Thaler on Discounting

This is a companion to “Richard Thaler, Nobel Laureate” and “Thaler’s Non-Revolution in Economics“. See also the long list of related posts at the end of “Richard Thaler, Nobel Laureate”.

Richard Thaler, the newly minted Noble laureate in economics, has published many papers, including one about discounting as a tool of government decision-making. The paper, “Discounting and Fiscal Constraints: Why Discounting is Always Right”, appeared in August 1979 under the imprimatur of the think-tank where Thaler was a consultant. It was also published in the October 1979 issue of the now-defunct Defense Management Journal (DMJ). Given the lead time for producing a journal, it’s almost certain that there is no substantive difference between the in-house version and the DMJ version. But only the in-house version seems to be available online, so the preceding link leads to it, and the quotations below are taken from it.

The aim of Thaler’s piece is to refute an article in the March 1978 issue of DMJ by Commander Rolf Clark, “Should Defense Managers Discount Future Costs?”. Specifically, Thaler argues against Clark’s conclusion that discounting is irrelevant in a regime of fiscal constraints.*

Clark took the position that a defense manager faced with fiscal constraints should simply choose among alternatives by picking the one with the lowest undiscounted costs. Why? Because the defense manager, unlike a business manager, can’t earn interest by deferring an expenditure and investing the money where it earns interest. To put it another way, deferring an expenditure doesn’t result in a later increase in a defense manager’s budget. Or in the budget of any government manager, for that matter.

Viewed in perspective, the dispute between Thaler and Clark is a tempest in a teaspoon  — a debate about how to arrange the deck chairs on the Titanic. Discounting is of little consequence against this backdrop:

  • uncertainty about future threats to U.S. interests (e.g., their sources, the weapons and tactics of potential enemies, and the timing of attacks)
  • uncertainty about the actual effectiveness of U.S. systems and tactics (e.g., see this)
  • uncertainty bout the costs of systems, especially those that are still in the early stages of development
  • a panoply of vested interests and institutional constraints that must be satisfied (e.g., a strong Marine Corp “lobby” on Capitol Hill, the long dominance of aviation in the Navy, the need to keep the peace within the services by avoiding drastic changes in any component’s share of the budget)
  • uncertainty about the amounts of money that Congress will actually appropriate, and the specific mandates that Congress will impose on spending (e.g., buy this system, not that one, recruit to a goal of X active-duty personnel in the Air Force, not Y).

But the issue is worth revisiting because it reveals a blind spot in Thaler’s view of decision-making.

Thaler begins his substantive presentation by explaining the purpose of discounting:

A discount rate is simply a shorthand way of defining a firm’s, organization’s, or person’s time value of money. This rate is always determined by opportunity costs. Opportunity costs, in turn, depend on circumstances. Consider the following example: An organization must choose between two projects which yield equal effectiveness (or profits in the case of a firm). Project A will cost $200 this year and nothing thereafter. Project B will cost $205 next year and nothing before or after. Notice that if project B is selected the organization will have an extra $200 to use for a year. Whether project B is preferred simply depends on whether it is worth $5 to the organization to have those $200 to use for a year. That, in turn, depends on what the organization would do with the money. If the money would just sit around for the year, its time value is zero and project A should be chosen. However, if the money were put in a 5 percent savings account, it would earn $10 in the year and thus the organization would gain $5 by selecting project B. [pp. 1-2]

In Thaler’s simplified version of reality, a government decision-maker (manager) faces a choice between two projects that (ostensibly) would be equally effective against a postulated threat, even though their costs would be incurred at different times. Specifically, the manager must choose between project A, at a cost of $200 in year 1, and project B, at a cost of $205 in year 2. Thaler claims that the manager can choose between the two projects by discounting their costs:

A [government] manager . . . cannot earn bank interest on funds withheld for a year. . . .  However, there will generally exist other ways for the manager to “invest” funds which are available. Examples include cost-saving expenditures, conservation measures, and preventive maintenance. These kinds of expenditures, if they have positive rates of return, permit a manager to invest money just as if he were putting the money in a savings account.

. . . Suppose a thorough analysis of cost-saving alternatives reveals that [in year 2] a maintenance project will be required at a cost of $215. Call this project D. Alternatively the project can be done [in year 1] (at the same level of effectiveness) for only $200. Call this project C. All of the options are displayed in table 1.

Discounting in the public sector_table 1

[pp. 3-4]

Thaler believes that his example clinches the argument for discounting because the choice of project B (an expenditure of $205 in year 2) enables the manager to undertake project C in year 1, and thereby to “save” $10 in year 2. But Thaler’s “proof” is deeply flawed:

  • If a maintenance project is undertaken in year 1, it will pay off sooner than if it is undertaken in year 2 but, by the same token, its benefits will diminish sooner than if it is undertaken in year 2.
  • More generally, different projects cannot, by definition be equally effective. Projects A and B may be about equally effective by a particular measure, but because they are different they will differ in other respects, and those differences could be crucial in choosing between A and B.
  • Specifically, projects A and B might be equally effective when compared quantitatively in the context of an abstract scenario, but A might be more effective in an non-quantifiable but crucial respect. For example, the earlier expenditure on A might be viewed by a potential enemy as a more compelling deterrent than the later expenditure on B because it would demonstrate more clearly the U.S. government’s willingness and ability to mount a strong defense against the potential enemy. Alternatively, the earlier expenditure on B might cause the enemy to accelerate his own production of weapons or mobilization of troops. These are the kinds of crucial issues that discounting is powerless to illuminate, and may even obscure.
  • For a decision to rest on the use of a particular discount rate, there must be great certainty about the future costs and effectiveness of the alternatives. But there seldom is. The practice of discounting therefore promotes an illusion of certainty — a potentially dangerous illusion, in the case of national defense.
  • Finally, the “correct” discount rate depends on the options available to a particular manager of a particular government activity. Yet Thaler insists on the application of a uniform discount rate by all government managers (p. 6). By Thaler’s own example, such a practice could lead a manager to choose the wrong option.

So even if there is certainty about everything else, there is no “correct” discount rate, and it is presumptuous of Thaler to prescribe one on the assumption that it will fit every defense manager’s particular circumstances.**

Thaler does the same thing when he counsels intervention in personal decisions because too many people — in his view — make irrational decisions.

In the context of personal decision-making — which is the focal point of Thaler’s “libertarian” paternalism — the act of discounting is rational because it serves wealth-maximization. But life isn’t just about maximizing wealth. That’s why some people choose to have a lot of children, when doing so obviously reduces the amount that they can save. That’s why some choose to retire early rather than stay in stressful jobs. Rationality and wealth maximization are two very different things, but a lot of laypersons and too many economists are guilty of equating them.

If wealth-maximization is your goal, just stop drinking, smoking, enjoying good food, paying for entertainment, subscribing to newspapers and magazines, buying books, watering your lawn, mowing the grass, driving your car (except to work if you have no feasible alternative), and on into the night. You will accumulate a lot of money — if you invest wisely (there’s the rub of uncertainty) — but you will live a miserable life, unless you are the rare person who is a true miser.
__________
* If you are unfamiliar with the background of the Clark-Thaler exchange, and the reference to fiscal constraints, here’s the story: Since 1969 the Secretary of Defense has required the military departments to propose multi-year spending programs that are constrained by an explicit ceiling on each year’s spending. Fiscal guidance, as it is called, was lacking before that. But, in reality, defense budgets have always been constrained, ultimately by Congress. Fiscal guidance represents only a rough guess as to the total amount of defense spending that Congress will approve, and a rougher guess about the distribution of that spending among the military departments.

