Le Grand (2018) on Government Paternalism

Julian Le Grand, “Future Imperfect: Behavioral Economics and Government Paternalism.” Review of Behavioral Economics 5: 281–290, 2018.

• Nudges and even stronger government interventions are often justified on the grounds of allowing long-run, more considered or "truer" individual preferences to assert themselves. But there are problems with identifying and privileging any one set of preferences. This article offers two justifications for paternalistic interventions that do not rely on identifying true or long-run preferences. 

• The defense of paternalism offered here applies (as is usually the case in economics) to means-related paternalism, not ends-related. People's goals are taken as given (and, implicitly, rational); can policies be designed to empower people to better achieve those goals?

 • What if the government sees people engaging in an activity like smoking that the government believes will have future costs for smokers that with a high probability will more than compensate (in terms of the smokers' own values) for the increased value they enjoy from smoking now? 

• The government might reasonably want to dissuade such smoking, but why would smokers make such a mistake? Maybe they lack information, so there is much to be said for ensuring that accurate information is readily available – but this is not the same as justifying a smoking tax or ban. Maybe smokers use a different discount rate than does the government in comparing current with future costs and benefits – again, this difference should not license coercive interventions by the government.

• But maybe (drawing upon Le Grand's 2015 book with Bill New) the problem is that smokers suffer from one or more "reasoning failures": "limited technical ability, limited experience or imagination, limited willpower and limited objectivity [p. 286]." In particular, can a young smoker imagine a realistic portrayal of herself as a 65-year old? The failure of imagination is not a problem of too little information about the health risks of smoking; rather, it is a lack of knowledge of how the well-being of future selves will be affected by current smoking. A paternalistic policy can be justified not only on the basis of better knowledge of true or more-considered preferences, but on a better understanding of health effects on well-being. 

• A second defense of paternalistic interventions might be to consider how a person's future selves might contract with current selves to influence current decision making. Government could serve as a stand-in for those underrepresented future selves. Now the justification for a paternalistic intervention is market failure, in that future selves generally are unable to participate in market transactions that nevertheless implicate their interests.

• Le Grand adapts an example from a 2018 book by Robert Sugden. A young person inherits from an uncle a wine collection, though she has little interest in wine, and does not place much value on her inheritance. But her father suspects that in a few years the young person will feel differently. So he could offer her a low price for the wine today (which she will accept), and after a few years, offer to sell it back to her at a higher price. If the father was right, she will agree to both transactions, and everyone is happy. 

• For goods which, unlike wine, cannot be transferred, the government could arrange a similar (though not voluntary?) deal, by subsidizing smoking avoidance today, with the subsidy repaid by taxes in the future on the now older non-smokers. But does this "contractarian approach" avoid the identification of a true or long-term preference? Le Grand thinks that it does not, as the (imposed) subsidy is designed to override the young person's current preferences.

Špecián (2019) on True Preferences

Petr Špecián, “The Precarious Case of the True Preferences.” Society 56(3): 267-272, June 2019.

• Are voluntary trades (with no spillovers) Pareto improving? To assert that they are suggests a belief in coherent preferences. This is the standard economics approach: choices reveal underlying, true preferences.

• Behavioral evidence undermines the belief that choices reveal true preferences. Nonetheless, nudges aim to make people better off “as judged by themselves," so there is an appeal to some underlying true preferences from which those judgments emerge.

• But when can we know that people's un-nudged choices do not reflect their true preferences? How can we determine which preferences should be disregarded or questioned? Signposts of potential irrationality might include rare choices, intertemporal choices, choices involving temptation goods…

• Can we rely upon cold-state (as opposed to hot-state) preferences, or long-run, considered preferences, as somehow being "true" preferences? But maybe these proclaimed "more considered" preferences reflect social norms and are just marketed for public consumption, even as people really want to be Mr. Hyde, not Dr. Jekyll. 

• Perhaps Sugden (2008) is right, perhaps there are no underlying coherent preferences at all.

• Nudgers might believe that their interventions make matters better in practice even if these fundamental questions about how to judge individual welfare remain unresolved. [That's pretty much my view, too -- JL] Nudgers should be humble, and wary of overconfidence.

