Who’s Your Nanny?

Thom Lambert —  10 March 2009

My law school classmate, M. Todd Henderson (Chicago Law), has posted an interesting paper on SSRN. The paper, entitled The Nanny Corporation and the Market for Paternalism, explores “Nannyism” by business firms and the government. Nannyism consists of imposing paternalistic rules designed to protect the governed — e.g., rules against smoking, drinking, over-eating, and engaging in extremely risky activities like sky-diving.

In imposing Nanny rules, Todd argues, governments and firms are merely responding to the demands of, respectively, citizens and employees. Governments (through Medicare, Medicaid, etc.) pay many of the health care expenses of their citizens, and firms (through employer-provided insurance) usually pick up the tab for employees’ health care expenses. But, of course, the citizens and employees themselves ultimately bear these costs in the form of, respectively, higher taxes and lower wages. Thus, each citizen has an interest in reducing his co-citizens’ health care expenditures, and each employee has an interest in having safe and healthy co-employees. Nannyism, then, can be seen as a means by which governments and firms force individuals to internalize the costs of their risky behaviors. In imposing nanny rules, Todd argues, governments and businesses are merely responding to citizens’ and employees’ demands for cost-reducing paternalism. They are, in short, suppliers in a “market for paternalism.”

That raises the question: “Who is the more efficient provider of paternalistic rules?” There’s no clear answer to that question, Todd maintains, but there are reasons to believe that firms will often be the superior rule-providers. First, competition in the labor, product, and capital markets will constrain firms from overreaching (imposing liberty restrictions that are not cost-justified) and from diverting the benefits of nanny regulations. (This latter benefit results in a tighter “fit” between the rules and their cost-reducing rationale, thereby ensuring that only cost-justified rules are adopted.) In addition, firms may have an advantage in that they can adopt and enforce rules that would be difficult for governments to adopt. Obesity, for example, could be more easily regulated by an employer who regularly sees her employees than by the government. The government, on the other hand, “may have advantages both in the severity of the penalties that can be employed (and thus less need for enforcement costs) and in covering behaviors, such as consuming specific foods like trans fats, that may be difficult for firms to observe.” While the superiority of one nanny over another will depend on the liberty restriction at issue and other contextual matters, firms will likely be the better nannies in many situations.

Unfortunately, Todd argues, there are a host of legal constraints that prevent private firms from responding to the demand for paternalism. The last part of the paper explores those barriers and argues for their elimination (or, at a minimum, for clarification on what firms are and are not allowed to do).

I learned a ton from this informative paper. I particularly enjoyed Part II, which traces the history of corporate nannyism from company towns in which all sorts of amenities were provided but all sorts of behaviors were regulated, to the Ford Motor Company’s “Sociological Department,” to modern efforts to reduce health care costs by controlling smoking, obesity, etc.

My one quibble with the paper is with its implicit assumption that government nanny rules are aimed at forcing individuals to internalize their externalities. I’m skeptical. There are good reasons to believe, for example, that government (and thus taxpayer) expenditures on health care would actually increase if people stopped smoking. Because of the de facto mandatory Medicare system, government pays a disproportionate share of the health care expenses of old people. From the government’s (and taxpayers’) standpoint, smoking deaths are cheap. The folks who really screw us are those healthy sons of guns who hang on forever and develop all sorts of costly, late-life ailments.

In The Health Care Costs of Smoking, published in the New England Journal of Medicine in 1997, the authors “analyzed health care costs for smokers and nonsmokers and estimated the economic consequences of smoking cessation.” They found that

Health care costs for smokers at a given age are as much as 40 percent higher than those for nonsmokers, but in a population in which no one smoked the costs would be 7 percent higher among men and 4 percent higher among women than the costs in the current mixed population of smokers and nonsmokers. If all smokers quit, health care costs would be lower at first, but after 15 years they would become higher than at present. In the long term, complete smoking cessation would produce a net increase in health care costs, but it could still be seen as economically favorable under reasonable assumptions of discount rate and evaluation period.

The authors thus concluded that “[i]f people stopped smoking, there would be a savings in health care costs, but only in the short term. Eventually, smoking cessation would lead to increased health care costs.”

Anti-smoking rules, then, probably reduce an employer’s overall health care costs (since the employer usually doesn’t see the “benefit” of the early death that typically occurs post-retirement, only the increased costs associated with smoking-related ailments) but probably don’t reduce taxpayers’ health care costs. Still, the government pushes for more rules to limit smoking. How come?

I can’t say for sure, but experience has led me to believe that people like to meddle. When employers do so, they have to “pay” for the liberty restrictions they impose by raising the wages of marginal employees. When governments do so, they just have to ensure that they don’t tick off 50+ percent of the populace.

Despite the fact that I’m a bit more cynical about government’s motives than my old classmate, I very much enjoyed his terrific paper, and I heartily recommend it to others.

Thom Lambert

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I am a law professor at the University of Missouri Law School. I teach antitrust law, business organizations, and contracts. My scholarship focuses on regulatory theory, with a particular emphasis on antitrust.