** Thaler’s example of a cost-saving investment is also a stretch, given how government budgets are decided. I gave it a pass in order to make the point that it wouldn’t save Thaler’s argument even if it were realistic. Here’s the missing reality:

Even if the Secretary of Defense (the grand panjandrum of defense managers) makes the kinds of moves counseled by Thaler, and even if his multi-year program sails through the Office and Management and Budget without a scratch, Congress has the final say. And Congress, though it pays attention to the multi-year plans coming from the Executive Branch, still makes annual appropriations. When it does so, it essentially ignores the internal logic of the multi-year plans (assuming that the Defense plan has an internal logic after it has been subjected to Pentagon politics). Instead, Congress divides the defense budget into various spending programs (see the list for national defense, here), and adjusts each program to suit the tastes, preferences, and moods of staffers, committee members, and committee chairman. Thus it is unlikely that the services’ maintenance and procurement budgets will emerge from Congress as they entered, with cross-temporal tradeoffs intact. A more rational budgeting strategy, from the perspective of the Secretary of Defense, is to submit plans that accord with the known preferences of Congress. Such plans may not incorporate the kind of trivial fine-tuning favored by Thaler, but they will more likely serve the national interest by yielding a robust defense.

Thaler’s Non-Revolution in Economics

James R. Rogers writes about Richard Thaler and behavioral economics:

[M]edia treatments of Thaler’s work, and of behavioral economics more generally, suggest that it provides a much-deserved comeuppance to conventional microeconomics. Well . . . Not quite….

… Economists, and rational choice theorists more generally, have a blind spot, [Thaler] argues, for just how often their assumptions about human behavior are inconsistent with real human behavior. That’s an important point.

Yet here’s where spin matters: Does Thaler provide a correction to previous economics, underscoring something everyone always knew but just ignored as a practical matter, or is Thaler’s work revolutionary, inviting a broad and necessary reconceptualization of standard microeconomics?…

… No. He has built a career by correcting a blind spot in modern academic economics. But his insight provides us with a “well, duh” moment rather than a “we need totally to rewrite modern economics” moment that some of his journalistic (and academic) supporters suggest it provides….

Thaler’s work underscores that the economist’s rationality postulates cannot account for all human behavior. That’s an important point. But I don’t know that many, or even any, economists very much believed the opposite in any serious way. [“Did Richard Thaler Really Shift the Paradigm in Economics?“, Library of Law and Liberty, October 11, 2017]

I have made the same point:

Even in those benighted days when I learned the principles of “micro” — just a few years ahead of Thaler — it was understood that the assumption of rationality was an approximation of the tendency of individuals to try to make themselves better off by making choices that would do so, given their tastes and preferences and the information that they possess at the time or could obtain at a cost commensurate with the value of the decision at hand.

Highly recommended reading: my previous post about Thaler and the many related posts listed at the end of it.

Richard Thaler, Nobel Laureate

I am slightly irked by today’s news of the selection of Richard Thaler as the 2017 Noblel laureate in economics. (It’s actually the Swedish National Bank’s Prize in Economic Sciences in Memory of Alfred Nobel, not one of the original prizes designated in Alfred Nobel’s will.) Granted, Thaler did some praiseworthy and groundbreaking work in behavioral economics, which is nicely summarized in this post by Timothy Taylor.

But Thaler, whom I knew slightly when he was a consultant to the outfit where I worked, gets a lot of pushback when he translates his work into normative prescriptions. He was already semi-famous (or infamous) for his collaboration with Cass Sunstein. Together and separately they propounded “libertarian paternalism”, an obnoxious oxymoron that they abandoned in favor of “nudging”. Thus their book-length epistle to true believers in governmental omniscience, Nudge: Improving Decisions about Health and Happiness.

It would be a vast understatement to say that I disagree with Thaler and Sunstein’s policy prescriptions. I have recorded my disagreements in many posts, which are listed below.

Sunstein at the Volokh Conspiracy
More from Sunstein
Cass Sunstein’s Truly Dangerous Mind
An (Imaginary) Interview with Cass Sunstein
Libertarian Paternalism
A Libertarian Paternalist’s Dream World
Slippery Sunstein
The Short Answer to Libertarian Paternalism
Second-Guessing, Paternalism, Parentalism, and Choice
Another Thought about Libertarian Paternalism
Back-Door Paternalism
Sunstein and Executive Power
Another Voice Against the New Paternalism
The Feds and “Libertarian Paternalism”
A Further Note about “Libertarian” Paternalism
Apropos Paternalism
Beware of Libertarian Paternalists
Discounting and Libertarian Paternalism
The Mind of a Paternalist
The Mind of a Paternalist, Revisited
Another Entry in the Sunstein Saga
The Sunstein Effect Is Alive and Well in the White House
Sunstein the Fatuous
Not-So-Random Thoughts (XVI) – first item
The Perpetual Nudger

The Perpetual Nudger

Richard Thaler, about whose “libertarian” paternalism I’ve written many times, is at it again. Thaler, in case you don’t know of him, is co-author (with Cass Sunstein) of Nudge: Improving Decisions About Health, Wealth, and Happiness. Thaler’s partnership with Sunstein should be enough to tell you that “libertarian” paternalism is about paternalism, not liberty. (My many essays about Thaler, Sunstein, and their works and minds are among the “related posts” at the bottom of this one.)

What’s Thaler up to now? It seems that he’s written a new book, Misbehaving: The Making of Behavioral Economics, from which he has drawn “Unless You Are Spock, Irrelevant Things Matter in Economic Behavior” (The New York Times, May 8, 2015). The article displays three of Thaler’s pet tricks:

  • He misrepresents classical microeconomics.
  • He assumes (implicitly) that everyone should make economic decisions from an omniscient, end-of-life perspective.
  • He substitutes his economic desiderata for the free choices of millions of persons.

Regarding Thaler’s misrepresentation of classical microeconomics, consider these passages from his article:

Economists [who adhere to traditional microeconomic theory] discount any factors that would not influence the thinking of a rational person. These things are supposedly irrelevant. But unfortunately for the theory, many supposedly irrelevant factors do matter.

Economists create this problem with their insistence on studying mythical creatures often known as Homo economicus. I prefer to call them “Econs”— highly intelligent beings that are capable of making the most complex of calculations but are totally lacking in emotions. Think of Mr. Spock in “Star Trek.” In a world of Econs, many things would in fact be irrelevant.

No Econ would buy a larger portion of whatever will be served for dinner on Tuesday because he happens to be hungry when shopping on Sunday. Your hunger on Sunday should be irrelevant in choosing the size of your meal for Tuesday. An Econ would not finish that huge meal on Tuesday, even though he is no longer hungry, just because he had paid for it. To an Econ, the price paid for an item in the past is not relevant in making the decision about how much of it to eat now.

An Econ would not expect a gift on the day of the year in which she happened to get married, or be born. What difference do these arbitrary dates make?…

Of course, most economists know that the people with whom they interact do not resemble Econs. In fact, in private moments, economists are often happy to admit that most of the people they know are clueless about economic matters. But for decades, this realization did not affect the way most economists did their work. They had a justification: markets. To defenders of economics orthodoxy, markets are thought to have magic powers.

This reads more like the confession of an Econ than an accurate description of the principles of microeconomics. Even in those benighted days when I learned the principles of “micro” — just a few years ahead of Thaler — it was understood that the assumption of rationality was an approximation of the tendency of individuals to try to make themselves better off by making choices that would do so, given their tastes and preferences and the information that they possess at the time or could obtain at a cost commensurate with the value of the decision at hand.

