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When Nudging Isn't Enough

By Tom W. Bell and Glen Whitman

In a New York Times op-ed, George Loewenstein and Peter Ubel argue that policymakers are relying too heavily on behavioral economics, when traditional -- that is, rational choice -- economics would often serve them better.

On cursory reading, you might think this op-ed repudiates the facile use of behavioral economics to guide policy. But in fact, the authors encourage us to go further down that road. They do so by questioning the efficacy of behavioral policies while implicitly accepting behavioral welfare analysis.

Consider, for instance, their position on the ?obesity epidemic.? They begin by diminishing the impact of New York?s nudge-like mandate on restaurants to post calories in restaurants, while nevertheless supporting it:

Calorie labeling is a good thing; dieters should know more about the foods they are eating. But studies of New York City?s attempt at calorie posting have found that it has had little impact on dieters? choices.

Obesity isn?t a result of a lack of information; instead, economists argue that rising levels of obesity can be traced to falling food prices, especially for unhealthy processed foods.

Aha! So it?s just the law of demand, a prediction of traditional rational-choice models. Do Loewenstein and Ubel conclude that consumers are rationally choosing greater girth in the face of lower prices (and, I might add, superior healthcare), and therefore recommend leaving them alone? Let?s see:

To combat the epidemic effectively, then, we need to change the relative price of healthful and unhealthful food ?- for example, we need to stop subsidizing corn, thereby raising the price of high fructose corn syrup used in sodas, and we also need to consider taxes on unhealthful foods.

In other words, Loewenstein and Ubel remain convinced that consumers are making poor choices that require government correction. If nudges don?t work, then shoves may be warranted.

(Removing corn-syrup subsidies could indeed make consumers better off, according to the traditional model, because doing so would eliminate the inefficiency resulting from a distorted price ratio. But for the very same reason, a tax on unhealthful foods would make consumers worse off. Notice that Loewenstein and Ubel see no important difference between removing a subsidy and imposing a tax.)

The pattern repeats through the rest of the op-ed. If gallons-per-mile laws don?t induce people to choose different vehicles, then we need higher gas taxes. If telling people how much electricity their neighbors use doesn?t cause them to turn out the lights, then we need a carbon tax. To be fair, these cases may involve genuine externalities -- which are recognized as a problem in traditional economics -- rather than the ?internalities? of behavioral economics. But Loewenstein and Ubel don?t mention that distinction. The behavioral goals of policy are taken as given; only the means get scrutiny.

In our first paper on paternalist slopes, Mario Rizzo and I warned about precisely this kind of process. When a policy is enacted to achieve a specific goal and then fails to achieve it, further policies are justified on grounds of achieving the goal that ?we? have already agreed upon. In Loewenstein and Ubel?s op-ed, I believe our prediction is vindicated.

[Cross-posted at ThinkMarkets.]

Full post as published by Agoraphilia on July 16, 2010 (boomark / email).