I intend to follow up this post with a few of the more tangential thoughts I had while reading.  For a very powerful elaboration of the main argument (bad laws create extralegality, which exacerbates poverty) get the book!

The Mystery of Capital was The Atlas Network’s #1 pick for pro-liberty book of the decade.  I have read and also recommend their #2 pick Radicals for Capitalism.

He blew up the Empire State Building and the White House in Independence Day, sent a giant monster careering through the heart of Manhattan in Godzilla and destroyed the famous Hollywood sign in The Day After Tomorrow. But it seems there are places even Roland Emmerich will not go – the German film-maker has revealed he abandoned plans to obliterate Islam’s holiest site on the big screen for fear of attracting a fatwa.

Or was this just a calculation based on profits?  2012 does not seem to have been made with any other considerations in mind.

However:

Richard Kenway, who holds Higgs’ former position at the University of Edinburgh, says that the 78-year-old emeritus professor remains quietly confident that the LHC will discover the Higgs boson when it is eventually running at full strength. For his part, Kenway says the LHC’s delays are to be expected given the size and intricacy of the $9 billion experiment. And he says if he ever needs further proof that the Higgs boson is not abhorrent to nature, he need only spend time with his friend and mentor. “If nature truly did not want us to discover the Higgs, a cosmic ray would have zapped the embryo that became Peter, preventing its development into a physicist,” he says.

Ah yes, but what if the universe wants us to prove Nielsen and Ninomiya’s theories that the universe doesn’t want us to prove the existence of Higgs particles?  Then Higgs would need to be born to invent the idea, and the LHC would need to fail in order to prove that the theory couldn’t be proven!  Can I have my Nobel prize in subatomic particle theory now?  No?  I’ll settle for a peace prize.

I am too young to remember the fall of the Berlin Wall or the collapse of the Soviet Union, but the idea of the wall, as I learned about it later, made quite an impression on me.  The Communists had voluntarily constructed a physical testament to their citizens’ fevered desire to escape.  And once that wall came down, the beneficent West welcomed the refugees with open arms.  But because I am too young to remember the Berlin Wall, another wall looms larger in my mind.

Today, a sickening parody of the past is unfolding.  A new wall goes up along our border, and the United States is building it.  It builds it not to keep its own rich well-fed citizens trapped inside, but to keep the poor and desperate out.  The Berlin Wall made a sick sort of sense.  The Communists needed to prevent the human material of their social experiments from escaping.  But the wall today is an aimless and demented cruelty, a jeering testament to our nation’s willingness to sacrifice its own prosperity, if only it can make our neighbors a little poorer.  It denies both the citizens inside our borders and those without the best operation of the capitalist system that was once the hope of desperate East Berliners.

Once we demanded that the Soviets tear down their wall.  Today we insist that our neighbors help us seal off our border.  So today, I look forward to the twentieth anniversary of the fall of a different wall, and a time when we will have seen it for the travesty that it is.

Balkin is correct that, technically, anyone who does not buy insurance under the new set of laws will only have to pay a tax (or as I prefer to think of it, a fine).  Only if they refuse to pay the fine will they then, eventually, be sent to jail as a tax evader.  Fair enough.  But the general point still remains.  If you do not comply with this new law – you will be sent to jail.  Being sent to jail for refusing to pay the fine is only morally different if the fine has some particular justification.

Balkin argues that the fine (or as he prefers to think of it, tax) is justified by free-rider problems:

If lots of people (and especially young and mostly healthy people) don’t buy health insurance, the cost of insurance goes up for everyone, and it is passed on to others in the form of higher premiums. In addition, people who don’t buy health insurance tend to wait until their health problems are severe and then use emergency services; they may contract communicable diseases (which they may pass on to others) or they may become disabled. All of these costs get passed along to others–in the form of higher premiums and higher costs for hospitals and insurers–or they have to be absorbed by federal and state governments through programs for the poor or the disabled.

So if you don’t buy health insurance, you are increasing costs for other people. The federal government is taxing you to recoup some of those costs. An analogy would be taxes on alcohol or tobacco, although these taxes are usually worked into the retail price of the goods so that people don’t even have the opportunity to refuse to pay them. Another example would be taxes on an enterprise that is creating additional costs to the environment through pollution; the government taxes you if you don’t purchase and install anti-pollution equipment.