Yes, there are Econs, but they’re usually economists who also know full well that the mass of people don’t behave like Econs (as Thaler admits), and for whom the postulate of utter rationality is, as I’ve suggested, shorthand for an imprecise tendency. The fact that most human beings aren’t Econs doesn’t vitiate the essential truth of the traditional theory of choice. What seems to bother Thaler is that most people aren’t Econs; their tastes and preferences seem irrational to him, and it’s his (self-appointed) role in life to force them to make “correct” decisions (i.e., the decisions he would make).

I’ll say more about that. But I can’t let Thaler’s views about markets pass without comment. He continues:

There is a version of this magic market argument that I call the invisible hand wave…. Words and phrases such as high stakes, learning and arbitrage are thrown around to suggest some of the ways that markets can do their magic, but it is my claim that no one has ever finished making the argument with both hands remaining still.

Hand waving is required because there is nothing in the workings of markets that turns otherwise normal human beings into Econs. For example, if you choose the wrong career, select the wrong mortgage or fail to save for retirement, markets do not correct those failings. In fact, quite the opposite often happens. It is much easier to make money by catering to consumers’ biases than by trying to correct them.

This is a perverted description of the role of markets. And it betrays the peculiar vantage point from which Thaler views economic decision-making. Markets provide information, much of which reflects decisions already made by others. Markets, in other words, enable persons who are contemplating decisions to learn from the decisions of others — whether those others view their decisions as bad, good, or indifferent. But it’s up to persons who are contemplating decisions to take advantage of the information provide by markets. I’ve never known anyone to suggest that markets are antidote of sorts for choices already made.

Moreover, markets don’t merely “cater to consumers’ biases.” Markets enable businesses to shape consumers’ tastes and preferences by presenting them with information about the availability and advantages of new and improved products and services. Markets transmit information in two directions, not just from consumers to producers.

What about people who make “bad” choices, such as choosing the “wrong” career, selecting the “wrong” mortgage, or failing to save for retirement? That’s Thaler the Nudge talking. He wants to save people from such fates. While he’s at it, perhaps he can also save them from choosing the wrong spouse or the wrong number of children.

I say that because when Thaler writes about “wrong” choices in such matters, he writes as if people can and should make their minute-by-minute, hour-by-hour, day-by-day, week-by-week, and year-by-year decisions by reckoning (like an Econ) how those decisions will affect their “score” when they reach the finish line of life, or some other arbitrary point in time. What about all those points in between, don’t they count, too? And who knows when the finish line will arrive? Given such quandaries and uncertainties, how are the irrational masses supposed to cope? Well, they don’t — or so Thaler would like to believe. So it follows that Thaler must cope for them, but only when it comes to his pet projects (e.g., automatic enrollment in 401(k) plans). He’s silent about the myriad other decisions that real people face.

Why should Thaler care if X chooses the “wrong” career, takes a mortgage he can’t afford, doesn’t save “enough” for retirement, chooses the “wrong” spouse, or has “too many” children? It’s paternalistic thinking like Thaler’s that leads politicians to concoct programs that transfer the cost of bad choices from those who make them to those who are just trying to live their lives without making them. I expect that Thaler would respond by saying that government is already in the business of making such transfers, so the best thing is to reduce the need for them. No, the best thing is to make individuals responsible for the consequences of their choices, and let them — and others — learn from the consequences. The best thing is to dismantle the dependency-creating, handout-giving functions of government. And a behavioral economist like Thaler is just the kind of person who could mount a strong economic case against those functions — if he were of a mind to do so.

Thaler doesn’t seem to be of a mind to do so because what he really wants is for people to make the “right” decisions, by his lights. Why? Because he knows what’s best for all of us; for example:

Consider defined-contribution retirement plans like 401(k)’s. Econs would have no trouble figuring out how much to save for retirement and how to invest the money, but mere humans can find it quite tough. So knowledgeable employers have incorporated three [features] in their plan design: they automatically enroll employees (who can opt out), they automatically increase the saving rate every year, and they offer a sensible default investment choice like a target date fund. These features significantly improve the outcomes of plan participants…. [TEA: This assumes that everyone should care more about retirement income than about anything else, at the margin.]

These retirement plans also have a supposedly relevant factor: Contributions and capital appreciation are tax-sheltered until retirement. This tax break was created to induce people to save more….

[The authors of a recent study] conclude: “…Automatic enrollment or default policies that nudge individuals to save more could have larger impacts on national saving at lower social cost.”

Get it? One of the objectives of nudging people to participate in 401(k) plans is to raise the national saving rate. Anyone who’s passingly familiar with this blog knows that I often decry government policies that discourage saving, especially by imposing more taxes on high-earners, because such policies reduce saving and therefore reduce investment and economic growth. But saving should be a voluntary thing, and the national saving rate should emerge from voluntary decisions. It shouldn’t be dictated by those, like Thaler, who view a higher national saving rate as a holy grail, to be advanced by policies that effectively dictate the “choices” that people make. But that’s Thaler for you: Imposing his economic desiderata on others.

I learned one thing from Thaler’s article: He’s a quintessential Econ. Pot. Kettle. Black.

*     *     *

Related reading: John Cochrane, “Homo Economicus or Homo Paleas?,” The Grumpy Economist, May 22, 2015 (In which Professor Cochrane reinforces some of my points and makes some others — all telling.)

*     *     *

Related posts:

The Rationality Fallacy
Libertarian Paternalism
A Libertarian Paternalist’s Dream World
The Short Answer to Libertarian Paternalism
Second-Guessing, Paternalism, Parentalism, and Choice
Another Thought about Libertarian Paternalism
Back-Door Paternalism
Another Voice Against the New Paternalism
Slippery Paternalists
The Feds and “Libertarian Paternalism”
A Further Note about “Libertarian” Paternalism
Apropos Paternalism
Irrationality, Suboptimality, and Voting
Beware of Libertarian Paternalists
More about Paternalism
Columnist, Heal Thyself
Discounting and Libertarian Paternalism
The Mind of a Paternalist
The Mind of a Paternalist, Revisited
Pseudo-Libertarian Sophistry vs. True Libertarianism
Irrational Rationality
Not-So-Random Thoughts (III) (third item)
The Sunstein Effect Is Alive and Well in the White House (see “related posts” for many more about Sunstein)
Not-So-Random Thoughts (XII) (eighth item)

Signature

Not-So-Random Thoughts (III)

Links to the other posts in this occasional series may be found at “Favorite Posts,” just below the list of topics.

Apropos Science

In the vein of “Something from Nothing?” there is this:

[Stephen] Meyer also argued [in a a recent talk at the University Club in D.C.] that biological evolutionary theory, which “attempts to explain how new forms of life evolved from simpler pre-existing forms,” faces formidable difficulties. In particular, the modern version of Darwin’s theory, neo-Darwinism, also has an information problem.

Mutations, or copying errors in the DNA, are analogous to copying errors in digital code, and they supposedly provide the grist for natural selection. But, Meyer said: “What we know from all codes and languages is that when specificity of sequence is a condition of function, random changes degrade function much faster than they come up with something new.”…

The problem is comparable to opening a big combination lock. He asked the audience to imagine a bike lock with ten dials and ten digits per dial. Such a lock would have 10 billion possibilities with only one that works. But the protein alphabet has 20 possibilities at each site, and the average protein has about 300 amino acids in sequence….

