Friday, June 18, 2010

Wink, Wink. Nudge, Nudge, Say No More, Say No More.

In today's Wall Street Journal, "De Gustibus" columnist Eric Felten goes after "libertarian paternalism" with both guns blazing. In case you haven't followed, the seemingly oxymoronic idea of LP comes from a (shotgun?) marriage of behavioral economics and nanny-statism, as most famously represented by the book and concept "Nudge." As the authors of Nudge say in their interview on the Amazon page:

"Those who are in position to shape our decisions can overreach or make mistakes, and freedom of choice is a safeguard to that. One of our goals in writing this book is to show that it is possible to help people make better choices and retain or even expand freedom. If people have their own ideas about what to eat and drink, and how to invest their money, they should be allowed to do so."

The typical topics of the Nudge approach include employers offering rewards for losing weight, clinics rewarding patients for taking their medicine, and parents paying children for good grades. I should disclose that my children bought a lot of computer games and music from our grade rewards program, and Felten himself admits to joining the "incentive parenting" program. So what are Felten's objections? From what I can tell, he has three:

1 ) "It rarely works."

2 ) It's driven by companies who are making money on consulting contracts on behavioral economics.

3 ) "There is something queasy-making about the whole business."

Let's start with 1 ). Felten's comment that incentive systems "rarely work" is demonstrably wrong. Double the price of gasoline, and people will drive less. Raise the marginal cost for water in a desert city from zero to something approaching a sustainable price, and residents will start fixing plumbing leaks. However, he is correct to urge caution because there are a number of cases in which some people are "surprised" when the simple "own price effect" isn't stronger. Lowering marginal income tax rates raises the "price" of charitable contributions, but the empirical research in this area is muddy. There are two obvious reasons. First, when marginal tax rates fall, there is a countervailing "increased income effect" that tends to increase contributions, so the two effects work against each other. Secondly, there are likely other price and/or income insensitive reasons that people contribute to charity. So, there is a respectable empirical research agenda to see when incentives work and don't work.

2) It doesn't bother me that somebody is making a buck helping to design these schemes. After all, Felten writes for the Wall Street Journal, not Mother Jones. Lot's of people make a profit designing and manufacturing pacemakers. Thank You God for these people. What does bother me is something along a slightly different line. The paternal part of Liberal Paternalism is still a type of central planning. Our President just recently asserted that his Nobel-Prize winning "green team" of energy experts had assured him that off-shore oil drilling would be "absolutely safe." Woody Allen in Sleeper depicts a future in which scientists laugh that we didn't understand the healing properties of deep fat frying, steak, and hot fudge sauce. As life has imitated art, since the year of Sleeper (1973) we have learned that, contrary to "expert opinion," moderate alcohol consumption is healthier than abstention, that it can be unhealthy to get too little sunshine as well as too much, and that AAA rated Fannie-Mae mortgage bonds might not be what we want to "Nudge" into our banking system. In addition to the decentralized knowledge problem from this type of central-planning thinking, these "nudge" activities are typically partial equilibrium programs that ignore tradeoffs, countervailing effects, and non-linearities in responses. The "Paternalism" part of Libertarian Paternalism by definition assumes that Nanny State Knows Best. To be fair to the LP people, that's part of the reason that they want to retain individual choices.

Finally, let me turn to Felten's point 3) about the creepiness factor surrounding some of these nudge programs. This is a good point and it is directly related to the topics that Doug and I write about in this blog. Consider Felten's penultimate sentence with particular application to LP in parenting: "Are we teaching effort, enterprise, honesty, kindness, loyalty, and perseverance, or are we instilling a grubby insistence on being rewarded at every turn?" As an economist I believe that incentives matter. But Felten is correct that values matter also (and in many cases such as parenting, undoubtedly more).

Felten's finally sentence is: "That said, I'm off to the Lego Store."

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