Balkin skips more than a few steps with this analysis.  In significant part, health care free riding is only possible because there are laws that legalize free riding.  For example, the laws requiring hospitals to treat all emergency room visitors, regardless of their capacity/intent to pay, are an invitation for free riding.  The costs of treating any of these patients who do not pay will be passed on to all of the hospital’s paying patients.  If we really wanted to eliminate this free rider problem, we would just make people pay for their emergency room visits – or we would at least not require hospitals to receive people without insurance.

The current health care reform is not a brilliant scheme to end free riding.  In large part, it is an attempt to write more free riding into law.  It requires insurance companies to transfer health care costs from sick to healthy patients.  It enacts massive subsidies that transfer costs from the poor to the wealthy.  These transfers are very much like actual free riding, and they would not occur in an efficient insurance market that had no free riding.

Balkin shrugs and says that “tax policy does this all the time”.  And so it does.  And opponents of these subsidies are right to remind the rest of the electorate that their participation is not voluntary, but enacted through threat of imprisonment.  Health care reform is commonly assumed to be in everyone’s benefit, but this is of course not the case.  The threat of jail time lies behind every government “charity”.

It might be responded that this is merely another failure of the authors to live up to their stated principles – not an indictment of those principles themselves. But I have trouble imagining a situation in which “libertarian paternalism” is enacted by government yet nobody’s decision space is narrowed.

Perhaps the claim is that, if only the employer’s decision space is narrowed, then an intervention is “libertarian paternalism”, because only employees are actual market participants and only their choices matter for utilitarian considerations. Let us fashion a hypothetical law that attempts to respect this conception in order to expose the underlying fallacy. We might coerce businesses into auto-enrolling their employees in retirement accounts that had no tax-benefits over normal bank accounts. This would, supposedly, have no negative effect on employees because they would remain free to opt out of auto-enrollment.

The supposition is inadequate. First, we have the “single-click” cost. Thaler and Sunstein frequently profess the desire to guide consumers to certain outcomes while granting the right to opt-out by methods as simple as a single click of a computer’s mouse. A trivial cost is a cost nonetheless – it does not leave the decision space unchanged. I’m tempted to set this point aside, but the authors seem eager to impose quite a few “single” clicks, involving just about every decision people can make. As the clicks accumulate, they will fatigue individuals who consider opting out – anything but reflexive default acceptance becomes costly. Or if opting in is made just as costly as opting out, the clicks will introduce generally an unnecessary friction to human action.

More importantly, impositions on the choices of employers implicitly create costs for their employees. Thaler and Sunstein argue that people have strong status quo biases. In a market system, there could be good reasons for this bias. If companies tended to offer a certain compensation default, employees could fairly assume that other people in fact preferred to receive compensation in those terms. If this compensation package were not the market equilibrium, workers with status quo biases would experience greater satisfaction at competing firms offering a more preferred default.

If the government mandates a certain default, businesses lose the ability to communicate market default preferences to their employees. Not only do employees lose access to this information, they may be deceived into thinking that the new default is in fact the market default, rather than governmental compensation-fixing. Nor must market information be destroyed to make space for “expert” information. If people want to know how Thaler and Sunstein want them to receive their compensation, they can just read Nudge. But market information can only be communicated through the market.

So to say that these employees can reach the same decision point is true in a sense, but misses the bigger picture. One might as well say that a dart player could make all of the same throws while wearing a blindfold, or that monkeys on typewriters could technically reproduce Shakespeare. Deciding on a particular decision point is in itself a costly procedure, and libertarian paternalism deprives people of important information. The imposition of a rigid, un-chosen, government default interferes with the optimal operation of human choice.

I have difficulty unpacking arguments to the effect that we should think carefully about existing choice architecture, because choice architecture cannot be avoided. These seem to be two separate claims without any important connection.

It is the case that prices must exist in a market. It is not the case that “we” or the government must think about what those prices should be. Nor is it the case that the government is creating choice architecture or fixing prices when it abstains from creating choice architecture or fixing prices. There need not be any government decision in arranging cafeteria food locations or employee retirement, any more than cafeteria managers need to plan their customers’ retirement plans or retirement planners need to design cafeterias for their customers! Some decisions need not be made by people with no connection to those decisions.