Remember: Not just any old jumble of amino acids makes a protein. Chimps typing at keyboards will have to type for a very long time before they get an error-free, meaningful sentence of 150 characters. “We have a small needle in a huge haystack.” Neo-Darwinism has not solved this problem, Meyer said. “There’s a mathematical rigor to this which has not been a part of the so-called evolution-creation debate.”…

“[L]eading U.S. biologists, including evolutionary biologists, are saying we need a new theory of evolution,” Meyer said. Many increasingly criticize Darwinism, even if they don’t accept design. One is the cell biologist James Shapiro of the University of Chicago. His new book is Evolution: A View From the 21st Century. He’s “looking for a new evolutionary theory.” David Depew (Iowa) and Bruce Weber (Cal State) recently wrote in Biological Theory that Darwinism “can no longer serve as a general framework for evolutionary theory.” Such criticisms have mounted in the technical literature. (Tom Bethell, “Intelligent Design at the University Club,” American Spectator, May 2012)

And this:

[I]t is startling to realize that the entire brief for demoting human beings, and organisms in general, to meaningless scraps of molecular machinery — a demotion that fuels the long-running science-religion wars and that, as “shocking” revelation, supposedly stands on a par with Copernicus’s heliocentric proposal — rests on the vague conjunction of two scarcely creditable concepts: the randomness of mutations and the fitness of organisms. And, strangely, this shocking revelation has been sold to us in the context of a descriptive biological literature that, from the molecular level on up, remains almost nothing buta documentation of the meaningfully organized, goal-directed stories of living creatures.

Here, then, is what the advocates of evolutionary mindlessness and meaninglessness would have us overlook. We must overlook, first of all, the fact that organisms are masterful participants in, and revisers of, their own genomes, taking a leading position in the most intricate, subtle, and intentional genomic “dance” one could possibly imagine. And then we must overlook the way the organism responds intelligently, and in accord with its own purposes, to whatever it encounters in its environment, including the environment of its own body, and including what we may prefer to view as “accidents.” Then, too, we are asked to ignore not only the living, reproducing creatures whose intensely directed lives provide the only basis we have ever known for the dynamic processes of evolution, but also all the meaning of the larger environment in which these creatures participate — an environment compounded of all the infinitely complex ecological interactions that play out in significant balances, imbalances, competition, cooperation, symbioses, and all the rest, yielding the marvelously varied and interwoven living communities we find in savannah and rainforest, desert and meadow, stream and ocean, mountain and valley. And then, finally, we must be sure to pay no heed to the fact that the fitness, against which we have assumed our notion of randomness could be defined, is one of the most obscure, ill-formed concepts in all of science.

Overlooking all this, we are supposed to see — somewhere — blind, mindless, random, purposeless automatisms at the ultimate explanatory root of all genetic variation leading to evolutionary change. (Stephen L. Talbott, “Evolution and the Illusion of Randomness,” The New Atlantis, Fall 2011)

My point is not to suggest that that the writers are correct in their conjectures. Rather, the force of their conjectures shows that supposedly “settled” science is (a) always far from settled (on big questions, at least) and (b) necessarily incomplete because it can never reach ultimate truths.

Trayvon, George, and Barack

Recent revelations about the case of Trayvon Martin and George Zimmerman suggest the following:

  • Martin was acting suspiciously and smelled of marijuana.
  • Zimmerman was rightly concerned about Martin’s behavior, given the history of break-ins in Zimmerman’s neighborhood.
  • Martin attacked Zimmerman, had him on the ground, was punching his face, and had broken his nose.
  • Zimmerman shot Martin in self-defense.

Whether the encounter was “ultimately avoidable,” as a police report asserts, is beside the point.  Zimmerman acted in self-defense, and the case against him should be dismissed. The special prosecutor should be admonished by the court for having succumbed to media and mob pressure in bringing a charge of second-degree murder against Zimmerman.

What we have here is the same old story: Black “victim”–>media frenzy to blame whites (or a “white Hispanic”), without benefit of all relevant facts–>facts exonerate whites. To paraphrase Shakespeare: The first thing we should do after the revolution is kill all the pundits (along with the lawyers).

Obama famously said, “”If I had a son, he would look like Trayvon.” Given the thuggish similarity between Trayvon and Obama (small sample here), it is more accurate to say that if Obama had a son, he would be like Trayvon.

Creepy People

Exhibit A is Richard Thaler, a self-proclaimed libertarian who is nothing of the kind. Thaler defends the individual mandate that is at the heart of Obamacare (by implication, at least), when he attacks the “slippery slope” argument against it. Annon Simon nails Thaler:

Richard Thaler’s NYT piece from a few days ago, Slippery-Slope Logic, Applied to Health Care, takes conservatives to task for relying on a “slippery slope” fallacy to argue that Obamacare’s individual mandate should be invalidated. Thaler believes that the hypothetical broccoli mandate — used by opponents of Obamacare to show that upholding the mandate would require the Court to acknowledge congressional authority to do all sorts of other things — would never be adopted by Congress or upheld by a federal court. This simplistic view of the Obamacare litigation obscures legitimate concerns over the amount of power that the Obama administration is claiming for the federal government. It also ignores the way creative judges can use previous cases as building blocks to justify outcomes that were perhaps unimaginable when those building blocks were initially formed….

[N]ot all slippery-slope claims are fallacious. The Supreme Court’s decisions are often informed by precedent, and, as every law student learned when studying the Court’s privacy cases, a decision today could be used by a judge ten years from now to justify outcomes no one had in mind.

In 1965, the Supreme Court in Griswold v. Connecticut, referencing penumbras and emanations, recognized a right to privacy in marriage that mandated striking down an anti-contraception law.

Seven years later, in Eisenstadt v. Baird, this right expanded to individual privacy, because after all, a marriage is made of individuals, and “[i]f the right of privacy means anything, it is the right of the individual . . . to be free from unwarranted governmental intrusion into matters so fundamentally affecting a person as the decision whether to bear or beget a child.”

By 1973 in Roe v. Wade, this precedent, which had started out as a right recognized in marriage, had mutated into a right to abortion that no one could really trace to any specific textual provision in the Constitution. Slippery slope anyone?

This also happened in Lawrence v. Texas in 2003, where the Supreme Court struck down an anti-sodomy law. The Court explained that the case did not involve gay marriage, and Justice O’Connor’s concurrence went further, distinguishing gay marriage from the case at hand. Despite those pronouncements, later decisions enshrining gay marriage as a constitutionally protected right have relied upon Lawrence. For instance, Goodridge v. Department of Public Health (Mass. 2003) cited Lawrence 9 times, Varnum v. Brien (Iowa 2009) cited Lawrence 4 times, and Perry v. Brown (N.D. Cal, 2010) cited Lawrence 9 times.

However the Court ultimately rules, there is no question that this case will serve as a major inflection point in our nation’s debate about the size and scope of the federal government. I hope it serves to clarify the limits on congressional power, and not as another stepping stone on the path away from limited, constitutional government. (“The Supreme Court’s Slippery Slope,” National Review Online, May 17, 2012)

Simon could have mentioned Wickard v. Filburn (1942), in which the Supreme Court brought purely private, intrastate activity within the reach of Congress’s power to regulate interstate commerce. The downward slope from Wickard v. Filburn to today’s intrusive regulatory regime has been been not merely slippery but precipitous.

Then there is Brian Leiter, some of whose statist musings I have addressed in the past. It seems that Leiter has taken to defending the idiotic Elizabeth Warren for her convenient adoption of a Native American identity. Todd Zywicki tears a new one for Leiter:

I was out of town most of last week and I wasn’t planning on blogging any more on the increasingly bizarre saga of Elizabeth Warren’s claim to Native American ancestry, which as of the current moment appears to be entirely unsubstantiated.  But I was surprised to see Brian Leiter’s post doubling-down in his defense of Warren–and calling me a “Stalinist” to boot (although I confess it is not clear why or how he is using that term).  So I hope you will indulge me while I respond.