Benartzi, Beshears, Milkman et al. (2017) on Government Investments in Nudges

Shlomo Benartzi, John Beshears, Katherine L. Milkman, Cass R. Sunstein, Richard H. Thaler, Maya Shankar, Will Tucker-Ray, William J. Congdon, and Steven Galing, “Should Governments Invest More in Nudging?” Psychological Science 28(8): 1041–1055, 2017.

• Government nudge units have thrived since the British showed the way in 2010; these units have set up canny defaults or streamlined paperwork or otherwise looked to make presumably desirable behavior easy for individuals to implement.

• But nudges, with their definitionally-low impact on "standard" (monetary, say) incentives, are not the only way to alter behavior, nor necessarily the cheapest. They do, however, tend to be cheap, so even a small behavioral impact might be well worth the nudge expense. 

• An e-mail nudge aimed at inducing US military personnel to enroll in a retirement plan increased enrollments in one month from a baseline just above 1 percent to somewhere in the 1.6 to 2.1 percent range; this nudge cannot be said to be wildly effective, but it was so inexpensive that the increased retirement savings per dollar invested were quite large (and orders of magnitude larger than with traditional monetary incentives targeted at inducing savings).

• "To be maximally informative, future policy-oriented behavioral science research should measure the impact per dollar spent on behavioral interventions in comparison with more traditional interventions [p. 1042]."

• The authors identify policy outcomes such as the amount of retirement savings and then scour the academic literature (highly-ranked journals) for relevant studies of both nudge and non-nudge policy interventions, for the purpose of calculating impact (on the chosen outcome variable) per dollar spent. In addition to retirement savings, the outcome variables include energy conservation, college enrollment, and influenza vaccination.

• For each outcome measure, the oomph-per-dollar ratio is highest (easily) with a nudge intervention as opposed to a traditional policy lever aimed at, for instance, monetary incentives. (This is not to say that all nudge interventions are comparative winners, just that the most cost-effective policies are nudges.) Automatic enrollment in retirement plans, for instance, is better at increasing savings (per dollar spent) than is a subsidy such as providing a 50% match for individual contributions.

• Nudges seem to be particularly cost effective when the problem that is being addressed implicates shortfalls in the rationality of individual decisionmaking. In these settings, small changes in the choice architecture can have large effects, whereas monetary interventions to improve the benefit-cost calculus that presumably underlies those individual decisions are both expensive and rather ineffective.

• In some circumstances, nudges and traditional policy interventions might be effective in combination.

• The evidence suggests that the current investment in nudge interventions is suboptimal.

Cronqvist, Thaler, and Yu (2018) on Long-Lasting Nudges

Henrik Cronqvist, Richard H. Thaler, and Frank Yu, “When Nudges are Forever: Inertia in the Swedish Premium Pension Plan.” American Economic Association Papers and Proceedings 108: 153-158, 2018.

• Perhaps nudges such as default settings initially are quite powerful, but over time lose their influence as people get around to shifting to a preferred option.

• The Swedish Premium Pension Plan was initiated in 2000, and by 2016, served more than 7 million Swedes. The nudges that accompanied that plan have proven to have long-lasting consequences.

• One nudge concerned the default pension plan that savers were placed into if they didn't explicitly choose one of the hundreds of options. 

• A second nudge involved trying to convince savers that they indeed should make a positive choice themselves, that is, that they should override the default. This second nudge was surprisingly effective, in that 2/3 of the initial pension participants made an explicit choice of their investment portfolio. 

• But this second nudge only operated at and near the inception of the plan, in which the large initial cohort (4.4 million people) entered the pension scheme. The annual flow of new entrants then became much smaller, with less than 200,000 entering in 2016. As a result, the public and private advertising which constituted the second nudge dissipated within a few years. The percentage of enrollees choosing their own portfolio in subsequent cohorts fell to less than 10 percent by 2003, and after 2007 has always been four percent or below. 

