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The Rise of the New Paternalism

A must read essay by Glen Whitman on the slippery slope of the governments recent interest in using behavioral economics to nudge us:

New paternalism has gone by many names, including “soft paternalism,” “libertarian paternalism,” and “asymmetric paternalism.” Whatever the name, it arose from the burgeoning field of behavioral economics, which studies the myriad ways in which real humans — unlike the agents who populate most economic models — deviate from pure rationality. Real people suffer from a variety of cognitive biases and errors, including lack of self-control, excessive optimism, status quo bias, susceptibility to framing of decisions, and so forth. To the extent such imperfections cause people to make choices inconsistent with their own best interests, paternalistic interventions promise to help them do better.

What sort of interventions? To the casual reader, the new paternalism might seem to have little to do with government at all. Cass Sunstein and Richard Thaler’s Nudge and Daniel Ariely’s Predictably Irrational, for instance, often read more like advice manuals than policy manifestos.

But if you dig deeper, you’ll find a wide-ranging policy agenda at work. In seminal journal articles by Sunstein & Thaler, Camerer et al., O’Donoghue and Rabin, and others, you’ll find a panoply of policy proposals from mild to downright intrusive. The story begins with the seemingly innocuous proposal to enroll all employees in savings plans automatically (with the ability to opt out). Then it progresses to new default rules in contracts, such as a presumption of “for cause” rather than “at will” employment, again with an opt-out. And then? Default rules that can be waived only through a cumbersome legal procedure. Then default rules with some options ruled out entirely — such as maximum hours that cannot be waived for less than time-and-a-half pay. Then cooling-off periods for high-cost purchases. Then sin taxes for fatty or sodium-rich foods. Then outright bans on ingredients like trans fats.

Not every new paternalist supports every one of these policies, and they don’t advocate them all with the same confidence. But they’re all on the list, and all justified by an appeal to behavioral economics.

If behavioral economics has taught us anything, it’s that humans are vulnerable to framing effects. In other words, how people make choices turns on seemingly irrelevant aspects of the situation, such as the order in which options are presented, the other (unchosen) options presented at the same time, which option is designated as the “default,” and so on.

The new paternalists, having learned this lesson well, frame the public policy debate in a way that encourages paternalistic interventions. They have done so in at least three ways.

First, it is well-established that people exhibit extremeness aversion: a tendency to avoid positions that are presented as extremes. When choosing between a low-end camera and a medium-quality camera, for instance, potential buyers split about equally between the two — but when these two options are presented alongside a high-end camera, the medium-quality camera attracts substantially more buyers. The mere presence of an extreme option makes the middle option seem better. The new paternalists, intentionally or not, have exploited this same tendency by presenting their position as a middle-ground between laissez-faire and heavy-handed paternalism.

This would be no great concern, were it not for the tendency of the middle ground to shift over time. A newly adopted middle-ground quickly becomes the status quo. Then a more intrusive option takes center stage, and what used to be the middle-ground becomes one of the bookends. To take just one example, legally mandated enrollment in savings plans (with exit option) seems like the middle ground right now. But once it becomes standard, it will occupy the laissez-faire position. Then a “Save More Tomorrow” policy (with exit option) becomes the new middle-ground. And once that has been adopted, it too becomes the low-end, while automatic enrollment with freedom to choose your investments but without the option to exit entirely becomes the middle. By this route, a series of minor steps can eventually make even mandatory enrollment with specified minimums, highly restricted investments, and no opt-out seem like the “reasonable middle.”

Sound paranoid? Anti-smoking regulations followed a similar path. Once upon a time, banning smoking on airplanes seemed like the reasonable middle ground. Now that’s the (relatively) laissez-faire position, smoking bans in bars and restaurants are the middle, and full-blown smoking bans have come to pass in some cities.

Second, as Daniel Kahneman has argued, “The basic principle of framing is the passive acceptance of the formulation given.” People tend to take the description of a situation as fixed, without reformulating it in different ways. And this tendency, too, is exploited by the new paternalists, who regularly present paternalism as inevitable. Sunstein and Thaler, for example, urge us to “abandon the less interesting question of whether to be paternalistic or not, and turn to the more constructive question of how to choose among the possible choice-influencing options.” Their basic argument is that choice situations often require some default, so why not choose the best one?

But alternative framings are available. Instead of positing paternalism as the default standard for selecting default rules, they could have said respecting customary expectations is the default standard for selecting default rules. Or they could have emphasized that in many domains of potential regulation, defaults are not required – and therefore paternalism is not inevitable in these areas. For instance, it is not inevitable for some contract options (like working overtime for regular pay) to be ruled out entirely.

Nevertheless, the new paternalists have framed the debate as being not whether there should be paternalism, but how much. Policymakers who adopt this frame of mind will naturally be led to introduce all manner of paternalistic interventions. “Since paternalism is inevitable,” they might think, “of course it’s my job to tinker with the terms of contracts, the conditions of employment, the ingredients of food, the content of exercise regimes,” ad infinitum.

Third, the new paternalists regularly present their policy agenda as existing on a continuum. Both Sunstein and Thaler and Camerer, et al., structure their proposals in an order much like the list I provided above: from the mild to the heavy-handed. More importantly, Sunstein and Thaler define the continuum in a way that elides crucial distinctions — such as the difference between private and public and between voluntary and coercive.

Sunstein and Thaler define their “libertarian paternalist” spectrum in terms of the cost of choice: “The libertarian paternalist insists on preserving choice, whereas the non-libertarian paternalist is willing to foreclose choice. But in all cases, a real question is the cost of exercising choice, and here there is a continuum rather than a sharp dichotomy.” Even outright bans, such as motorcycle helmet laws, lie on the spectrum because “[t]hose who are required to wear motorcycle helmets can decide to risk the relevant penalty, and to pay it if need be.” This framing ignores the question of who imposes the cost and how. To see why this is bizarre, notice that a 10-cent tax on Twinkies is relatively low-cost, while having to drive 20 miles to the nearest 7-11 is relatively high-cost. In Sunstein and Thaler’s rubric, the state-imposed tax is more “libertarian” than the self-imposed cost of living far from civilization.

In addition, many specific paternalist policies exist on a continuum. Sin taxes can range from tiny to exorbitant. Legal hurdles for opting-out of defaults can range from minimal (signing a waiver) to prohibitive (hiring a lawyer and attending hours of seminars).

Why does this matter? Because slippery slopes, as implied by the name, are more likely to occur in the presence of a continuum. As Eugene Volokh has observed, people display small-change tolerance, that is, a willingness to tolerate changes perceived as relatively small movements from the status quo. The tendency probably has both a rational basis (it’s costly to invest time and effort on changes whose effects are probably small) and an irrational one (it’s easy to miss the big picture when focusing on the problem at hand).

Worth the read.