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When does libertarian paternalism work?
Not always. Here is the abstract from a new paper:
We develop a theoretical model to study the effects of libertarian paternalism on knowledge acquisition and social learning. Individuals in our model are permitted to appreciate and use the information content in the default options set by the government. We show that in some settings libertarian paternalism may decrease welfare because default options slow information aggregation in the market. We also analyze what happens when the government acquires imprecise information about individuals, and characterize its incentives to avoid full disclosure of its information to the market, even when it has perfect information. Finally, we consider a market in which individuals can sell their information to others and show that the presence of default options causes the quality of advice to decrease, which may lower social welfare.
I do not yet see an ungated version. Of course anyone interested in this topic should also pursue the papers of Mario Rizzo, Glen Whitman, and Daniel Klein.
Posted by Tyler Cowen on July 11, 2009 at 01:36 PM in Economics | Permalink
Comments
I consider myself a Milton Friedman Democrat. I endorse the following positions:
1) A Guaranteed Income
2) A Health Care Plan that:
A. Buys everyone Catastrophic Care
B. Has a deductible for medical services that can be shopped, and based partly on income
3) Narrow Banking
4) An end to the War on Drugs
5) Major cuts in Military Spending
6) A Non-Interventionist Foreign Policy, although we can send some aid and jawbone countries
In other words, what I consider necessary is a strong social safety net aimed at helping the poor, otherwise a less obtrusive government than we have now. I believe, as did Milton Friedman, that this could save money, lessen the size of govt, and that it is appropriate for the govt to help the truly needy for humanitarian reasons. This is also Hayek's view in "The Road To Serfdom", and has a lot in common with the original Chicago School of Simons, Knight, and Viner. It also comports more closely with the views of Adam Smith and Edmund Burke, who were both very pragmatic and non-ideological.
What is my view called then? It seems to me that it's at least possible that Democrats would accept my positions, but Republicans couldn't accept any of them. Am I wrong?
Posted by: Don the libertarian Democrat at Jul 11, 2009 3:01:36 PM
"We show that in some settings libertarian paternalism may decrease welfare because default options slow information aggregation in the market."
(1) I haven't read the paper yet, but I assume the argument is that people don't investigate the different options when one is given to them by default, so less information is gathered, potentially leading to inefficient choices. If people are fully rational, then this must be a utility-maximizing outcome, right? The only explanation I can think of for this leading to welfare loss is if there are positive externalities to private information gathering, in which case there is a strong argument for having the government gather and publish information on the options and also (*gasp*) choosing one as a default, to save individuals the costs of gathering information. It seems that to support their conclusion, one must posit irrationality or market failure, or else private agents will move to a Pareto optimal allocation from whatever default is given to them. This is true even when information is costly--in fact it is an even more solid argument in that case because of the public good nature of information.
(2) Even accepting their conclusion, it seems the solution that the paper offers is pretty unpalatable. In essence, their solution is to make things harder for people; that is, imposing a deadweight loss or implicit tax on people by making them go through the paperwork, etc., regarding choosing an option. That just makes people worse off. That's probably why the paper states that libertarian paternalism "may" decrease welfare, rather than that it does with certainty.
(3) A final point is that in many if not all cases, it is logically impossible to NOT impose some type of paternalism. By definition, there is always a default option, even if that default is to force people to make a decision. That's why in general I don't buy arguments against libertarian paternalism because it is pretty much impossible to escape it.
Posted by: libert at Jul 11, 2009 5:20:25 PM
I haven't read the paper yet, but I assume
That's really impressive. Such a skill would save me gobs of time.
Posted by: Constant at Jul 11, 2009 6:32:00 PM
Don the Libertarian, what is a "Milton Friedman Democrat"? How can you give someone a guaranteed income without taking that income from someone else? I have read quite a bit of Milton Friedman (less of Burke and Smith) and I don’t recall Friedman ever mentioning a guaranteed income or advocating government run health plan.
Posted by: kingstu at Jul 11, 2009 9:29:30 PM
Don the Libertarian, it's been quite some time since I read Capitalism and Freedom. I see you were referring to the negative income tax (i.e. EITC).
Posted by: kingstu at Jul 11, 2009 9:36:41 PM
Actually, I think that Friedman's negative income tax established a floor of income, because $0 income people would get a tax refund. The EITC is essentially a government paid subsidy for low wages: no income earned, no subsidy.
Posted by: liberalarts at Jul 11, 2009 10:11:00 PM
Libertarian paternalism? Sounds oxymoronic.
I do know that people getting welfare tend to avoid going over arbitrary earning limits that would jeopardize benefits.
I'd say that benefits should decline gradually and always slower than earnings rise, but I'm opposed to the whole business.
Handouts should never be taken from others by force and never guaranteed by law. In fact, the notion that they could be discontinued at any time is good motivation. Living off of the effort of others IS precarious, as people in California are about to discover.
Posted by: Alan Brown at Jul 11, 2009 11:02:21 PM
I currently advocate a version the Guaranteed Income Plan put forward by Charles Murray in "In Our Hands". But, yes, the idea comes from "Capitalism and Freedom" and Nixon's GAI.
Here's Friedman on Health Care:
"A more radical reform would, first, end both Medicare and Medicaid, at least for new entrants, and replace them by providing every family in the United States with catastrophic insurance (i.e., a major medical policy with a high deductible). Second, it would end tax exemption of employer-provided medical care. And, third, it would remove the restrictive regulations that are now imposed on medical insurance—hard to justify with universal catastrophic insurance.
