April 4, 2006
From the desk of Winterspeak:Libertarian paternalism
Arnold Kling comments on Daniel McFadden's thoughts regarding behavioral economics and Medicare Part D.
In the March, 2006 American Economic Review, which has an unusually large number of articles that interested me, Daniel McFadden writes concerning Medicare Part D and behavioral economics,I am not sure if McFadden is getting it wrong, or Arnold is getting it wrong, but Thaler and Sunstein's "libertarian paternalism" does not mean that markets can satisfy wants but people need to be taught what to want."leaving the large block of uninformed consumers to "sink or swim", and relying on their self-interest to achieve satisfactory outcomes is clearly unrealistic. I endorse Thaler and Sunstein’s (2003) libertarian paternalism."
(note--the version I quoted differs slightly from the printed version)
What McFadden means by libertarian paternalism is that markets can satisfy wants, but people need to be taught what to want.
"Libertarian paternalism" recognizes that centralized decision making is often wrong, and that individuals don't always make the best possible choices, so defaults matter and it's worth putting some thoughts into them.
Medicare Part D offers seniors a baffling array of prescription drug plans they can opt into. Uptake has been weak. Libertarian paternalism would automatically enroll seniors into a particlar plan, while allowing them to opt out, or switch plan if they wanted.
From a libertarian perspective, both of these options should result in the same outcome -- after all, people are still free to do what they want and their opportunity set is identicle in both cases. From a real world perspective, the automatic enrollment with opt-out being an option will result in much higher uptake than optional enrollment. Given that most people are just going to take the default option, it makes sense to put some thought into it. Given that committees thinking things in DC often get things wrong, it's critical that their decision is not binding in any way.
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Mmmmm, comment spam.
Getting back to the topic at hand, this is the same thinking behind some new, common features of employee retirement savings plans now. Usually, one has to opt-in into a 401(k) plan, and the default allocation was money market. Also, people would set an initial contribution amount... but not be forced to revisit that choice of contribution amount or allocation of funds. The real-life upshot is that many people never even join their company's 401(k), and those that do often never rebalance or pick an appropriate investment allocation, and usually keep contributions at a flat amount or percentage (it's generally better to increase the percentage as one gets older, or as one gets raises beyond a COLA.)
So, many plan sponsors have been changing this -- changing the program to opt-out, and making the default allocation a "lifecycle" fund that has an investment mix depending how close to retirement age one is, and automatically rebalances. Also, there are programs (usually titled something like "Save More Tomorrow") which automatically increases the percentage contributed (until it reaches some max) when one gets performance/promotion raises. These program designs are in their infancy, but they'll make the default option that much better, and people should see better results.
"Identicle"? Your British spellynge becomes more and more strange.
As I recall, various libertarians (Friedman's son, etc.) were calling for the opt out choice for social security as far back as 1969, with the caveat that those opting out promised never to use s.s. no matter how badly they invested their opted out funds. The collectivist's lament was the same then as it probably would be today: we
cannot accomodate those individuals who want to opt out because it would wreck the scam for the rest of us.
People who know enough and care enough about Medicare Part D to base their votes on it also probably know enough enough and care enough to use it properly. From that perspective, Medicare Part D might be an efficient way to buy the votes of people who really demand prescription drug coverage without wasting money on people whose votes wouldn't be influenced anyway.
From a libertarian perspective, both of these options should result in the same outcome
I'd say "From a theoretical economics perspective."
The two are not the same thing.
Isn't it a bit counter-intuitive to create a byzantine government program and then say that consumers are too inept to help themselves and that we should further invest in extensions of these programs?
Making a program opt-in and making it opt-out are not the same from the libertarian perspective. It costs more in tax dollars if it is opt-out, because more people are using it. Real libertarians don't forget the taxes when they are analyzing the details of the welfare program. All else equal, more taxes is less libertarian than less taxes.
rvman, Winterspeak was speaking from the viewpoint of individual freedom to accept or reject the program, and assuming that the program is fully funded by the extra tax levied on those who are in in.
If you want to pick nits in "opt-in and opt-out are the same from the libertarian perspective" consider this: They are the same only if the costs of making the non-default selection are trivial. That is, that you don't have to do something like stand in line for hours at a typical government office, or go through hassles with mailing-in an opt-out form for them to lose repeatedly (while continuing to collect the tax). Opt-out and opt-in are highly unlikely to be equivalent when you have to deal with bureaucrats who have a vested interest in delaying processing of your opt-out, and it will be far worse when these are lawsuit-proof government bureaucrats rather than corporate functionaries.
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