legal framework for competition policy that broadly mirrors its own. What the EU fears is a politicised state aid regime where a British government subsidises companies for opportunistic reasons, and thus undermines competition with EU companies. It is highly unlikely UK prime minister Boris Johnson could agree to this.

Here Wolfgang Münchau of the FT is suggesting that Britain’s Conservatives are so eager to start subsidizing their corporations that they are willing to walk away from a free trade deal with the EU rather than forgo that sort of interventionism. Britain has drifted far from the lofty ideals of 2016. But then that’s often how nationalism evolves over time.

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Escaping Paternalism Book Club: Part 5

Summary

When you begin the final chapter of Escaping Paternalism, Rizzo and Whitman (RW) seem ready to rest their case.  They neatly recap their nested argumentative strategy:

We began this book with an extended critique of the neoclassical model of rationality, which behavioral economists have rejected as a positive model of human behavior but nevertheless have accepted as a normative standard…

The rest of the book could easily be read as a series of “even if” arguments: even if we accept neoclassical rationality as true rationality, behavioral science has not advanced far enough to answer a number of crucial questions for policymaking, such as the generalizability of behavioral results across different contexts and the applicability of laboratory results in the wild. Even if we had better research on those questions, policymakers would face practically insurmountable local and personal knowledge gaps that would hobble attempts at crafting paternalist policies that are effective and cost-benefit justified. Even if we could acquire such knowledge, policymakers have little incentive to do the hard work of crafting good policies, especially when interested parties (such as rent-seekers, moralists, and bureaucrats) can tilt the legislative and regulatory process in their favor – and so much the worse if policymakers are afflicted by any of the cognitive biases attributed to regular people. And even if we set all of these concerns aside, behavioral paternalism creates the risk of a slippery slope toward more extensive and intrusive policies that go beyond what has been justified by theory and evidence, resulting in ever greater restrictions on individual choice.

They also fault their opponents for dire intellectual negligence:

The reality of behavioral policymaking stands in sharp opposition to the rhetoric. Behavioral paternalists have frequently emphasized the need for evidence-based policy (Thaler 2015b, 338) that should be implemented in a cautious and disciplined manner (Camerer et al. 2003, 1212). Their confident tone often suggests that it is anti-paternalists who eschew evidence and rely on gut instinct for policymaking. To paraphrase the Bible, they behold the mote in the anti-paternalists’ eyes while neglecting the beam in their own. Consider this telling passage from Sunstein that purports to recognize the need for better evidence:

With respect to errors, more is being learned every day. Some behavioral findings remain highly preliminary and need further testing. There is much that we do not know. Randomized controlled trials, the gold standard for empirical research, must be used far more to obtain a better understanding of how the relevant findings operate in the world. Even at this stage, however, the underlying findings have been widely noticed, and behavioral economics, cognitive and social psychology, and related fields have had a significant effect on policies in several nations, including the United States and the United Kingdom. (Sunstein 2014, 11–12)

Notice the speed of the transition from the need for cautious collection of more research to a congratulatory discussion of policy impact. If the need for better research were taken seriously, surely the “significant effect on policies in several nations” would be cause for concern, not approbation.

Instead of heading home, however, RW return to the stage for a stunning encore.  They list, explore, and critique an encyclopedic list of intellectual “escape routes” for paternalists.  In order of appearance: revert to objective welfare paternalism; appeal to obviousness; shift the burden of proof; loosen the definition of paternalism; rely on the “libertarian condition”; invoke the inevitability of choice architecture; focus on the irrational subset of the population; rely on extreme cases,;treat behavioral paternalism as a “toolbox”; and invoke fiscal externalities.

Each of these sections is rich and wise.  Yes, if you make paternalism vague enough, “We’re all paternalists now.”  A silly game.

Is GPS really a form of paternalism? Sunstein thinks so. In fact, GPS is one of his favorite examples, and not just when it’s a gift. He even calls GPS an “iconic nudge” that should be seen as “a form of means paternalism,” and one that paternalists should seek to build upon (Sunstein 2015, 61–62). GPS is, of course, almost always self-adopted… Is consulting a map also a form of paternalism? A map does, after all, simplify the territory that it depicts in order to ease the process of finding things.

But GPS is not the most trivial example of alleged paternalism. According to Sunstein, a restaurant providing a low-calorie menu for its customers is (or can be) a paternalist nudge (2014, 2). According to Thaler, giving someone accurate instructions on how to get to the subway is a form of paternalism (2015b, 324). Text-message reminders from doctors (Thaler 2015b, 342) and credit card companies (Sunstein 2015, 518) are also apparently paternalism… As Sunstein and Thaler see it, any time someone gives helpful advice, provides useful information, or gives a friendly warning, that’s paternalism. The paternalist bar seems to be remarkably low.

