If the boy is father to the man, then I was raised by a profligate dunce. Even though I had learned the power of compound interest in high school, I foolishly squandered my trivial savings at a time when the “eighth wonder of the world,” as Albert Einstein called it, would have had the greatest impact. Had I invested a mere $2,000 in Apple stock on my 18th birthday I would now be $252,039 richer and well on my way to being a millionaire by the time I reach retirement. Economists might say my choice was rational (it was all the money I had in the world at the time) but it certainly wasn’t optimal.
Fortunately, I had a distant relative—Uncle Sam—that stepped in to save me from my own economic incompetence. For example, during my first week of Marine Corps boot camp I had to fill out a form in which I had the choice to “opt out” of the Montgomery GI Bill. If I did not check the box I would have $100 a month deducted from my pay for six months and in return I would have $36,000 to use for college. Although several of my fellow recruits chose not to participate, the majority of us took the lazy way out and left the box unchecked. That act of sloth made me $35,400 richer.
My experience was an example of an action of what The Economist referred to in 2006 as the “avuncular state”: “worldly-wise, offering a nudge in the right direction, perhaps pulling strings on your behalf without your even noticing.” Advocates of this form of paternalistic governance include a number of behavioral economists who term such approaches “asymmetric paternalism”, “benign paternalism,” “cautious paternalism,” or, as Richard Thaler, the economist who won this year’s Nobel Prize in Economics, calls it, “libertarian paternalism.”
In 2009, Thaler and Cass Sunstein published a book called Nudge: Improving Decisions About Health, Wealth, and Happiness, which popularized the concept. Before that, though, they wrote an influential law review article on libertarian paternalism:
The idea of libertarian paternalism might seem to be an oxymoron, but it is both possible and legitimate for private and public institutions to affect behavior while also respecting freedom of choice. Often people’s preferences are ill-formed, and their choices will inevitably be influenced by default rules, framing effects, and starting points. In these circumstances, a form of paternalism cannot be avoided. Equipped with an understanding of behavioral findings of bounded rationality and bounded self-control, libertarian paternalists should attempt to steer people’s choices in welfare-promoting directions without eliminating freedom of choice.
“Libertarians embrace freedom of choice, and so they deplore paternalism,” note Sunstein and Thaler. “Paternalists are thought to be deeply skeptical of freedom of choice and to deplore libertarianism.” The two groups would appear to be mutually exclusive but the authors argue for a “form of paternalism, libertarian in spirit, that should be acceptable to those who are firmly committed to freedom of choice on grounds of either autonomy or welfare.”
A few examples they provide of how libertarian paternalism can be put into practice are:
• In an attempt to increase savings by workers, a company decides not to ask employees if they wish to participate in a 401(k) plan. Instead, the workers are automatically enrolled unless they specifically choose otherwise.
• “Sin goods”—such as junk food—are often repeatedly purchased in small quantities for short-term consumption. Because people make numerous purchases over the course of their lives rather than, for instance, a single trip to the store to purchase a lifetime supply of potato chips, they can distort their long-term consumption decisions by giving in to small preferences for immediate gratification. A way to correct for this would be to impose a per-unit tax on potato chips to induce people to consume less, and return the proceeds to consumers via a lump-sum transfer or by lowering income taxes or taxes on some non-sin commodity, such as socks.
• Another approach would be to induce people with self-control problems to make “prospective choices,” making choices now that influence their future in-the-moment incentives. One way to implement this would be to impose a high presumptive tax, and then sell licenses (or vouchers) that permit people to buy the good tax-free (or at a reduced tax) in the future. For example, rather than pay $2 per pack on cigarettes, a smoker could buy a “sin license” which might cost $5,000 and entitle the holder to an unlimited supply of cigarettes tax-free. Paying such an upfront fee would require a serious commitment to the habit.
Although these examples are all monetarily based, other illustrations can be found of imposing self-constructed limits in order to increase awareness of choices. The Economist article mentions a program in Missouri that allowed compulsive gamblers to add their names to a voluntary blacklist. If the gamblers breach the self-imposed ban by entering one of the state’s riverboat casinos, they face arrest for trespassing and the confiscation of their winnings.
Another example is covenant marriage laws that allow couples the freedom to choose to be held to a higher level of marital commitment. Before being able to obtain a divorce, spouses who entered into a covenant marriage limit the reasons they can seek a divorce and often must agree to undergo marital counseling before the marriage can be dissolved.
Although these examples are relatively benign, there is a danger in allowing government technocrats government influence the economic choices of affected parties in a way that will make choosers better off.
Several years ago, In a review of Robert and Edward Skidelsky’s book How Much is Enough?, Karen Horn explained why this approach often leads to disaster:
The Skidelskys produce a whole list of basic goods that constitute the good life as they see it: health, security, respect, personality (which in their view leads both to the right to a private sphere and to redistribution of property), friendship, leisure and harmony with nature. Not only are these items taken to be universal needs, but ends in themselves as well.
The argument is by no means religious. It is Aristotelian, based on a notion of natural law — and thus axiomatic. It is not a very large step from there to imposing a lifestyle on other people. Such intrusiveness cannot be avoided by paying lip-service to the idea of liberty. Calling one’s version of paternalism “non-coercive”, as the Skidelskys self-consciously rush to do, is not enough. These days, the “road to serfdom” that Friedrich Hayek famously feared to see Western civilisation embark on in the 1940s is paved with the good intentions of a fast-growing group of libertarian paternalists. And the self-appointed messiahs who show us the way along this road are clothed in nannies’ uniforms.
The policy recommendations that flow from the Skidelskys are as old as they are proven recipes for disaster: ever more government influence, massive income redistribution, a basic wage, progressive consumer taxes, a slower economic integration of the world. Some ghosts continue to haunt us
Thaler would respond, as he did in his book Nudge, that, “The first misconception is that it is possible to avoid influencing people’s choices.”
If private and public institutions are going to attempt to influence people’s behavior (and they always will, say behavioral economists), why should they not do so in a way that, as Thaler and Sunstein claim, “steer people’s choices in directions that will improve their own welfare?” After all, as Thaler’s Nobel-winning research shows, humans are not the rational animals that economists have always presumed us to be. We are often willfully ignorant, intemperate, and prone to inertia. Libertarian paternalism offers a gentle correction, a non-intrusive means of influencing what another Nobel-winning economist, Thomas Schelling, calls the “intimate contest for self-command.”
“Libertarian paternalism is a relatively weak, soft, and nonintrusive type of paternalism,” say Thaler and Sunstein, “because choices are not blocked, fenced off, or significantly burdened.” Are they right? Would we be better off trading the nanny state for the avuncular state?