First, let me say again what I expressed at the outset–I have known from highly-credible sources for a decade that in the past Warren identified herself as a Native American in order to put herself in a position to benefit from hiring preferences (I am certain that Brian knows this now too).  She was quite outspoken about it at times in the past and, as her current defenses have suggested, she believed that she was entitled to claim it.  So there would have been no reason for her to not identify as such and in fact she was apparently quite unapologetic about it at the time….

Second, Brian seems to believe for some reason that the issue here is whether Warren actually benefited from a hiring preference.  Of course it is not (as my post makes eminently clear).  The issue I raised is whether Warren made assertions as part of the law school hiring process in order to put herself in a position to benefit from a hiring preference for which she had no foundation….

Third, regardless of why she did it, Warren herself actually had no verifiable basis for her self-identification as Native American.  At the very least her initial claim was grossly reckless and with no objective foundation–it appears that she herself has never had any foundation for the claim beyond “family lore” and her “high cheekbones.”… Now it turns out that the New England Historical Genealogical Society, which had been the source for the widely-reported claim that she might be 1/32 Cherokee, has rescinded its earlier conclusion and now says “We have no proof that Elizabeth Warren’s great great great grandmother O.C. Sarah Smith either is or is not of Cherokee descent.”  The story adds, “Their announcement came in the wake of an official report from an Oklahoma county clerk that said a document purporting to prove Warren’s Cherokee roots — her great great great grandmother’s marriage license application — does not exist.”  A Cherokee genealogist has similarly stated that she can find no evidence to support Warren’s claim.  At this point her claim appears to be entirely unsupported as an objective matter and it appears that she herself had no basis for it originally.

Fourth, Brian’s post also states the obvious–that there is plenty of bad blood between Elizabeth and myself.  But, of course, the only reason that this issue is interesting and relevant today is because Warren is running for the U.S. Senate and is the most prominent law professor in America at this moment.

So, I guess I’ll conclude by asking the obvious question: if a very prominent conservative law professor (say, for example, John Yoo) had misrepresented himself throughout his professorial career in the manner that Elizabeth Warren has would Brian still consider it to be “the non-issue du jour“?  Really?

I’m not sure what a “Stalinist” is.  But I would think that ignoring a prominent person’s misdeeds just because you like her politics, and attacking the messenger instead, just might fit the bill. (“New England Genealogical Historical Society Rescinds Conclusion that Elizabeth Warren Might Be Cherokee,” The Volokh Conspiracy, May 17, 2012)

For another insight into Leiter’s character, read this and weep not for him.

Tea Party Sell-Outs

Business as usual in Washington:

This week the Club for Growth released a study of votes cast in 2011 by the 87 Republicans elected to the House in November 2010. The Club found that “In many cases, the rhetoric of the so-called “Tea Party” freshmen simply didn’t match their records.” Particularly disconcerting is the fact that so many GOP newcomers cast votes against spending cuts.

The study comes on the heels of three telling votes taken last week in the House that should have been slam-dunks for members who possess the slightest regard for limited government and free markets. Alas, only 26 of the 87 members of the “Tea Party class” voted to defund both the Economic Development Administration and the president’s new Advanced Manufacturing Technology Consortia program (see my previous discussion of these votes here) and against reauthorizing the Export-Import Bank (see my colleague Sallie James’s excoriation of that vote here).

I assembled the following table, which shows how each of the 87 freshman voted. The 26 who voted for liberty in all three cases are highlighted. Only 49 percent voted to defund the EDA. Only 56 percent voted to defund a new corporate welfare program requested by the Obama administration. And only a dismal 44 percent voted against reauthorizing “Boeing’s bank.” That’s pathetic. (Tad DeHaven, “Freshman Republicans Switch from Tea to Kool-Aid,” Cato@Liberty, May 17, 2012)

Lesson: Never trust a politician who seeks a position of power, unless that person earns trust by divesting the position of power.

PCness

Just a few of the recent outbreaks of PCness that enraged me:

Michigan Mayor Calls Pro-Lifers ‘Forces of Darkness’” (reported by LifeNews.com on May 11, 2012)

US Class Suspended for Its View on Islam” (reported by CourierMail.com.au, May 11, 2012)

House Democrats Politicize Trayvon Martin” (posted at Powerline, May 8, 2012)

Chronicle of Higher Education Fires Blogger for Questioning Seriousness of Black Studies Depts.” (posted at Reason.com/hit & run, May 8, 2012)

Technocracy, Externalities, and Statism

From a review of Robert Frank’s The Darwin Economy:

In many ways, economics is the discipline best suited to the technocratic mindset. This has nothing to do with its traditional subject matter. It is not about debating how to produce goods and services or how to distribute them. Instead, it relates to how economics has emerged as an approach that distances itself from democratic politics and provides little room for human agency.

Anyone who has done a high-school course in economics is likely to have learned the basics of its technocratic approach from the start. Students have long been taught that economics is a ‘positive science’ – one based on facts rather than values. Politicians are entitled to their preferences, so the argument went, but economists are supposed to give them impartial advice based on an objective examination of the facts.

More recently this approach has been taken even further. The supposedly objective role of the technocrat-economist has become supreme, while the role of politics has been sidelined….

The starting point of The Darwin Economy is what economists call the collective action problem: the divergence between individual and collective interests. A simple example is a fishermen fishing in a lake. For each individual, it might be rational to catch as many fish as possible, but if all fishermen follow the same path the lake will eventually be empty. It is therefore deemed necessary to find ways to negotiate this tension between individual and group interests.

Those who have followed the discussion of behavioural economics will recognise that this is an alternative way of viewing humans as irrational. Behavioural economists focus on individuals behaving in supposedly irrational ways. For example, they argue that people often do not invest enough to secure themselves a reasonable pension. For Frank, in contrast, individuals may behave rationally but the net result of group behaviour can still be irrational….

…From Frank’s premises, any activity considered harmful by experts could be deemed illegitimate and subjected to punitive measures….

…[I]t is … wrong to assume that there is no more scope for economic growth to be beneficial. Even in the West, there is a long way to go before scarcity is limited. This is not just a question of individuals having as many consumer goods as they desire – although that has a role. It also means having the resources to provide as many airports, art galleries, hospitals, power stations, roads, schools, universities and other facilities as are needed. There is still ample scope for absolute improvements in living standards…. (Daniel Ben-ami, “Delving into the Mind of the Technocrat,” The Spiked Review of Books, February 2012)

There is much to disagree with in the review, but the quoted material is right on. It leads me to quote myself:

…[L]ife is full of externalities — positive and negative. They often emanate from the same event, and cannot be separated. State action that attempts to undo negative externalities usually results in the negation or curtailment of positive ones. In terms of the preceding example, state action often is aimed at forcing the attractive woman to be less attractive, thus depriving quietly appreciative men of a positive externality, rather than penalizing the crude man if his actions cross the line from mere rudeness to assault.

The main argument against externalities is that they somehow result in something other than a “social optimum.” This argument is pure, economistic hokum. It rests on the unsupportable belief in a social-welfare function, which requires the balancing (by an omniscient being, I suppose) of the happiness and unhappiness that results from every action that affects another person, either directly or indirectly….

