The Avuncular State:
In Praise of Libertarian Paternalism

Economics & Law — By on April 11, 2006 at 2:52 am

If the boy is father to the man, then I was raised by a profligate dunce. Even though I had learned the power of compound interest in high school, I foolishly squandered my trivial savings at a time when the “eighth wonder of the world,” as Albert Einstein called it, would have had the greatest impact. Had I invested a mere $2,000 in an index fund at the tender age of 22, I would now be $40,000 richer and well on my way to being a millionaire by the time I reach retirement. Economists might say my choice was rational, but it certainly wasn’t optimal.
Fortunately, I had a distant relative–Uncle Sam–that occasionally stepped in to save me from my own economic incompetence. For example, during my first week of Marine Corps boot camp I had to fill out a form in which I had the choice to “opt out” of the Montgomery GI Bill. If I did not check the box I would have $100 a month deducted from my pay for six months and in return I would have $36,000 to use for college. Although several of my fellow recruits chose not to participate, the majority of us took the lazy way out and left the box unchecked. That act of sloth made me $35,400 richer.
My experience was an example of an action taken by what The Economist refers to as the “avuncular state”: “worldly-wise, offering a nudge in the right direction, perhaps pulling strings on your behalf without your even noticing.” Advocates of this form of paternalistic governance include behavioral economists who term such approaches “asymmetric paternalism”, “benign paternalism”, “cautious paternalism”, or as Cass Sunstein and Richard Thaler, two University of Chicago professors who published an intriguing paper on the topic call it, “libertarian paternalism”:

The idea of libertarian paternalism might seem to be an oxymoron, but it is both possible and legitimate for private and public institutions to affect behavior while also respecting freedom of choice. Often people’s preferences are ill-formed, and their choices will inevitably be influenced by default rules, framing effects, and starting points. In these circumstances, a form of paternalism cannot be avoided. Equipped with an understanding of behavioral findings of bounded rationality and bounded self-control, libertarian paternalists should attempt to steer people’s choices in welfare-promoting directions without eliminating freedom of choice.

“Libertarians embrace freedom of choice, and so they deplore paternalism,” note Sunstein and Thaler. “Paternalists are thought to be deeply skeptical of freedom of choice and to deplore libertarianism.” The two groups would appear to be mutually exclusive but the authors argue for a “form of paternalism, libertarian in spirit, that should be acceptable to those who are firmly committed to freedom of choice on grounds of either autonomy or welfare.”
A few examples of how libertarian paternalism can be put into practice are:
* In an attempt to increase savings by workers, a company decides not to ask employees if they wish to participate in a 401(k) plan. Instead, the workers are automatically enrolled unless they specifically choose otherwise. (1)
* “Sin goods”, such as junk food, are often repeatedly purchased in small quantities for short-term consumption. Because people make numerous purchases over the course of their lives rather than, for instance, a single trip to the store to purchase a lifetime supply of potato chips, they can distort their long-term consumption decisions by giving in to small preferences for immediate gratification. A way to correct for this would be to impose a per-unit tax on potato chips to induce people to consume less, and return the proceeds to consumers via a lump-sum transfer or by lowering income taxes or taxes on some non-sin commodity, such as socks. (2)
*Another approach would be to induce people with self-control problems to make “prospective choices”, making choices now that influence their future in-the-moment incentives. One way to implement this would be to impose a high presumptive tax, and then sell licenses (or vouchers) that permit people to buy the good tax-free (or at a reduced tax) in the future. For example, rather than pay $2 per pack on cigarettes, a smoker could buy a “sin license” which might cost $5,000 and entitle the holder to an unlimited supply of cigarettes tax-free. Paying such an upfront fee would require a serious commitment to the habit. (2)
Although these examples are all monetarily based, other illustrations can be found of imposing self-constructed limits in order to increase awareness of choices. The Economist article mentions a program in Missouri that allows compulsive gamblers to add their names to a voluntary blacklist. If the gamblers breach this self-imposed ban by entering one of the state’s riverboat casinos, they face arrest for trespassing and the confiscation of their winnings. Another example is covenant marriage laws that allow couples the freedom to choose to be held to a higher level of marital commitment. Before being able to obtain a divorce, spouses who entered into a covenant marriage limit the reasons they can seek a divorce and often must agree to undergo marital counseling before the marriage can be dissolved.
Although these examples are relatively benign, some people may reject them out of a knee-jerk reaction to any forms of paternalism. Clinging to the naive notion that governments or corporations can be neutral on such matters, they prefer a pure form of libertarianism. But for freedom-loving moralists like me, libertarian paternalism offers an ideal combination of two concepts we normally deplore: libertarianism and paternalism.
If private and public institutions are going to attempt to influence people’s behavior (and they always will), why should they not do so in a way that, as Cass and Sunstein say, “steer people’s choices in directions that will improve their own welfare?” After all, humans are not the rational animals that economists have always presumed us to be. We are often willfully ignorant, intemperate, and prone to inertia. Libertarian paternalism offers a gentle correction; a non-intrusive means of influencing what Nobel-winning economist Thomas Schelling calls the “intimate contest for self-command.”
Sources:
(1) “Libertarian Paternalism Is Not an Oxymoron”, by Cass Sunstein and Richard Thaler. The University of Chicago Law Review No.4, 2003 [PDF]
(2) “Optimal Taxes for Sin Goods”, by Ted O’Donoghue and Matthew Rabin. Journal of Public Economics, forthcoming.[PDF]