Escaping Paternalism then provides a series of “friendly warnings” about how to spot dangerous paternalism:

We want to focus on the characteristics that distinguish innocuous interventions from more problematic ones, irrespective of the label attached. Here are several factors, often overlapping and highly correlated with each other, that will help us to distinguish the harmless activities from more troubling ones…

RW name the following criteria: self-imposed versus other-imposed; invited versus uninvited; competitive versus monopolistic environment; coercive versus voluntary; public versus private; and informative versus manipulative.  On the latter point:

When a Swedish maker of snus, a form of smokeless tobacco, petitioned to modify the warning label on its product to say that it carries “substantially lower risks to health than cigarettes,” the FDA rejected the petition even though the claim is true given current medical knowledge. Why? The primary concern seems to have been that “labels that indicate lower risk may tempt people, particularly young people, to use tobacco products that they might not have tried otherwise” (Tavernise 2015). We don’t know whether any behavioral paternalists weighed in on this particular issue, but it is indicative of how providing truthful information, even that which is clearly relevant to some consumers, takes a back seat when the regulatory focus is on changing behavior.

In short, behavioral paternalism has a complicated relationship with the truth. Truthful disclosures may be useful from a paternalist standpoint . . . but not necessarily. To judge whether a given piece of information is desirable, the paternalist must have some notion of how the targeted agent should behave, all things considered. Then information can be delivered – or obscured – in the manner most likely to nudge the agent in the supposedly correct direction.

None of these “escape route” sections is without its charms, but RW’s critique of the “inevitability” argument is my favorite.  Highlights:

If paternalism is inevitable, it’s pointless to discuss whether or not to be paternalistic, and instead we should focus on how and how much to be paternalistic. But in fact, only choice architecture is inevitable. That means we can ask about other ways, besides paternalistically, that choice architecture might be chosen.

Even this wording may be too narrow, as “chosen” implies a level of intentionality… It would be a mistake, then, to assume that undesigned choice architecture is simply arbitrary or random. Here is one simple example: goods displayed in public view in a store, particularly those with price tags, are available for sale to anyone who can afford the price. When this rule is violated, merchants will usually say so explicitly (“Display items not for sale”). This simple default rule, a kind of choice architecture, minimizes confusion and eases communication between potential buyers and sellers. As far as we know, this practice was never explicitly chosen by anyone.

Consider a more detailed example: the case of refunds and exchanges. In the United States, there is no general legal rule requiring merchants to let customers return goods for a refund or exchange. Although there are some exceptions, especially with regard to door-to-door sales, for most transactions merchants are free to make all sales final (Ben-Shahar and Posner 2011, 115–116)… Consumers assume goods can be returned in good condition during a reasonable period, unless sellers explicitly say otherwise…

Furthermore, the usual default rule is suspended in a number of familiar cases, undergarments and perishable foods being well-known examples. In these cases, most customers are aware that refunds cannot be taken for granted, even if the merchant hasn’t said so explicitly. These goods presumably differ from other goods because the goods in question “depreciate” quickly after sale or use. What all of these cases together suggest is an ongoing market for default rules. If all-sales-final were the universal default, we might suspect that consumers aren’t thinking carefully and sellers are simply taking advantage of them. But the variation of default rules tells a different story – one in which market default rules are responsive to the needs of both buyers and sellers.

Furthermore:

Even when defaults are chosen deliberately rather than evolving, there exist ways to decide among default rules that do not necessarily involve paternalism. Here are a few possibilities:

* Defaults may be chosen in line with conventional expectations. This has the advantage of not surprising or confusing people who have become accustomed to the usual rules…

* Default rules may be chosen in a minimalistic fashion – i.e., assuming that people are not making promises or exchanges unless they explicitly consent to them. This would rule out, for instance, a default rule that assumes for-cause termination, as that constitutes an additional promise on top of the simple agreement to exchange labor for compensation…

* Defaults may be chosen in line with the goal of minimizing transaction costs, which usually would mean minimizing opt-outs…

* Defaults could be chosen to minimize how much choosers infer from the rule. In other words, people are more inclined to infer advice or information from some defaults (or framings) than others…

Analysis

1. Big picture: Rizzo and Whitman’s Escaping Paternalism is probably the best book about paternalism ever written.  The authors demonstrate an old-school mastery of their subject, and pack the work with so much insight that you’ll keep learning new things if you read it five times.  This book is a more valuable contribution to human knowledge than the latest paper in the AER, or even the whole latest issue of the AER.

2. While RW insist otherwise, I reluctantly conclude that their “inclusive rationality” verges on unfalsifiable.   Given their level of expertise, their refusal to name a single definite example of irrationality in the world is telling.  They’ve raised their bar so high even they can’t meet it.

3. Still, RW rightly point out that mainstream economists are too quick to call others irrational.  Yes, saying, “People changed their mind,” is an unsatisfying explanation of human behavior.  Yet people really do change their minds, and they’re hardly “irrational” to do so.  Indeed, stubbornness is a greater cognitive flaw than flightiness.  To quote Emerson:

A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. With consistency a great soul has simply nothing to do. He may as well concern himself with his shadow on the wall. Speak what you think now in hard words, and to-morrow speak what to-morrow thinks in hard words again, though it contradict every thing you said to-day.

4. While reading the book, I kept thinking about (a) kids; and (b) opioid addicts.  RW cover an immense range of topics, but gloss over the human beings almost everyone thinks should be treated paternalistically.  RW could have bitten the bullet and declared kids and opioid addicts to be “inclusively rational.”  Or they could have backed off and said, “Paternalism for such people clears the burden of proof.”  Disappointingly, they decline to take a stand.