A believer in externalities might respond by saying that they are of “economic” importance only as they are imposed on bystanders as a spillover from economic transactions, as in the case of emissions from a power plant that can cause lung damage in susceptible persons. Such a reply is of a kind that only an omniscient being could make with impunity. What privileges an economistic thinker to say that the line of demarcation between relevant and irrelevant acts should be drawn in a certain place? The authors of campus speech codes evidently prefer to draw the line in such a way as to penalize the behavior of the crude man in the above example. Who is the economistic thinker to say that the authors of campus speech codes have it wrong? And who is the legalistic thinker to say that speech should be regulated by deferring to the “feelings” that it arouses in persons who may hear or read it?

Despite the intricacies that I have sketched, negative externalities are singled out for attention and rectification, to the detriment of social and economic intercourse. Remove the negative externalities of electric-power generation and you make more costly (and even inaccessible) a (perhaps the) key factor in America’s economic growth in the past century. Try to limit the supposed negative externality of human activity known as “greenhouse gases” and you limit the ability of humans to cope with that externality (if it exists) through invention, innovation, and entrepreneurship. Limit the supposed negative externality of “offensive” speech and you quickly limit the range of ideas that may be expressed in political discourse. Limit the supposed externalities of suburban sprawl and you, in effect, sentence people to suffer the crime, filth, crowding, contentiousness, heat-island effects, and other externalities of urban living.

The real problem is not externalities but economistic and legalistic reactions to them….

The main result of rationalistic thinking — because it yields vote-worthy slogans and empty promises to fix this and that “problem” — is the aggrandizement of the state, to the detriment of civil society.

The fundamental error of rationalists is to believe that “problems” call for collective action, and to identify collective action with state action. They lack the insight and imagination to understand that the social beings whose voluntary, cooperative efforts are responsible for mankind’s vast material progress are perfectly capable of adapting to and solving “problems,” and that the intrusions of the state simply complicate matters, when not making them worse. True collective action is found in voluntary social and economic intercourse, the complex, information-rich content of which rationalists cannot fathom. They are as useless as a blind man who is shouting directions to an Indy 500 driver….

Theodore Dalrymple

If you do not know of Theodore Dalrymple, you should. His book, In Praise of Prejudice: The Necessity of Preconceived Ideas, inspired  “On Liberty,” the first post at this blog. Without further ado, I commend these recent items by and about Dalrymple:

Rotting from the Head Down” (an article by Dalrymple about the social collapse of Britain, City Journal, March 8, 2012)

Symposium: Why Do Progressives Love Criminals?” (Dalrymple and others, FrontPageMag.com, March 9, 2012)

Doctors Should Not Vote for Industrial Action,” a strike, in American parlance (a post by Dalrymple, The Social Affairs Unit, March 22, 2012)

The third item ends with this:

The fact is that there has never been, is never, and never will be any industrial action over the manifold failures of the public service to provide what it is supposed to provide. Whoever heard of teachers going on strike because a fifth of our children emerge from 11 years of compulsory education unable to read fluently, despite large increases in expenditure on education?

If the doctors vote for industrial action, they will enter a downward spiral of public mistrust of their motives. They should think twice before doing so.

Amen.

The Higher-Eduction Bubble

The title of a post at The Right Coast tells the tale: “Under 25 College Educated More Unemployed than Non-college Educated for First Time.” As I wrote here,

When I entered college [in 1958], I was among the 28 percent of high-school graduates then attending college. It was evident to me that about half of my college classmates didn’t belong in an institution of higher learning. Despite that, the college-enrollment rate among high-school graduates has since doubled.

(Also see this.)

American taxpayers should be up in arms over the subsidization of an industry that wastes their money on the useless education of masses of indeducable persons. Then there is the fact that taxpayers are forced to subsidize the enemies of liberty who populate university faculties.

The news about unemployment among college grads may hasten the bursting of the higher-ed bubble. It cannot happen too soon.

The Mind of a Paternalist, Revisited

If there was any doubt that Richard Thaler is not a “libertarian,” even though he implies that he is one when he calls himself a “libertarian paternalist,” read this:

There is another possible argument for including the rich in these tax cuts, one based on “fairness.” By this reasoning, the wealthy are entitled to low tax rates because they have temporarily had them, and it would now be unfair to take them back.

But by that same argument, unemployment insurance should never expire, and every day should be your birthday. “Temporary” has no meaning if it bestows a permanent right.

By Thaler’s convoluted logic, the money one earns is a gift from government, and those who pay taxes have no greater claim on their own money than those to whom the government hands it. How is this “libertarian,” by any reasonable interpretation of that word?

As I have said in various ways, Thaler is a paternalist but not a libertarian. One cannot be both.

Related posts:
Beware of Libertarian Paternalists
Columnist, Heal Thyself
Discounting and “Libertarian” Paternalism
The Mind of a Paternalist

The Mind of a Paternalist

The April 2010 edition of Cato Unbound, “Slippery Slopes and the New Paternalism,” is about “libertarian” paternalism and whether it deserves to be called libertarian, without the scare quotes. Richard Thaler, of whom I have written extensively (e.g., see this, this, and this), is a key contributor to the colloquy and a fierce defender of his ideas, which have had their fullest exposition in Nudge: Improving Decisions About Health, Wealth, and Happiness. The co-author of Nudge is Cass Sunstein, which should be enough to tell you that “libertarian” paternalism is about paternalism, not liberty. (Even The New York Times Magazine can’t disguise Sunstein’s arrogance.)

Thaler’s method of defending his position is to insist, repeatedly, that it is “libertarian,” even as he oozes paternalism. Consider one of his entries (“The Argument Clinic“) in the Cato Unbound colloquium, where he says the following:

[S]ince the word paternalism is what seems to give [the colloquium’s lead essayist Glen] Whitman fits, let’s re-label our policy “Best Guess”. “Best Guess” is the policy of choosing the choice architecture that is your best guess of what the participants would choose for themselves if they had the time and expertise to make an informed choice.

If that isn’t pure, presumptive arrogance, I don’t know what is. It conveys a presumption of omniscience on the part of the “best guesser,” along with a presumption that the “best guesser” ought to be making decisions for others.

Here’s another passage from Thaler’s post:

In many domains we [paternalists] can drastically improve on what is customary. Consider organ donations. In most states in the United States, to make your donation available you have to take some action such as sign the back of your driver’s license and get two witnesses to sign it. In some countries such as Spain they have switched to an “opt out” system called presumed consent. In Nudge we endorse a third approach, in this domain called “mandated choice.” It also happens to be used in my home state of Illinois.

Under this plan, when you go in to get your drivers license picture retaken every few years, you are asked whether you want to be a donor or not. You must say yes or no to get a license. About two thirds of drivers are saying yes, and lots of lives will be prolonged as a result. This is a great example of libertarian Best Guess in action. Although a large majority of people say in polls that they would want their organs harvested, many never get around to opting in, and a vocal minority in the United States object strenuously to the idea of presumed consent. So it is worthwhile to find a policy that gets many of the benefits of presumed consent without while honoring the preferences of those who object to having to opt out. Mandated choice has some other advantages in this context, namely that families are less likely to overrule the choices of the donor if that choice has been made actively rather than passively.

Let me count the assumptions: (1) Organ donation is the government’s business. (2) The government should deny a driver’s license to a person does not wish to say whether or not he wishes to be an organ donor. (3) This oppression of an individual is justified by the supposed fact that “a large majority of people . . . say that they would want their organs harvested.” Why give the government yet another excuse to intrude into private matters? The obvious answer to that question is that Thaler can’t resist the urge to lead others toward the decisions that he wants them to make. If, when you renew your driver’s license, you’re asked if you want to be an organ donor, your likely (politically correct) response is to say “yes,” even if you don’t really want to be an organ donor. This is not freedom of choice; it is subtle coercion.

