I see via Matt Yglesias that Obama is naming Cass Sunstein to head the Office of Information and Regulatory Affairs. Yglesias notes that this job, particularly in the form it took during the previous administration, seems a bit below Sunstein’s level (especially given his close relationship with Obama, who among other things is responsible for his recent marriage to Samantha Power). It won’t surprise anyone that Obama intends to take regulation a little bit more seriously than Bush, but the nature of this pick suggests a particularly meaningful change of direction. Although I am sure Sunstein wouldn’t hesitate to serve at the pleasure of the President, he did just take a rather nice position at Harvard, and I have to imagine that Obama offered him big ideas for this appointment to bring him over.
The really exciting aspect of this pick, at least to someone with my sensibilities, is not how much regulation it predicts but what kind. Sunstein, along with Richard Thaler (another informal Obama campaign advisor) recently published Nudge, a fantastic book about how to apply behavioral economics to public policy. With the advent of neuroeconomics, behavioral approaches to economic theory are rapidly gaining influence, and this pick signals that economic thought as implemented in government is finally catching up. The Milton Freidman style free market positive economics is predicated on an idea of humans as agents who seek to perfectly maximize their utility in economic decision making. Behavioral economics opposes this conception of human nature, observing that in many cases cognitive biases force us into decisions that are less than perfectly rational or just plain bad.
Thaler and Sunstein advocate for “libertarian paternalism” (also known as “light paternalism”), which is the theory that government should intervene to help people make better choices without actually restricting their freedom to choose. A common example of the idea involves 401k policy. Because our brains aren’t evolved to hoard resources for the long-term of several decades, it’s difficult to get people to adequately save for retirement. Despite attractive tax incentives and company matching, 401k participation rates are lower than they should be. We also know, though, that the default state of a choice strongly influences our decision making. Thus, libertarian paternalists shift the 401k decision from opt-in to opt-out. Employees are told that, unless they express otherwise, some portion of their income will be deducted from each paycheck for the savings plan. People are still free to opt-out, so this policy doesn’t exactly squeeze anyone with the hand of government; it does, though, let markets function more efficiently. In pilot programs, this simple change significantly increases the percentage of employees who participate in 401k programs.
As Yglesias notes, the OIRA despite its low profile “has rather sweeping influence across the whole ambit of regulatory activities.” This is extremely good news. It looks to me like Obama picked Sunstein to institute an broad new theoretical approach to regulatory policy. It’s fair not to agree that the root cause of the financial crisis was a simple paucity of regulation, but I’m conviced that what regulation we had failed because it did not properly acknowledge our basic human nature. Done properly, the goal of behavioral regulatory strategies will be to maximize long-term utility, which is what human nature ultimately fails at. Hopefully, this choice signals the begining of the end of our worthless talk about free markets. Instead of arguing about more or less regulation, we might finally start debating the best regulation.
[...] 8, 2009 by Michael Following up on this post, Obama’s pick of Sunstein prompted me to reread Noam Scheiber’s excellent TNR piece [...]
[...] of power issues. But of course that’s well outside the scope of OIRA’s ambit. And as this very interesting blog post argues, his recent work in the area of behavior economics suggests a real interest in bringing a new [...]
As many have argued, a shortcoming of Sunstein’s approach in Nudge is that it doesn’t really justify the idea that regulators “know better” than the individuals making decisions.
“Libertarian paternalism” requires straight-up paternalism — the idea that the regulators know best. The novelty is that rather than using this assumption as a pretext for outright bans or taxes, it can be used as a pretext for imposing non-monetary costs on people. But do regulators know best? When do they know best, and when not?
Sunstein has shown us a better kind of paternalism. But he has not solved the question of when, if ever, paternalism is really justified.
A completely different, also popular approach is to say that government intervention is only justified when there is a “market failure” or a coordination problem. Government can step in to solve a prisoner’s dilemma or similar problem, but nothing else.
This is a completely different approach because it does not assume that a regulator knows better than the individual — rather, it acknowledges that the individual is more or less forced into self-defeating decisions because of a lack of coordination with other actors.
In my opinion “libertarian paternalism” is intriguing but the word “paternalism” has an archaic ring that we should not ignore. The “market failure,” “coordination-based” or “game-theoretic” theory of government intervention seems to me the soundest.
[...] Behavioral Revolution Through Regulation? [...]
[...] 11, 2009 by Michael In the comments section of this post, mk writes, As many have argued, a shortcoming of Sunstein’s approach in Nudge is that it [...]
[...] I’ve written before about my hope that behavioral economics would guide Obama’s policies. Now, [...]