Rizzo vs. Thaler on Libertarian Paternalism
By Arnold Kling
The latest celebrity death match on the Wall Street Journal site features Richard Thaler and Mario Rizzo.
Mario Rizzo writes: I repeat: “Is New Paternalism primarily about advising private individuals and firms? If so, why use a political term — libertarian — to identify it?” It is simply a management-consulting philosophy…
Richard Thaler writes: Let’s recapitulate. People make mistakes, so sometimes they can be helped. It is possible to help without coercion. That is libertarian paternalism. The concept can be and is used in both the public and private sectors. For example, in London, pedestrians from abroad are reminded by signs on the pavement to “look right” because their instincts from back home are to expect traffic to approach from the left. No one is forced to look right, but fewer pedestrians are hit by trucks.
Another example comes from Sweden, which launched a partial privatization of their social security system in 2000. The plan was open to any fund, which meant that participants faced 456 options. There was also a very well-designed default fund — using private managers selected by the government — that offered global diversification at very low fees (16 basis points). By any standard, both ex ante and ex post, the participants who selected their own portfolio of funds did worse than those who took the default plan. The main mistake the government made in designing this plan was to discourage participants from choosing the default fund, perhaps thinking, as Mario does, that choosing for oneself is always the best approach…
Mario Rizzo writes…
Does Richard wish to reduce his “libertarian paternalism” to the appropriate management of government-owned streets or other enterprises? In the London case, what people want is obvious: They don’t want to get hit by cars. London is doing what entrepreneurs generally do: satisfying actual preferences. London is mimicking the market.
In Sweden, the government actively discouraged people from relying on the default investment option. People probably interpreted this as meaning the default option was not very good. They succumbed to this unfortunate inference because they viewed the government as an authoritative investment adviser. Government provision of investment advice is not consistent with libertarianism.
They did not really engage over the philosophical question of how it is that the government knows my “true preferences” to go on a diet, choose an index fund, or what have you. I attended a Cato lunch where Rizzo spoke a couple months ago, and at that time I thought he raised some doubts about whether behavioral economics was a way for economist X to infer citizen Y’s true preferences or instead was simply a fancy way for economist X to impose his own preferences on citizen Y.