Thaler stretches hard to discredit Whitman’s objections to “libertarian” paternalism; for example:

One of the examples we discuss in Nudge is an innovation by the city of Chicago on a dangerous curve on Lake Shore Drive. The city painted horizontal lines across the road that get closer and closer together as the driver approaches the apex of the curve. As we recently posted on our blog, this innovation has reduced accidents by 36%. Does Whitman think this is bad because it was implemented by the government? Should only private toll roads be allowed to think creatively? And notice that the “customary” signage in this location, which included a reduction in the speed limit to 20 mph, was less effective than the nudge.

What does this have to do the subject at hand? The government of Chicago is already in place as the paternalistic provider of Chicago’s streets — having usurped voluntary private decisions about the placement, construction, upkeep, and regulation of those streets. Given that the government is the provider of Chicago’s streets, it has assumed the duty of making those streets “safe” for their users, without the benefit of market feedback about users’ preferences as to the the tradeoff between safety and other attributes (e.g., speed). The government merely adopted an innovation (the horizontal lines), which replaced (or supplemented) another innovation (a speed-limit sign). Horizontal lines are no more or less paternalistic than speed-limit signs, merely different in their effectiveness along one dimension of street-users’ preferences.

In the examples I have given, Thaler simply assumes that government is “the answer.” Instead of arguing that decisions are best made in by private, voluntary actors, he too readily accepts the role of government and, instead, seeks ways to embed it more deeply in our lives by making it seem more effective. That is one path down the slippery slope toward serfdom — a slope that Thaler denies, even as he pours intellectual lubricant on it.

Thaler’s invocation of the Lake Shore Drive innovation is especially revealing. Only a hardened paternalist (if a closeted one) would stretch so hard (and fail) to find something non-paternalistic about one of America’s most paternalistic institutions: the government of Chicago.

Discounting and “Libertarian” Paternalism

Richard Thaler is a leading proponent of “libertarian” (or “soft”) paternalism. But there is nothing “libertarian” or “soft” about paternalism, no matter what it’s called. (See this, for example.)

Thaler’s embrace of paternalism springs from arrogance — the presumption that he knows how others should lead their lives. A sign of that arrogance, and one that finds its way into Thaler’s rationale for paternalism, is the identification of well-being with wealth-maximization.

The surest route to wealth-maximization — for the Thalers of this world — is to evaluate alternative courses of action by discounting projected streams of revenues (income) or costs (expenses). Consider the following passage from an old paper of Thaler’s:

A discount rate is simply a shorthand way of defining a firm’s, organization’s, or person’s time value of money. This rate is always determined by opportunity costs. Opportunity costs, in turn, depend on circumstances. Consider the following example: An organization must choose between two projects which yield equal effectiveness (or profits in the case of a firm). Project A will cost $200 this year and nothing thereafter. Project B will cost $205 next year and nothing before or after. Notice that if project B is selected the organization will have an extra $200 to use for a year. Whether project B is preferred simply depends on whether it is worth $5 to the organization to have those $200 to use for a year. That, in turn, depends on what the organization would do with the money. If the money would just sit around for the year, its time value is zero and project A should be chosen. However, if the money were put in a 5 percent savings account, it would earn $10 in the year and thus the organization would gain $5 by selecting project B. (Center for Naval Analyses,  “Discounting and Fiscal Constraints: Why Discounting is Always Right,” Professional Paper 257, August 1979, pp. 1-2)

More generally, the preferred alternative — among alternatives conferring equal benefits (effectiveness, output, utility, satisfaction) — is the one whose cost stream has the lowest present value:

the value on a given date of a future payment or series of future payments, discounted to reflect the time value of money and other factors such as investment risk.

It is my view that economists seize on discounting as a way of evaluating options because it is a trivial exercise to compute the present value of a stream of outlays (or receipts). I should say that discounting seems like a trivial exercise because the difficult tasks — choosing a time horizon, choosing a discount rate, and translating outlays into future benefits — are assumed away.

Consider the choices facing a government decision-maker. In Thaler’s simplified version of reality, a government decision-maker (manager) faces a choice between two projects that (ostensibly) would deliver equal benefits (effectiveness, output), even though their costs would be incurred at different times. Specifically, the manager must choose between project A, at a cost of $200 in year 1, and equally-effective project B, at a cost of $205 in year 2. Thaler claims that the manager can choose between the two projects by discounting their costs:

A [government] manager . . . cannot earn bank interest on funds withheld for a year. . . .  However, there will generally exist other ways for the manager to “invest” funds which are available. Examples include cost-saving expenditures, conservation measures, and preventive maintenance. These kinds of expenditures, if they have positive rates of return, permit a manager to invest money just as if he were putting the money in a savings account.

. . . Suppose a thorough analysis of cost-saving alternatives reveals that [in year 2] a maintenance project will be required at a cost of $215. Call this project D. Alternatively the project can be done [in year 1] (at the same level of effectiveness) for only $200. Call this project C. All of the options are displayed in table 1.

Discounting in the public sector_table 1

(op. cit, pp. 3-4)

Thaler believes that his example clinches the argument for discounting because the choice of project B (an expenditure of $205 in year 2) enables the manager to undertake project C in year 1, and thereby to “save” $10 in year 2. But Thaler’s “proof” is deeply flawed:

  • If a maintenance project is undertaken in year 1, it will pay off sooner than if it is undertaken in year 2 but, by the same token, its benefits will diminish sooner than if it is undertaken in year 2.
  • More generally, different projects cannot, by definition be equally effective. Projects A and B may be about equally effective by a particular measure of effectiveness, but because they are different things they will differ in other respects, and those differences could be crucial in choosing between A and B.
  • Specifically, projects A and B might be equally effective when compared quantitatively in the context of an abstract scenario, but A might be more effective in an unquantifiable but crucial respect. For example, the earlier expenditure on A might be viewed by a potential enemy as a more compelling deterrent than the later expenditure on B because it would demonstrate more clearly the government’s willingness and ability to mount a strong defense against the potential enemy.
  • The “correct” discount rate depends on the options available to a particular manager of a particular government activity. Yet Thaler insists on the application of a uniform discount rate by all government managers (op. cit., p. 6). By Thaler’s own example, such a practice could lead a manager to choose the wrong option.
  • For a decision to rest on the use of a particular discount rate, there must be great certainty about the future costs and benefits of alternative courses of action. But there seldom is. The practice of discounting therefore promotes an illusion of certainty — a potentially dangerous illusion, in the case of national defense.

The fundamental problem is that Thaler presumes to place himself in the position of the decision-maker. But every decision-maker — from a senior government executive to a young person starting his first job — has a unique set of objectives, options, uncertainties, and risk preferences. Because Thaler cannot locate himself in a decision-maker’s unique situation, he can exercise his penchant for arrogance only by insisting that each and every decision-maker adhere to a simplistic rule of thumb — one that obtains results favored by Thaler.

In the context of personal decision-making — which is the focal point of “libertarian” paternalism — the act of discounting serves wealth-maximization (a favored paternalistic objective). But, as I have said,

[t]here is simply a lot more to maximizing satisfaction than maximizing wealth. That’s why some people choose to have a lot of children, when doing so obviously reduces the amount they can save. That’s why some choose to retire early rather than stay in stressful jobs. Rationality and wealth maximization are two very different things, but a lot of laypersons and too many economists are guilty of equating them.

The 34-year-old Richard Thaler of 1979 was arrogantly wrong about government decision-making. The 65-year old Thaler of 2010 is — and has been — arrogantly wrong about personal decision-making.

I will have more to say about Thaler’s wrong-headedness. In the meantime, read this post and follow the links therein.