As I argued at great length below, paternalists have no grounds for picking out “better” outcomes. They do not need to make most choices for consumers. And if they need not make choices that cannot on objective grounds be said to improve outcomes, then they ought to abstain from interfering.

The authors refer to their preferred program as “libertarian paternalism”.  I suspect this term is insincere, (perhaps merely an attempt to woo libertarians into more state-friendly territory?) since Thaler, for example, seems quite willing to endorse clearly non-libertarian paternalism.  But for argument’s sake I’ll use their nomenclature.  After all, the authors’ inability to stand by their professed principles is not a rebuttal of those principles per se (though it does undermine their pat dismissal of slippery-slope arguments).

Facially, libertarian paternalism attempts to account for subjective preferences in its definition.  Paternalism, Thaler and Sunstein say, “tries to influence choices in a way that will make choosers better off, as judged by themselves” (page 5).  This neat trick hangs subjective consumer preferences as the goal-point of all rigid government interventions.  But it gets us nowhere.

Any of the chapters could be used to demonstrate the inability of libertarian paternalism to choose a “correct” direction in which to point consumers.  But the discussion of retirement planning (Chapter 6 – “Save More Tomorrow”) struck me as the most obviously futile.

Musing whether people save enough, the authors proceed accordingly (pages 108-109):

This turns out to be a complex and controversial question.  For one thing, economists do not agree about how much saving is appropriate, because they do not agree on the right level of post-retirement income.  Some economists argue that people should aim to have retirement income that is at least as high as the income enjoyed when working, because retirement years offer the opportunity for such time-intensive expensive activities as travel.  Retired people also have to worry about growing health care costs.  Others claim that retirees can use their greater time to live a more economical lifestyle: saving the money once spent on business clothes, taking the time to shop carefully and prepare meals at home, and taking advantage of senior discounts.

We do not take a strong position on this debate, but consider a few points.  It seems clear that the costs of saving too little are greater than the costs of saving too much.  There are many ways to cope with having saved too much–from retiring earlier than expected, to taking up golf, to traveling to Europe, to spoiling the grandchildren.  Coping in the opposite direction is less pleasant.  Second, we can say for sure that some people in our society are definitely saving too little—namely, those employees who are not participating at all in their retirement plan….  These folks could clearly use a nudge.

It is worth noting that the authors’ language assumes that there are objective answers to the problem of savings (“how much saving is appropriate”, “people should aim”, “the costs of saving too little are greater”, “for sure some are saving too little”).  This might be waved aside as a linguistic concession to readers perhaps unfamiliar with subjective preferences, were it not for the paternalistic proposal that followed.

Instead of taking an absolute objective position (that people should save X amount), Thaler and Sunstein pretend to abstain from judgment (“We do not take a strong position on this debate”), then immediately change gears and take a relative objective position!  Instead of arguing that people should say a specific amount, they argue that people should be subjected to incentives that will induce them to save more than they are currently saving.

This conclusion is absurd.  The authors are rightly unwilling to specify some “correct amount” of retirement savings.  But absent any objective reference point, it is impossible to say whether people as a whole are spending too little.  Relative position is impossible to determine except in reference to an objective point.

Thaler and Sunstein attempt to pad their argument by referencing employer matching programs (pages 109-110):

For example, a common plan feature is that the employer will match 50 percent of the employee’s contributions up to some threshold, such as 6 percent of salary.

This match is virtually free money….

Some older American workers are also turning down “free money”….  For such employees, joining the plan is a sure profit opportunity because they can join, then immediately withdraw their contributions without any penalty, yet keep the employer match.  Nonetheless, a study finds that up to 40 percent of eligible workers either do not join the plan at all or do not save enough to get the full match.

The existence of this “free money” cannot, of course, justify further government intervention in savings.  Any aggregate windfall will vanish, like a mirage, if people attempt to capture it en masse.  As any economist will tell you, wages are determined by productivity.  Whether or not employees collect “free money” is a salient factor in wages.  If more people claim the “free money”, employers must lower wages for the elderly as a group to keep them equal to (an unchanged level of) productivity.