  • http://TheEverWiseBoonton.blogspot.com Boonton

    A very worthwhile idea which, like most good economic theories, feels like common sense.

  • college guy

    Neat. Keep us updated, Joe.

  • Jemison Thorsby

    I can agree with approaches that weight the outcome in favor of the ‘benefit’ barring positive action by the individual (like the 401K or G.I. Bill example). When you start talking about taxing ‘sin food,’ however, you’re in a different realm. Taxation should be for the purpose of funding legitimate gov’t activity. Instead, it’s become a social engineering tool. The power to tax is the power to destroy, which is why media and religious establishments enjoy certain immunities. Once gov’t starts levying taxes based on conformity with prescribed behaviors, though, freedom is at risk.

  • J. J.

    I don’t know what to say. Forcing people’s hands via taxes is the furthest thing from “libertarian”. Black is white. White is black. Good is bad. Bad is good. Libertarianism is Paternalism. There is no truth!!!
    Relying on the goodness of government is a big mistake. To accept the paternalistic taxing of potato chips as morally acceptable might sound okay, but how long will it be until those in power (ex. President Hillary) think they’ll be doing the country a favor by taxing something you think is morally good (ex. churches Hillary doesn’t like)?

  • Bryan K Mills

    Unless we cut the nanny-strings of government completely, taxes as social engineering are unavoidable. The more government is involved in paying for healthcare, the more we can expect government to want to regulate our health. The fast food industry will become a target and someday Twinkies will either be illegal or heavily taxed.
    We seem to want it both ways. Government give me a safety net, but don

  • http://www.evangelicaloutpost.com Joe Carter

    J.J.,
    To accept the paternalistic taxing of potato chips as morally acceptable might sound okay, but how long will it be until those in power (ex. President Hillary) think they’ll be doing the country a favor by taxing something you think is morally good (ex. churches Hillary doesn’t like)?
    My summary doesn

  • Adam

    It is worth noting that apparently both Joe and Boonton agree that this is a good idea. How often do they agree about anything?

  • http://www.evangelicaloutpost.com Joe Carter

    Adam It is worth noting that apparently both Joe and Boonton agree that this is a good idea. How often do they agree about anything?
    Boonton and I have such opposite views on most matters that whenever he agrees with me it makes me have second thoughts. If Mumon were to agree too it would throw me into an epistimic panic (fortunately, Mumon is physically incapable of agreeing with me so I don’t forsee that happening). ; )

  • http://gopchristian.blogspot.com Rev. Thomas S. Painter (R)

    I retired at 25. I had zero expenditures in 2005. Do you want to know how I did it?
    I didn’t. :-)
    Let go & let God. ;-)
    Alot of people think you need to be a millionaire to retire, but that’s utter rubbish. You don’t need money to retire, you need to retire to retire. If your goal is to have more money, you’ll never retire. …but if your goal is to retire, retire already. :-D
    That’s right, retire now. Retire poor. :-) Try it, see what happens. If it works out, give glory to God; if it doesn’t work out, your *hands-off* *off-the-job* experience will help you get your foot *out* the door next time. ;-)
    Now choose God or Mammon! Sell what you have, give to the needy, and come and follow me on your journey to zero expenditures! Never pay taxes again! What belongs to Caesar? NOTHING! It all belongs to God! :-D
    Seek God, find God, obey God. Go!
    gopchristian.blogspot.com

