How Paternalistic Should Policymakers be?

Below cross-posted from my irisheconomy.ie post: 

The literature on behavioural economics has set off a very interesting debate on the extent to which policy-makers should intervene to improve outcomes in cases where individuals are potentially harming themselves but not others.

A paper by Camerer et al in 2003 put forward the case for asymmetric paternalism whereby policy could potentially help individuals who are not making rational decisions, while not infringing on others. An example is pension auto-enrolment whereby individuals procrastinating on pensions decisions are helped in the process of saving while those who genuinely do not want to take out a pension are not forced to.

Sunstein and Thaler added the idea of Libertarian Paternalism to the literature whereby policy-makers strive to improve outcomes (paternalism) while also placing a high weight on freedom to choose (libertarianism). The now-famous book Nudge is an expression of this philosophy and has had a dramatic impact on policy-makers in the US, UK and to some extent Australia and is being discussed at least in the Irish policy environment.

A big debate is ensuing around Nudge with some claiming the philosophy is too interventionist (see Sunstein's Storr lectures for a list of these critiques and also his responses - see also a reading list I put together here).

Another line of argument is that Nudge artificially restricts the application of behavioural economics to non-mandated policy interventions. A recent Harvard Law Review piece by Bubb and Pildes examines three areas of policy (financial regulation, fuel pollution and consumer credit regulation) and makes the case that the behavioural evidence does not support soft-paternalist policies but rather a more interventionist approach. In particular they argue that there is a large tension between the evidence provided by behavioural economics and the political position being advocated by many of its adherents. In their view, the bounded rationality displayed by citizens leaves them far more open to exploitation and also far less likely to respond to soft-policies to improve their welfare. They cite an extremely interesting article by Lauren Willis in the University of Chicago Law Review, who argues that Nudges are insufficient in cases where large corporations have incentives to counteract them and she gives a detailed case-study from US financial regulation where financial companies quite easily ran around various default options embedded in consumer protection regulation. She argues that mandates and generally more active regulation is needed in many cases due to the degree of control that the regulated firms have over how to implement "nudges".

Sunstein's response to this is available here where he argues that it is important to respect people's freedom of choice and that it is unclear yet that nudges are ineffective in the face of counteracting moves by vested interests. He argues that, while in some cases mandates may turn out to be neccesary and more effective, this should at least partly be an empirical question and should not ignore the importance of autonomy.

This debate is important in the Irish context. There are many areas of policy where policy objectives lead to tensions between implementation of effective policies and the autonomy of individuals to choose. In cases where individual actions lead to costs to others then traditional economics and regulation is on more solid ground. But when there is active debate about how to reduce health-damaging diet and consumption patterns, promote greater pension coverage and other policies effectively aimed at improving individual welfare through changing their behaviour then this debate is very important and interesting. It also hits against the idea that behavioural economics is an attempt to individualise wider social and economic problems. In this debate, there is a clearly interesting tussle between the interests of large companies, the decisions of boundedly rational households and the political factors that lead to the mandates of regulators. It provides an interesting and realistic way of debating policy and regulation.