Monday, June 04, 2007

Nothing new

Paternalism bothers me and I believe in slippery slopes. The "new" paternalism does nothing to help. Prof. Mario Rizzo, writing in Forbes (June 18), makes the point very nicely. The "new" may look better than the despicable old paternalism but not by much.

Russia's new leaders look a lot like the those of 20 years ago. I imagine that the new (and improved) paternalism would be administered by the same cast of characters that have been there all along applying the older version.

Trust Us
by Mario J. Rizzo

Some of us remember the Spice Girls in the 1990s asking, "So
tell me what you want, what you really, really want." Today, some economists
have decided to take this one step further. They intend to tell us what we
really, really want. I call these economists, and those who embrace their ideas,
the New Paternalists.

Old-fashioned paternalists impose restrictions on behavior,
like mandating bicycle helmets or outlawing marijuana, because they believe
they're good for you, period. By contrast, New Paternalists coerce or manipulate
behavior because they believe it's what you would really want if you were
thinking straight. They are not deciding for you, they say, but rather, simply
making it easier for you to do what you want to do at some deep level, but

Easier said than done. For example, in surveys people say they want
to save more. Most firms that have 401(k) savings plans require employees to
actively choose to enroll. Disorganized procrastinators don't sign up for years.
The New Paternalists, such as University of Chicago professors Richard Thaler
and Cass Sunstein, have a plan to help the procrastinators. They want employers,
either voluntarily or by legal requirement if necessary, to automatically enroll
people. Employees can opt out later if they choose. Their own inertia will
further employees' interests, goes the thinking. People will enroll sooner and
save more.

But there's a problem with that reasoning. In a study
Jagadeesh Gokhale, Laurence Kotlikoff and Todd Neumann show that for some
workers the 401(k) may not be a good choice. They conclude that a young, low- to
moderate-income household may raise its lifetime taxes and reduce its lifetime
expenditures by saving in a 401(k) program. This has to do in part with the fact
that because such people are in a low tax bracket, they don't get much benefit
from the 401(k) deduction now, yet the 401(k) withdrawals years later can raise
the share of their Social Security benefits that are subject to taxation.
Besides, people have more liquidity needs when they are getting started in life.
High-income households do get tax benefits from a 401(k).

Conclusion: An enrollment default is regressive. Is this what non-enrollees, who are mainly
young and low-income, really, really want? Perhaps they are rational, after

Some New Paternalists advocate a "fat tax" on junk foods that
are high in salt and fats, like potato chips. These foods can make you chubby
and hike your risk for heart disease. If only people had greater foresight and
willpower, goes the reasoning, they would resist these snacks. In other words,
this is what people would really, really want if they could see the Fritos bag
with a clear eye. How much should the tax be? If the optimal chip consumption
amount is zero, then it should be very high indeed.

But do people really want to give up all this junk-food
enjoyment in the hopes of a better life later? It is unclear what optimal
willpower and foresight imply in terms of behavior, especially given the
differences among individuals. What about the 100-pound triathlete? Should she
pay, say, a 30% tax on her bag of chips? Or the rail-thin 14-year-old boy who
eschews sweets but likes a savory treat once in a while?

People already exercise self-control to different degrees and
in different ways. Should those who are highly self-controlled pay the same tax
as those who are less self-controlled? If so, it is quite possible that a fat
tax will cause the former to eat too few chips in terms of what they really,
really want.

The basic problem for the New Paternalists is this: They do
not know what people really want. To get clear-cut policy goals or standards
they will have to either explicitly impose their own values, reify the values of
some Orwellian authority or go with what the rent-seekers, like mutual fund
companies or health advocates, come up with.

Thus, to quote a line from yet another song (by The Who):
"Meet the new boss, same as the old boss."