  • rdsmith3 (Bob)

    Interesting concept, Joe. I was an economics major many years ago. My subscription to The Economist lapsed because I just don’t have the time, but I digress.
    Thanks for bringing this to our attention.
    Sin taxes are a form of a consumption tax, which is the fairest tax of all for a non-essential good, IMO. Ignoring the issue of addictive behavior, one makes a choice to drink, smoke, gamble, etc. The demand for these goods and services is very inelastic, meaning that people will continue to demand them even if the price is increased (within a reasonable range). So why not tax them, assuming that tax revenue is required?

  • http://southernappeal.org QD

    The only trick here is that, in the end, a tax is a tax is a tax and that all taxes end up in the hands of a state that, once it has the taxes, can then decide to do something other than it originally promised. Consider, for example, Social Security taxes or the revenues extracted by the states from the tobacco companies. In the former, the state has “borrowed” those funds for general purpose. In the latter, states have, for the most part, reneged on their commitment to use the monies to pay for health care expenses, anti-smoking campaigns, etc. and instead put the money toward education, roads, etc.
    The realities of politics makes “Libertarian Paternalism” just plain paternalism in the end. Now, maybe that’s not a bad thing and maybe we can be “smart” about our paternalism (e.g. economically efficient) but this doesn’t seem all that new…

  • http://www.natsocratic.blogspot.com Dave Nat

    This is an idea that has a great deal of appeal, and I particularly like the “libertarian” aspect encompassing some choice and responsibility, leaving the Goverment to support, to guide, but not control.
    David
    Christians – There’s a little girl who needs your prayer!
    http://www.prayforalicia.blogspot.com

  • http://TheEverWiseBoonton.blogspot.com Boonton

    It is worth noting that apparently both Joe and Boonton agree that this is a good idea. How often do they agree about anything?
    It should be noted that neither of us actually came up with this idea. I think you should be concerned when you find me agreeing with a ‘homemade’ idea by Joe.

  • ex-preacher

    I’m listening to the audiobook of “Freakonomics,” so I must mention something. If you raise the taxes on any product too exorbitantly, a black market will inevitably be created. I understand that some states are already struggling with the problem of black market cigarettes. I can only imagine what would happen with a $5,000 license to buy cigarettes. My economics teacher said that people would meet in dark alleys to buy and sell sugar if it were ever made illegal.

  • http://johncoleman.typepad.com John

    Ok…I am too often a token pseudo libertarian commenter here, but Sunstein has about as much ethos talking about the so-called intellectual validity of libertarian paternalism as Mohammed Ali has speaking to the subtelties of Christian ethics.
    There is a big distinction that is treated lightly in this post: that between public and private sector paternalism. On of these entities holds violent sway over you, the other does not. To think that libertarians stand wholeheartedly against company 401K withdrawals is silly. As a matter of policy, we may think such policies are not in the company’s or the employee’s best interest (indeed, market based management, as a business discipline, is on the rise); but we wouldn’t ban them or call them illigitimate. MEanwhile, the government telling me that twinkies are a sin is a whole different ball game. Welcome to the brave new world, right? Where even the best of us aren’t allowed to make the tradeoffs between personal virtue and personal vice.

  • http://johncoleman.typepad.com John

    Incidentally, I noticed a coupel of commenters mention the Economist. You can find great deals on the magazine on Ebay. I got a subscription for $30.

  • college guy

    I thought the point of libertarian paternalism version of the “junk food tax” was not so much that twinkies are bad, but that not thinking long-term about twinkies and needing immediate gratification is bad because people aren’t considering the “all the information” available concerning twinkies. so the tax is levied so people think twice, but ultimately if you want twinkies you get them and the tax is returned to the you “via a lump-sum transfer” at a later date, so you don’t lose bottom line.
    certainly, hard-core libertarians believe this is restricting the consumer’s “freedom” to make irrational choices that don’t consider long-term effects. yes?
    ex-preacher’s point concerning black-market creation is true, but that’s just a matter of having the tax be high enough to make people think twice, but low enough so that black market’s aren’t created, and that’s what economists do.