Moreover, these “free money” programs likely only exist because governments have strong-armed businesses into offering them!  Thaler and Sunstein blithely accept this legislative bullying – and nearly every regulation mentioned in the book.  But this begs the very question that the authors leave unanswered in the first place – how much should people be saving?

Libertarian paternalism ought to reject government decisions to subsidize savers at the greater expense of consumers, if these decisions are based merely on the preferences of government bureaucrats (and we have not yet established other grounds for these programs).  The authors waste little time (for once) objecting to our government’s (non-libertarian paternalistic?) starting point in marriage laws, when they conflict with the obvious progressive goal of gay rights.  Yet more, not fewer, regulations are somehow warranted in retirement laws by consumers’ “irrational” decision not to adequately adjust to pre-existing costly (un-libertarian) government regulations that the authors never bother to justify in the first place.

The only reference Thaler and Sunstein make to consumers’ retirement preferences, beyond their central appeal to the emotionally “obvious”, is a halfhearted reference to survey data.  The authors elevate thin, aggregated poll responses into a demonstrated goal of all employees (page 108):

For what it’s worth, many employees say that they “should” be saving more….  It is easy to say that you “should” be doing many good things—dieting, exercising, spending more time with your children—and people’s actions may tell us more than their words….  But such statements are not meaningless or random.  Many people announce an intention to eat less and exercise more next year, but few say they hope to smoke more next year or watch more sitcom reruns.  We interpret the statement “I should be saving (or dieting, or exercising) more” to imply that people would be open to strategies that would help them achieve these goals.

Of course, the authors do much more than “offer strategies”.  They use consequence-free surveys conducted in artificial environments as a mandate for costly and inescapable regulation that will affect everyone.  And they could not do otherwise – nothing but thin survey data could serve as an alternative to human action in determining subjective human preferences.  And a program of paternalism must reject human action as a valid basis of demonstrated preference.

This is the fundamental dilemma facing libertarian paternalists.  The paternalist must figure out what people want without reference to what people actually choose to do.  What method could possibly suffice for this?  The planner could suppose himself to simply know all preferences by virtue of his common humanity.  I expect that any program of well-intentioned paternalism will eventually regress to this level – and the authors seem to concede this point.  But a shared human perspective does not, in itself, put a paternalist in a superior position to those he is regulating.  And, moreover, this sort of justification does not take seriously Thaler and Sunstein’s injunction that regulators make consumers better off as judged by themselves.

The only possible alternative to observed action (i.e., the market) is the survey.  It is perhaps not surprising that leftist intellectuals will favor programs that transfer authority from the market to the university psych study.  But whenever I see these proposals, I begin to suspect, as Megan McArdle likes to say, that somebody missed the socialist calculation debates.  The difficulties faced in determining preferences by poll are intractable.

As a warm-up, we have the problem of the contrapositive counterfactual.  Any group of retiring consumers evaluating their position for a survey are ignorant of the opinion that they would have in some conceivable alternative position.  For example, consumers who save for their retirement cannot know the relative life satisfaction they would have if they had not saved for retirement.  Conversely, those who do not save are ignorant of the satisfaction that they would experience in the hypothetical alternative where they had saved.  Even if consumers in both situations agreed that one of the situations was preferable (for example, if both the spendthrift and the miser agreed, upon retirement, that being miserly were better) this would simply be agreement between two ignorant parties.  Their agreement would lack the objectivity reserved for the impossible individual who simultaneously experienced both alternatives (whose own judgment could yet be assailed as dynamically inconsistent!).

In any event, if the choice is made by those who have already retired, it cannot represent the preferences of those who have not yet retired.  Thaler and Sunstein avoid this and the above problem by reporting prospective, rather than retrospective, survey data.  Individuals choosing for their future remain ignorant of their actual future satisfaction, but they at least avoid the bias of uneven ignorance of outcomes inherent to the retiring, retrospective choosers.  In this sense, the surveys are more like human action and the market.  But insurmountable difficulty remains.

Nudge recognizes that the answers that individuals give in a survey are strongly influenced by the circumstances in which the survey is conducted.  The authors’ paternalistic program is, in fact, supposedly justified by this inconsistency.  On page 24, the authors note that survey respondents rated their overall happiness lower if they were first asked about their dating lives.  On page 36, they note that decisions and assessments are strongly influenced by “framing effects” – e.g. whether a glass is portrayed as half-full or half-empty.

