Obama, Paternalism, and Behavioral Economics?

Josh Wright —  7 January 2008

David Leonhardt wrote the following in a column last week in the NY Times:

The easiest way to describe Senator Clinton’s philosophy is to say that she believes in the promise of narrowly tailored government policies, like focused tax cuts. She has more faith that government can do what it sets out to do, which is a traditionally liberal view. Yet she also subscribes to the conservative idea that people respond rationally to financial incentives.

Senator Obama’s ideas, on the other hand, draw heavily on behavioral economics, a left-leaning academic movement that has challenged traditional neoclassical economics over the last few decades. Behavioral economists consider an abiding faith in rationality to be wishful thinking. To Mr. Obama, a simpler program — one less likely to confuse people — is often a smarter program.

Two things bother me about this particular passage despite the fact that I found the column pretty interesting. The first is that I’m not sure this accurately characterizes Hillary Clinton’s view on markets, i.e. that she “subscribes to the conservative idea that people respond rationally to financial incentives” as a general matter. But this post is about the second thing that bothers me about the column.

The second issue is that I’m not convinced that Obama’s policies have much to do with a behavioral economics-based platform. Leonhardt raises Obama’s savings plan (opt-out 401(k)’s), broad based tax cuts for the middle class, and opposition to a health care “mandate” as examples of policies informed by behavioral economics. I understand the the connection between the 401k default policy and behavioral economics. But the second two examples don’t strike me as have much do with with the insights of behavioral economics per se. The link between tax cuts and the lessons of behavioral economics, in this context, is tenuous at best. And as Ezra Klein notes while taking the position that he doesn’t see much behavioral economics in Obama’s positions either, one might suspect that a health care mandate would be more in line with the teachings of behavioral economics rather than Obama’s plan.

It is important to remember that the promise of the field of behavioral economics is to identify systematic and predictable deviations from individiual rationality in economic environments. Whether or not this young and growing field in economics lives up to this promise in a manner that translates into sensible legal reforms has yet to be seen as a general matter. I’ve written here that I am unconvinced that behavioral economics has lived up to this promise in the field of consumer contracts where the tools of neoclassical economics generates greater explanatory power.

The point is that the mere assertion of individual irrationality is not a case for behavioral economics, nor any sort of “libertarian paternalism.” For starters, a serious proponent of such interventions must be able to demonstrate the “errors” must be systematic, predictable, and convincingly documented empirically (and in real markets). Then, and only then, does it make sense to seriously discuss the costs (including the long-term dynamic costs emphasized by Klick and Mitchell) and benefits of potentially paternalistic interventions. Indeed, a part of the classical argument for libertarianism is a presumption not that individuals do not make mistakes (there are surely costs associated with being right “all” of the time), but that individuals making their own decisions leads to better outcomes in the long run. Regardless, merely asserting deviations from the rational actor model and calling for government regulation on the behalf of individuals who do not know what is best for them has little do to with behavioral economics or “New Paternalism.” It’s just good old-fashioned paternalism.

I admit that this last paragraph has little to do with Obama’s policies directly.  Its not meant to be a critique.  I have no doubt that there is serious intellectual content to many of Obama’s economic policies — both Austan Goolsbee and David Cutler are very well respected economists.  But I think it is worth pointing out when terms like “behavioral economics” and “libertarian paternalism” are thrown around willy-nilly.  The same approach is often taken in the law review literature where it is relatively common to see  articles purporting to take a paternalistic approach informed by behavioral economics which fail to even attempt to satisfy the threshold discussed above.  Here, I’m also not convinced that Leonhardt is correct that the roots of Obama’s economic policies lie in behavioral economics.

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