Beware of Libertarian Paternalists

I have written extensively about paternalism of the so-called libertarian variety. (See this post and the posts linked therein.) Glen Whitman, in two recent posts at Agoraphilia, renews his attack on “libertarian paternalism,” the main proponents of which are Cass Sunstein and Richard Thaler (S&T). In the first of the two posts, Whitman writes:

[Thaler] continues to disregard the distinction between public and private action.

Some critics contend that behavioral economists have neglected the obvious fact that bureaucrats make errors, too. But this misses the point. After all, wouldn’t you prefer to have a qualified, albeit human, technician inspect your aircraft’s engines rather than do it yourself?

The owners of ski resorts hire experts who have previously skied the runs, under various conditions, to decide which trails should be designated for advanced skiers. These experts know more than a newcomer to the mountain. Bureaucrats are human, too, but they can also hire experts and conduct research.Here we see two of Thaler’s favorite stratagems deployed at once. First, he relies on a deceptively innocuous, private, and non-coercive example to illustrate his brand of paternalism. Before it was cafeteria dessert placement; now it’s ski-slope markings. Second, he subtly equates private and public decision makers without even mentioning their different incentives. In this case, he uses “bureaucrats” to refer to all managers, regardless of whether they manage private or public enterprises.

The distinction matters. The case of ski-slope markings is the market principle at work. Skiers want to know the difficulty of slopes, and so the owners of ski resorts provide it. They have a profit incentive to do so. This is not at all coercive, and it is no more “paternalist” than a restaurant identifying the vegetarian dishes.

Public bureaucrats don’t have the same incentives at all. They don’t get punished by consumers for failing to provide information, or for providing the wrong information. They don’t suffer if they listen to the wrong experts. They face no competition from alternative providers of their service. They get to set their own standards for “success,” and if they fail, they can use that to justify a larger budget.

And Thaler knows this, because these are precisely the arguments made by the “critics” to whom he is responding. His response is just a dodge, enabled by his facile use of language and his continuing indifference – dare I say hostility? – to the distinction between public and private.

In the second of the two posts, Whitman says:

The advocates of libertarian paternalism have taken great pains to present their position as one that does not foreclose choice, and indeed even adds choice. But this is entirely a matter of presentation. They always begin with non-coercive and privately adopted measures, such as the ski-slope markings in Thaler’s NY Times article. And when challenged, they resolutely stick to these innocuous examples (see this debate between Thaler and Mario Rizzo, for example). But if you read Sunstein & Thaler’s actual publications carefully, you will find that they go far beyond non-coercive and private measures. They consciously construct a spectrum of “libertarian paternalist” policies, and at one end of this spectrum lies an absolutely ban on certain activities, such as motorcycling without a helmet. I’m not making this up!…

[A]s Sunstein & Thaler’s published work clearly indicates, this kind of policy [requiring banks to offer “plain vanilla” mortgages] is the thin end of the wedge. The next step, as outlined in their articles, is to raise the cost of choosing other options. In this case, the government could impose more and more onerous requirements for opting out of the “plain vanilla” mortgage: you must fill out extra paperwork, you must get an outside accountant, you must have a lawyer present, you must endure a waiting period, etc., etc. Again, this is not my paranoid imagination at work. S&T have said explicitly that restrictions like these would count as “libertarian paternalism” by their definition….

The problem is that S&T’s “libertarian paternalism” is used almost exclusively to advocate greater intervention, not less. I have never, for instance, seen S&T push for privatization of Social Security or vouchers in education. I have never seen them advocate repealing a blanket smoking ban and replacing it with a special licensing system for restaurants that want to allow their customers to smoke. If they have, I would love to see it.

In their articles, S&T pay lip service to the idea that libertarian paternalism lies between hard paternalism and laissez faire, and thus that it could in principle be used to expand choice. But look at the actual list of policies they’ve advocated on libertarian paternalist grounds, and see where their real priorities lie.

S&T are typical “intellectuals,” in that they presume to know how others should lead their lives — a distinctly non-libertarian attitude. It is, in fact, a hallmark of “liberalism.” In an earlier post I had this to say about the founders of “liberalism” — John Stuart Mill, Thomas Hill Green, and Leonard Trelawney Hobhouse:

[W]e are met with (presumably) intelligent persons who believe that their intelligence enables them to peer into the souls of others, and to raise them up through the blunt instrument that is the state.

And that is precisely the mistake that lies at heart of what we now call “liberalism” or “progressivism.”  It is the three-fold habit of setting oneself up as an omniscient arbiter of economic and social outcomes, then castigating the motives and accomplishments of the financially successful and socially “well placed,” and finally penalizing financial and social success through taxation and other regulatory mechanisms (e.g., affirmative action, admission quotas, speech codes, “hate crime” legislation”). It is a habit that has harmed the intended beneficiaries of government intervention, not just economically but in other ways, as well….

The other ways, of course, include the diminution of social liberty, which is indivisible from economic liberty.

Just how dangerous to liberty are S&T? Thaler is an influential back-room operator, with close ties to the Obama camp. Sunstein is a long-time crony and adviser who now heads the White House’s Office of Information and Regulatory Affairs, where he has an opportunity to enforce “libertarian paternalism”:

…Sunstein would like to control the content of the internet — for our own good, of course. I refer specifically to Sunstein’s “The Future of Free Speech,” in which he advances several policy proposals, including these:

4. . . . [T]he government might impose “must carry” rules on the most popular Websites, designed to ensure more exposure to substantive questions. Under such a program, viewers of especially popular sites would see an icon for sites that deal with substantive issues in a serious way. They would not be required to click on them. But it is reasonable to expect that many viewers would do so, if only to satisfy their curiosity. The result would be to create a kind of Internet sidewalk, promoting some of the purposes of the public forum doctrine. Ideally, those who create Websites might move in this direction on their own. If they do not, government should explore possibilities of imposing requirements of this kind, making sure that no program draws invidious lines in selecting the sites whose icons will be favoured. Perhaps a lottery system of some kind could be used to reduce this risk.

5. The government might impose “must carry” rules on highly partisan Websites, designed to ensure that viewers learn about sites containing opposing views. This policy would be designed to make it less likely for people to simply hear echoes of their own voices. Of course, many people would not click on the icons of sites whose views seem objectionable; but some people would, and in that sense the system would not operate so differently from general interest intermediaries and public forums. Here too the ideal situation would be voluntary action. But if this proves impossible, it is worth considering regulatory alternatives. [Emphasis added.]

A Left-libertarian defends Sunstein’s foray into thought control, concluding that

Sunstein once thought some profoundly dumb policies might be worth considering, but realized years ago he was wrong about that… The idea was a tentative, speculative suggestion he now condemns in pretty strong terms.

Alternatively, in the face of severe criticism of his immodest proposal, Sunstein merely went underground, to await an opportunity to revive his proposal. I somehow doubt that Sunstein, as a confirmed paternalist, truly abandoned it. The proposal certainly was not off-the-cuff, running to 11 longish web pages.  Now, judging by the bulleted list above, the time is right for a revival of Sunstein’s proposal. And there he is, heading the Office of Information and Regulatory Affairs. The powers of that office supposedly are constrained by the executive order that established it. But it is evident that the Obama adminstration isn’t bothered by legal niceties when it comes to the exercise of power. Only a few pen strokes stand between Obama and a new, sweeping executive order, the unconstitutionality of which would be of no import to our latter-day FDR.

It’s just another step beyond McCain-Feingold, isn’t it?

Thus is the tyranny of “libertarian paternalism.” And thus does the death-spiral of liberty proceed.