So what environment is most appropriate for conducting surveys?  Should they be result-oriented?  Should the government ask questions about savings in environments aimed at encouraging support for retirement programs, as the authors encourage corporations to do throughout the book?  But this would simply assume as objective the preference that surveys are supposed to determine.  Should surveys occur in some sort of “neutral” setting, with the pollee isolated, listing and ranking preferences as they occur to him, without any input from the pollers?  Aside from the difficulty there would be in aggregating this sort of data, why would we expect a complete and careful result from this low-pressure survey?  Why would we even expect a lack of bias – wouldn’t the individual simply bring in with him whatever biases that clung to him the particular day of the survey?

Is the idea of a “neutral” polling methodology coherent?  Thaler and Sunstein give no indication that it is.  So what exactly are they trying to accomplish?  Do mutable survey results give them license to simply cherry pick the one whose results they like and then “nudge” people in a direction that was never really anything other than their own subjective preference?  If surveys ever did manage to become truly objective and comprehensive, they would likely need to be as long and onerous as those that interwar socialists of the economic calculation debates imagined would replace markets as a preference transmitting device in the Soviets’ communist paradise.

Lest this piece become a novella, I want to comment on only one more problematic feature of surveys.  There is one inescapable difference between decisions made for a psych study and decisions made in the market.  You might call it a “framing effect”, and it is one that seriously undermines the authority of all survey results.  Survey respondents do not conceive of their answers to surveys as being actual life choices. The most fundamental difference between surveys and action makes the former an unacceptable substitute for the latter.  Paternalists can only make their surveys like actual choice by discarding the surveys altogether and just permitting the market to run its course.  Instead, Thaler and Sunstein seem ready to tilt the playing field whenever a survey yields a result different from the market, as if unaware that this might simply reveal a deficiency in surveys.

A final, perhaps ill-placed, note.  Some readers may object to my use of the terms “interference” and “regulation” throughout this piece.  Thaler and Sunstein pretend or imply, for most of Nudge, that their interventions are “costless” or “nearly costless” (“nearly” being another arbitrary term open to interpretation by – who else? – the paternalist).  But they confess as early as page 8, in a footnote, that their interventions are not actually costless:

Alert readers will notice that incentives can come in different forms.  If steps are taken to increase people’s cognitive effort—as by placing fruit at eye level and candy in a more obscure place—it might be said that the “cost” of choosing candy is increased.

This puts the matter too tentatively.  It must be said that increasing cognitive effort increases costs!  All costs – from hard physical labor to selecting food in a cafeteria are ultimately experienced by individuals in terms of “cognitive effort”.  Imposing costs in terms that are not monetized obscures but does not reduce them.  It does, of course, deny citizens a quite useful measuring heuristic: prices.  In World War II, for example, governments hid the monetary costs of maintaining large standing armies by drafting millions of men, instead of hiring them at the market wage.  In advocating for the imposition of non-monetary costs, Thaler and Sunstein merely join a storied bureaucratic tradition of dissimulation.

To the first point, I think the issue is that in any setting, it is impossible to avoid constructing some choice architecture. I actually think the recognition of this should reduce special interest control, since the government will be able to employ people who think about the implications of the choice architecture, rather than letting special interests set it.

Further, a nudge is not the same thing as an intervention. It is important that Libertarian Paternalism does not imply an expansion of interventions–just smarter construction of existing interventions.

To the second, a defining characteristic of Libertarian Paternalism is that the decision space is not changed in any way. Consumers/citizens can choose the exact same set of goods under a different choice architecture. (Ideally there are no costs to doing this, but I think this probably plays out differently depending on the specific example.)

In the policy areas they make recommendations on, the broad finding is that a majority of people don’t care or are not expert enough to figure out what is best for them. I see no problem with attempting to help those people make smarter decisions, as long as they are nudges and not shoves.

Given this, it seems that your problem is not with Nudge, but with the government. In my reading, the authors are agnostic about the appropriate level of intervention. If your complaint is against the government manipulation of markets, your fight should not be against efforts to make that manipulation smarter, but against the manipulation itself.

More to come.