5. RW have little patience for the “revert to objective welfare paternalism” escape route:

From our perspective, the very idea of objective welfare is implausible. No such thing as “welfare” exists until an individual mind comes into being. The individual mind generates values, desires, and preferences (typically through interaction with many other minds). And as it turns out, different minds can generate very different values, desires, and preferences. People are idiosyncratic; they want different things. And despite the many wants they have in common, they want the same things to a different extent. We see no plausible grounds for stepping outside of the mind to define what is good for it.

Despite my shared hostility to paternalism, I staunchly disagree.  The very idea of objective welfare is not merely plausible, but compelling.  (Even “inevitable”!)  Like everyone else, the homeless act on their own preferences; but almost all of them would have much higher objective welfare if they adopted a sober bourgeois lifestyle.  The same goes for children, alcoholics, drug addicts, and so on.  Left to their own devices, these impulsive humans generate “very different values, desires, and preferences.”  And left to their own devices, they ruin their lives.

6. RW convincingly accuse the “new paternalists” of being crypto old paternalists.

The apparent willingness of behavioral paternalists to favor some expressed preferences over others also colors the policy debate. They lend the veneer of science to what are in fact subjective judgments, giving policymakers the cover they need to implement policies based on prejudices and moralistic attitudes, such as the universal desirability of conventional virtues such as patience, moderation, and temperance.

So far so good.  But aren’t the new paternalists wrong for the right reason?  Namely: Despite RW’s incredulity, the conventional virtues of patience, moderation, and temperance are indeed universally desirable.  If someone taught their kids to be impatient, immoderate, and intemperate, you would baffled.  And if you had to quickly summarize the “root causes” of the miseries of homelessness, drug addiction, and so forth, isn’t the obvious answer that those who suffer fail to practice these bourgeois virtues?  This is no “veneer of science”; this is common-sense.

7. RW almost grant this point in their “Rely on Extreme Cases” section:

If you want to demonstrate the irrationality of human beings, one very simple strategy is to point to extreme cases: drug addicts whose actions destroy their lives, compulsive gamblers who lose everything they have and more, morbidly obese people who cannot even leave their homes. It is hard to believe that such people are acting rationally, even by the most permissive definition.

In these cases, perhaps we can safely indulge our intuition that their biases are truly damaging in terms of their own well-considered well-being, and if only they could see their situation globally they would truly wish to behave differently.

I agree that “intuition” (or just “common-sense”) says this.  The reason, though, is that “well-considered well-being” is a thinly-veiled version of objective well-being.  The morbidly obese are plainly acting in accordance with their own preferences, but they are acting contrary to their own long-run happiness.

Couldn’t you simply say, “The morbidly obese care about food more than happiness”?  You can and you should.  I’ve argued much the same about the “mentally ill.” But this doesn’t show that objective well-being is a myth.

8. If we concede that objective welfare exists, doesn’t this open the door to paternalism?  Sure, in the same sense that conceding that China exists opens the door to protectionism.  Logically speaking, the cleanest way to prevent a trade war with China is to deny that China exists.  This, however, is an absurd claim, and will at best convince your most dogmatic allies.  Similarly, the cleanest way to prevent paternalism is to deny that objective welfare exists.  But this, too, is an absurd claim, and will at best convince your most dogmatic allies.

9. What then is the reasonable position on paternalism?  Per Michael Huemer’s The Problem of Political Authority, we should begin with a strong but defeasible moral presumption against using coercion to increase objective welfare.  This is hardly an exotic libertarian position; in their personal lives, almost everyone holds such a presumption.  To justify paternalism, you have to show that the net benefits of paternalism are large, even after factoring in knowledge problems, public choice problems, slippery slopes, and all the other practical difficulties RW detail.

10. This Huemerian position explains why it is typically OK to treat your own young children paternalistically.  Why?  Because they’re incompetent, you really do know better, and you really do have their best interests at heart.  (And don’t forget, “My house, my rules.”)  The same goes for elderly relatives with dementia, though the bar should be much higher because the love of the old for the young is so much stronger than the love of the young for the old.

11. Doesn’t this justify actually-existing paternalistic government policy?  Hardly.  As RW explain, governments habitually use their powers with gross negligence – and plenty of earlier researchers document the collateral damage of policies like Prohibition and the War on Drugs.  Yes, the world is complex; but as long as there is a strong moral presumption against coercion, the complexity of the world tips the moral scales strongly toward inaction.

12. To return to my own nagging concern, what about the opioid addicts?  I say government should leave them – and their suppliers – in peace.  Why?  Yes, they’re acting strongly against their own objective welfare.  Yet this pales before (a) the classic economic arguments against prohibition, (b) RW’s pragmatic concerns, and (c) the strong moral presumption in favor of leaving strangers alone.  The case against parents forcibly placing their adult children in rehab for their own good is weaker, though even there we should be skeptical.  As the old joke goes, “How many therapists does it take to screw in a lightbulb?  Just one, but the bulb must want to change.”

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