Thursday, June 27, 2013

Simpler, by Cass Sunstein

In his new book Simpler Cass Sunstein looks back over his 3 years as Head of the Office of Information and Regulatory Affairs (2009-2012). 

President Reagan gave OIRA the role of overseeing federal regulation in 1981, legislation for which Sunstein was actually involved in drafting. Reagan also issued an executive order stating that “regulatory action shall not be undertaken unless the potential benefits to society …outweigh the potential costs.” President Obama built on this in 2011 with Executive Order 13563 stating that “[The regulatory system] must take into account benefits and costs. It must ensure that regulations are accessible, consistent, written in plain language, and easy to understand. It must measure, and seek to improve, the actual results of regulatory requirements.”

In addition to the broad policy goals in Figure 1, Sunstein was powerfully motivated by a desire to simplify many regulations, citing inspiration from the user-friendliness of modern tablets such as the iPad. This desire was not manifested in across the board slashings of regulations – rather Sunstein notes the need for context sensitive administration. While teachers, hospitals and schools may be burdened by overly detailed rules crowding out their ability to use their own judgment, private sector industries, wary of legal recriminations, often prefer to know exactly where the line is so that they can stay on just the right side of it.

Sunstein quotes a 2012 OIRA Report showing the savings made under the Obama administration, which I have adapted in Figure 2. These savings were achieved by (among other initiatives) fuel economy and energy efficiency rules, deregulation of business and clean air and road safety rules saving thousands of lives and preventing illness. A practical example is a 2010 rule from the FDA which prevents up to 79,000 annual illnesses from salmonella. This is all part of the ‘Regulatory Moneyball’ approach of dispassionate cost:benefit analysis that Sunstein and President Obama are such forceful advocates of. See this paper by Sunstein for more fascinating examples of the application of cost:benefit analysis in government.

Sunstein reviews the literature on System 1&2 thinking, hyperbolic discounting, mental accounting, heuristics, the power of defaults and so on, citing the examples of automatic enrollment (see Nudge #4) and age-progressed renderings as means to encourage saving (Nudge #45).

As an example of the need for simplification and a general organizing principle, Sunstein contrasts the USDA’s unintelligible old ‘Food Pyramid' (take a moment to examine it and reflect on just how unbelievably uninformative it is) with the new ‘Food Plate’ (Figure 3). Along with the image, the Food Plate’s website also has clear guidelines concerning healthy eating with recommendations like “drink water instead of sugary drinks”. 
This change is part of Sunstein’s broader goal of nudging people towards better choices with smart disclosure of the most relevant information in a given domain. You might think of this as the Amazonification of regulation (the website, not the jungle). Why can we avail of Amazon’s search engine to evaluate thousands of goods, but are totally lost when evaluating fuel efficiency of different vehicles? Why can we use websites such as Skyscanner to find the cheapest flights, but can’t do the same for mortgages? Sunstein cites a valuable example of disclosure as President Clinton’s unscrambling of GPS signals in 2000, which allowed for information brokers to arise and meet market needs in areas such as car navigation. In a similar vein, the Obama administration has overseen the creation of  simplified fuel economy labels, college scorecards and understandable insurance coverage forms. This principle of smart disclosure can be extended to innumerable areas; credit card companies giving customers one page statements making their APR rules salient, airplane fees including all costs up front, shops listing the price of different bags of sugar per kilo to allow easy comparisons. 

Sunstein takes Amazon as an exemplar of personalized defaults in its purchase recommendations. Sunstein has called this trend a ‘wave of the future’ although less ambitiously group demographics such as age and income might be more realistic tools when tailoring, say, default pension plans. If deciding a default for someone can seem too paternalistic, active-choice mechanisms (see #44) are an option for encouraging people to overcome inertia and accommodate diverse tastes.

Sunstein concludes with a reflection on the work to be done in simplifying a vast government architecture that has at times developed haphazardly, with overlapping regulations and cumulative, burdensome red-tape. Beyond the retrospective streamlining of old laws, his greater contribution is to clearly formulate a paradigm of having regulation work in closer harmony with peoples’ behavior. He closes with three lessons he has learned in his time at OIRA (Figure 4).

Further reading
Sunstein has a number of recent papers on this area:
(3) The Real World of Cost-Benefit Analysis

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