Wednesday, August 20, 2008

Putting lipstick on a pig?

Discussing libertarian paternalism, Cass Sunstein and Richard Thaler, in an opinion piece in the Financial Times, write:

In this light, it is not surprising that policy teams for Barack Obama, the US Democratic presidential candidate, and David Cameron, the Conservative party leader, have shown an interest in nudge-like solutions to social problems. In dealing with the credit crisis in the US, Mr Obama favours a policy of disclosure and transparency. His mortgage policy is designed not to preclude choices, but to ensure that consumers have a better sense of what they are getting. In dealing with environmental problems and crime, Mr Cameron seeks to enlist the power of social norms, pricking people's consciences to inspire them to do better. Ideas of this kind suggest the development of an approach we call "libertarian paternalism", by which governments try to move people in good directions without imposing penalties, mandates or bans.

"Libertarian paternalism" has nothing to do with libertarianism and everything to do with paternalism. Speaking of "friendly nudges" where mandates, penalties or bans are not imposed, I think a mortgage policy makes a great example as to why this notion is absurd. Let us assume a policy that, as the authors put it, ensure that the consumers knows what he or she is getting into. Like any regulatory scheme, such a program would require (mandate) lenders disclose certain information to borrowers, require lenders maintain compliance with this and will directly penalize violators via fines. I do not see how it would work any other way. How else is the law enforced? What is also going in is that 1) the policy would impose a cost to lenders in terms of increased compliance costs, and 2) the policy would imposes additional costs to taxpayers with respect to the cost to enforce the new policy. How is forcing everyone, through law, to come along for the ride libertarian? Sunstein and Thaler may want to read Frederic Bastiat.

Furthermore, the so-called libertarian paternalists claim that they aim for policy goals that seek to promote the general welfare without eliminating the freedom of choice. They may claim, as Sunstein and Thaler do, that Obama's mortgage policy is designed not to preclude choices to consumers but it would very likely, as I speculated above, force lenders into regulatory structures that they themselves would rather avoid when given a choice. Shouldn't individuals who are pursuing their own entreprenurial interests in a way that violates the right of no one be allowed to do so as he or she sees fit? Wouldn't the market-friendly solution to a lender that refuses to disclose some of the information a consumer wishes to achieve is for the consumer to do business with a lender who does?

Unless there is something I am missing (I have not read Sunstein and Thaler's paper), libertarian paternalsim seems nothing more than a dressed-up form of liberalism that attempts to address the issues important to libertarians. In other words, they've put lipstick on a pig.