This reform would solve the problem of the currently medically uninsured, eliminate most of the bureaucratic structure, free medical practitioners from an increasingly heavy burden of paperwork and regulation, and lead many employers and employees to convert employer-provided medical care into a higher cash wage. The taxpayer would save money because total government costs would plummet. The family would be relieved of one of its major concerns—the possibility of being impoverished by a major medical catastrophe—and most could readily finance the remaining medical costs. Families would once again have an incentive to monitor the providers of medical care and to establish the kind of personal relations with them that were once customary. The demonstrated efficiency of private enterprise would have a chance to improve the quality and lower the cost of medical care. The first question asked of a patient entering a hospital might once again become "What’s wrong?" not "What’s your insurance?"
My views might differ a bit from Friedman's, but they are essentially based on his ideas. Here's Hayek:
"Nor is there any reason why the state should not assist the individuals in providing for those common hazards of life against which, because of their uncertainty, few individuals can make adequate provision. Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance—where, in short, we deal with genuinely insurable risks—the case for the state’s helping to organize a comprehensive system of social insurance is very strong."
Burke:
"Economy is a distributive virtue, and consists not in saving but selection. Parsimony requires no providence, no sagacity, no powers of combination, no comparison, no judgment."
From Gavin Kennedy:
"I posted the following list last month (from Jacob Viner), but its worth reminding readers of his stance:
"● The Navigation Acts, blessed by Smith under the assertion that ‘defence, however, is of much more importance than opulence’; (WN464)
● Sterling marks on plate and stamps upon linen and woollen cloth (WN138-9)
● Enforcement of contracts by a system of justice; (WN720)
● Wages to be paid in money, not goods;
● Regulations of paper money in banking; (WN437)
● Obligations to build party wars to prevent the spread of fire; (WN324)
● Premiums and other encouragements to advance the linen and woollen industries’; (TMS185)
● ‘Police’, or preservation of the ‘cleanliness of roads, streets, and to prevent the bad effects of corruption and putrifying substances’;
● ensuring the ‘cheapness or plenty [of provisions]’; (LJ6; 331)
● patrols by town guards, fire fighters and of other hazardous accidents; (LJ331-2)
● Erecting and maintaining certain public works and public institutions intended to facilitate commerce (roads, bridges, canals and harbours); (WN723)
● Coinage and the Mint; (WN478; 1724)
● Post office; (WN724)
● Regulation of institutions, such as company structures (joint stock companies; co-partneries, regulated companies); (WN731-58)
● Temporary monopolies, including copyright, patents, of fixed duration; (WN754)
● Education of youth (‘village schools’, curriculum design); (WN758-89)
● Education of people of all ages (tythes or land tax) (WN788);
● Encouragement of ‘the frequency and gaiety of publick diversions’; (WN796)
● The prevention of ‘leprosy or any other loathsome and offensive disease’ from spreading among the population; (WN787-88)
● Encouragement of martial exercises; (WN786)
● Registration of mortgages for land, houses, and boats over two tons; (WN861, 863)
● Government restrictions on interest for borrowing (usury laws) to overcome investor ‘stupidity’; (WN356-7)
● Laws against banks issuing low-denomination promissory notes; (WN324)
● Natural liberty may be breached if individuals ‘endanger the security of the whole society’; (WN324)
● Limiting ‘free exportation of corn’ only ‘in cases of the most urgent necessity’ (‘dearth’ turning into ‘famine’); (WN539)
● Moderate export taxes on wool exports for government revenue; (WN 879)"
I'm not claiming that other views aren't possible. I'm simply trying to put forward a coherent political economy and politics for myself, based on the actual views of my favorite authors.
For Narrow Banking, I would put forth a version of the Chicago Plan put forward in 1933, I believe.
Posted by: Don the libertarian Democrat at Jul 11, 2009 11:32:35 PM
To engage in some advertising: My papers (coauthored with Glen Whitman)on libertarian and other forms of "new" paternalism are being published in the fall. "The Knowledge Problem of the New Paternalism" will be published in the Brigham Young University Law Review. "Little Brother is Watching You: New Paternalism on the Slippery Slopes" will be published in the Arizona Law Review in a special issue on the new regulatory state. I will post links both on ThinkMarkets and on my bepress site as soon as the final edited versions are ready.
Posted by: Mario Rizzo at Jul 13, 2009 10:40:24 AM
How is it that you are always one of the first to post?
Posted by: supra shoes at Jul 15, 2009 3:01:11 AM
thank you admin.
Posted by: muhabbet at Aug 2, 2009 1:32:03 PM
The premise underlying the notion of libertarian paternalism is: Given that X is socially desirable choice, Y is the least coercive way of getting you (or "them") to make that choice. I, of course, need no such nudging. One could substitute least troublesome or least expensive for least coercive, and thus have slothful paternalism or capitalist paternalism -- the idea is the same. The presumption is that we know what they should do, and that we have a writ to do it to them (for the good of society, or their own good). This kind of thinking leads to really good-bad policies, such as "let's impose a VAT because consumers will easily comply with it." That is true, but it means we are likely to impose a higher tax than is economically optimal, because people are less aware of it, or are less inconvenienced by it.
Posted by: Joe Barnett at Aug 6, 2009 2:55:17 PM
thanks admin
Posted by: cet at Sep 14, 2009 9:07:18 PM