• Those in the initial, large cohort who stayed with the default tended to continue with the default, though more than one-quarter of them did eventually choose a different portfolio. Of those who initially chose to make their own portfolio choice, less than three percent later decided just to go with the default. They also displayed quite a bit of attachment to their initial portfolio choice, even though they could alter it more or less continuously if they so chose. 

• The features of the default fund changed markedly in 2010 and 2011, removing a bias towards investments in Swedish companies (2010) and increasing the amount of leverage significantly (2011). These major reforms did not seem to alter the attractiveness of the default, few people opted out even though the financial characteristics of their pension plan were significantly changed.

• A 2017 corruption scandal at one of the leading pension funds also was not met with the huge abandonment of that fund that might have been expected.

• The Swedish pension nudges have had very significant, long-term effects! Nudge wisely!

Sachs (2019) on Addiction and Happiness

Jeffrey D. Sachs, “Addiction and Unhappiness in America.” Chapter 7 in World Happiness Report 2019.

• In the US, the Easterlin paradox continues to appear: "the average life evaluation in the United States, as measured by the Cantril ladder, has declined during the past dozen years, from 7.2 in 2006 to 6.9 in  2018, despite ongoing U.S. economic growth [p. 124]."

• Sachs hypothesizes that the US is in the midst of an addiction epidemic – with rising unhappiness and depression as consequences. 

• The addiction epidemic includes alcohol, tobacco, and other drugs, of course, but also the internet, food, sex, exercise, work...  

• Co-morbidities are common 

• Causes of the increase in addictions are hard to identify precisely, but there are many candidates: current life conditions, inequality, marketing (and designing more addictive goods, such as slot machines and cigarettes), failure to sufficiently regulate industries such as opioids and sweetened foods and social media...

• "The U.S. has had, by now, two startling wake-up calls: back to back years of falling life expectancy and declining measured subjective well-being [p. 130]." Better public policy is desperately needed, and directions to go are outlined in the Global Happiness and Well-Being Policy Report, 2019.

Allcott, Lockwood, and Taubinsky (2019) on Soda Taxes

Hunt Allcott, Benjamin B. Lockwood, and Dmitry Taubinsky, “Should We Tax Sugar-Sweetened Beverages? An Overview of Theory and Evidence.” Journal of Economic Perspectives 33(3): 202-227, Summer 2019.

• Some US cities, and many nations, tax beverages with added sugar; often such drinks do not receive the favorable tax treatment otherwise provided to groceries, too

• In the US, consumption of sweetened beverages falls with income, and the top 20% of consumers drink a lot of soda

• Associated health risks include weight gain, type 2 diabetes, and cardiovascular disease

• Fiscal externalities abound throughout the health care “system," so someone's unhealthy behavior is in part paid for by others. [Nonetheless, I am very wary of justifying policy on the basis of such fiscal externalities, in part because they seemingly justify any draconian measure. Your lack of exercise is costly to me! You must be coerced to exercise more and to eat in a more healthy way! Perhaps our willingness to provide subsidies for those in health crisis is predicated on the notion that we don't ask too many questions of how they got in such dire straits.] 

• Sugary drinks also present the potential for internalities, perhaps emanating from poor information or present bias or addiction or some other rationality shortfall

• The monetary incidence of a soda tax is likely to be regressive; do the internality benefits reverse the full incidence of such a tax? (That is, those who consume the most will pay the most tax, but (presumably) also receive the lion's share of benefits in the form of better health down the road from reduced soda consumption.)

• Soda tax revenues can be earmarked for programs benefiting people who pay the taxes, but if those programs are desirable, they should be funded anyway, and not have their funding dependent on a single dedicated revenue source. 

• Perhaps 1-to-2.1 cents per ounce is an “optimal” soda tax?

• Lessons? (1) Focus on the externalities and internalities (therefore…); (2) target those consumers who present the largest ex- and in- ternalities; (3) Implement the tax in terms of grams of added sugar; (4) Diet drinks and fruit juices are another story; (5) Be sophisticated about incidence; (6) Reduce avoidance through statewide (not municipal) taxes; and... (7) Reasonable soda taxes probably bring net social benefits.

• Here's a previous outline of an article on the sweetening of diets.