  • http://TheEverWiseBoonton.blogspot.com Boonton

    As the Economist article pointed out, though, there are many situations where you have to have a default one way or the other.
    To use Joe’s eample new recruits are either defaulted to be in the GI program or defaulted to not be in it. Likewise in a corporate 401K program new employees are either defaulted to be automatically contributing or defaulted to not.
    In economic models that use perfect rationality the above should have no effect. If 90% take the ‘no brainer’ and opt to be in the GI program when it’s the default then 90% will also check the box if it is not the default. Emperically, though, this does not seem to happen.
    The most interesting model they cited was the ‘split personality’…. People seem to have a mini-battle going on inside themselves between ‘long run guy’ who would rather you not eat that junk food, contribute the max to your 401K and exercise every day versus ‘short run guy’ who wants to eat junk food now, watch TV and grab every dollar he can from the MAC machine.
    It seems that defaults can give the edge in the battle to one of the two people inside everyone.

  • mike

    Rev. Tom, you raise an interesting point, though it has no Biblical backing. As Christians, we are called to be charitable. We are also called to be good stewards of what God has given us and to support our families. As a Christian man, I am required to work hard to provide for my family, and I know that the work I do is to glorify God and that the money I make is from God.
    I checked your blog, and saw that it was written there “You can’t work for both God and money.” That’s a misrepresentation of Scripture. The correct verse is “You can’t serve both God and mammon.” As Christians, we’re required to work to provide for our families and for the poor – that requires working for money. But to serve money is to worship it; that is why we cannot serve money. Not because money is evil, but because the love of money is evil. As Christians who know that good stewardship of money is a virtue, we continue to invest and save so as not to be a burden to other Christians, just as Paul kept making tents while he was preaching to the early churches (1 Thes 2:9).
    To neglect our God-given responibilities on earth, saying “God will provide”, is to take the name of the Lord in vain.

  • mike

    after checking Tom Painter’s blog a second time, I retract the title of “Reverend” which I had ascribed to him in my previous post.

  • http://inkan.blogspot.com pgepps

    Joe, I have to agree with JJ, who likes the idea but bridles at the “sin tax” concept.
    The justification for such things as making the default option (while both options are presented as simple matters of choice) the “beneficial one”–and even framing the information in the way the program’s proponents consider most beneficial–is that a framing effect (participation through explanation in the decision-making process) is inevitable, ergo it might as well be made responsibly.
    Similarly, while I do not support activist attempts to legislate on unbelievers matters of church discipline (i.e., Christian morality), I also think that where a Christian legislator is compelled to engage an issue, or to speak out on or frame the issue in public discourse, that he should do so in keeping with his beliefs, and not in a hypocritical, public-lives-are-pluralistic way.
    However, there is no similar inevitability to a *tax*. What has happened, here, is that the government has *added* costs to behavior it disapproves.
    That is certainly not libertarian, and to the extent that such is shaped by an attempt to “improve the lives” of consituents rather than to “preserve the liberties” of those same constituents, neither is it conservative.
    Using the coercive powers of government to “improve” humanity is core liberalism.
    Cheers,
    PGE

  • Gordon Mullings

    Joe:
    Thought-provoking post. The real issue though for Christians is to recognise that government both is there to do good and to uphold justice — both are in Rom 13:1 -7, adn in that context, taxing power is primarily warranted to sustain government.
    When taxes are used to confiscate wealth, it raises the question that that is plain old fashioned stealing. Similarly, transfer payments are often made under theguise of welfare, but too often that hides the 80 – 90+% that goes to the bureau-rats and the consult-ants and the cont-ra[c]t-ors. [I am just kidding on the modified words.]
    It may also hide the fact that there is often a moral/sinful lifetyle component to poverty. Unless that is addressed, there is no real solution only a subsidising of self- and socially- destructive behaviour. Thus, morality is an inescapable issue inthe matter, and that is why so often church based charities do much better thant hose driven by secularist agfendas or constraints. Teen Challenge on drug rehab comes to mind!
    Grace to all
    Gordon