A Critical Appraisal of Network Unbundling

High-speed broadband networks are key to the growth of digital markets as well as most modern forms of communication, and have been subject to far-reaching regulation in many countries. In this piece, we’ll review the rationale behind a cornerstone of the prevailing regulatory paradigm: forced access to incumbent operators’ network infrastructure by alternative operators on regulated terms, so-called “unbundling”.

Richard Thaler’s Nobel Prize

by Mario Rizzo

Richard Thaler has won the Nobel Prize for initiating the behavioral moment in economics.

My view of the Nobel Prize in economics is much like Time magazine’s view of its “Person of the Year.” It is awarded to the economist who “for better or for worse… has done the most to influence” the course of economic thinking – at least in certain respects. It also, like Time magazine, operates under the constraint that an award must be given every year.

Interests are More Powerful than Ideas?

THE BIG STORY OF SPENDING

by Mario Rizzo

There is an interesting interview with Ed Feulner, the outgoing president of the Heritage Foundation, in the weekend (Dec. 8-9) Wall Street Journal. The interview got me thinking about the progress made in the pro-economic-liberty cause, not only over the years of Heritage, but since, say, 1960.

Healthcare as Social Planning

by Mario Rizzo

Although I am an advocate of voluntary birth control, I am not happy about (1) the equation of this choice with healthcare – even preventative healthcare (as if pregnancy were a disease); and (2) the government mandating that health insurers must cover these expenses, without even a copayment.

Libya and the Rule of Law

by Mario Rizzo  

Frank H. Knight had an important insight about economics. Howsoever we may seek to narrow it, the basic human interests that make the subject important lie at the intersection of ethics, the theory of knowledge, and psychology (at least in a broad sense).  Friedrich Hayek was also right to think that the insights of law and the insights of economics can be mutually beneficial.  

Classical liberalism, however, is not simply economics even in a broadened sense. It is a philosophy about the limits to state power and action even when the goals are alleged to be good or holy. Classical liberalism, as Hayek taught us, is about appropriate means and not simply about the desirability of ends.  

ThinkMarkets is vitally concerned with economics, it is true, but also more generally with classical liberalism and it application to real-world problems. Accordingly, one of the main concerns of this blog has been the rule of law (albeit applied mostly to issues of economic policy).  Another important concern has been the slippery slope processes that get policy-makers and, more importantly, the public into situations that are unforeseen and undesirable.  

This brings me to the Libya question.

Easy Money, Emerging Market Miracles and the Revival of Industrial Policies

by Andreas Hoffmann and Gunther Schnabl

While most advanced economies continue to suffer from high unemployment and record debt levels, monetary expansions in the advanced economies feed a tsunami of carry trades, hiking asset and raw material prices and accelerating growth rates in emerging markets from Brazil over the Middle East to China. While capital inflows drive miraculous catch-ups in many corners of the world – having learnt the lesson for the recent mega-crisis – the monetary authorities in the emerging markets are aware of the risk of financial market exuberance. They aim to prevent inflation and bubbles by absorbing surplus liquidity and tightening credit growth.

Yet by doing so, they cause distortions in the real sectors of their economies, which are not on the radar screen of the now ballooning financial supervision bodies.

Could Sarah Palin Be Right?!

by Mario Rizzo  

In an editorial the Wall Street Journal criticizes Sarah Palin for criticizing Michelle Obama’s anti-obesity campaign. The point seems to be that such talk from the Ms. Bully Pulpit is innocuous or benign. The writer makes an analogy with Nancy Reagan’s “Just Say No” anti-drug campaign. 

Now if Michelle Obama were just a Chicago-based community activist who was organizing a nation-wide propaganda campaign to urge people to eat healthily I would have no objection.  

Pragmatic Road to Bankruptcy

by Mario Rizzo

In the September 15th Wall Street Journal there is a chart that gives a quick view of the “pragmatic” expansion of entitlement programs that has led to where we are now. Who could have predicted the long-term consequences of case-by-case pragmatic problem solving?  I suggest Herbert Spencer, Ludwig von Mises, and Friedrich Hayek.

Lament for Conservatism

by Mario Rizzo  

In today’s New York Times David Brooks argues that conservatives need to plan for “the day after tomorrow.” Tomorrow there will be the revolt against out-of-control government and that is good. But the day after America must return to its traditional non-ideological pragmatism about government. We need to solve problems as we find them. Government used in wise ways can be very helpful.   

But what are these pragmatic government policies? Was it not one “fix” after another with little thought to the kind of society being created that has produced what we have today. I have no objection to “pragmatism” if it is a far-seeing pragmatism that looks to consequences – both indirect and complex.  

The conservative reaction against “ideology” is a total misconception. A “good” ideology is a philosophy that focuses our attention on the long-run, Bastiat’s “unseen,” and the fundamental values of a free society. Most of all, however, it helps us focus on those rules that act to resist the special interests who would undermine the structure of a free society, one issue at a time.  

This ideology is classical liberalism. If we truly understand how things went wrong in the over the past many decades, we would see that non-ideological pragmatism does not inspire confidence.

When Nudging Isn’t Enough

by 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.

The Cost of Making Exceptions

by Mario Rizzo  

As a political and legal culture, we do not know how to deal with slippery-slope tendencies. The recent discussion (here and here, and many other places) of the public-accommodations provision of the Civil Rights Act of 1964 has made me more conscious of this issue.  

I am willing to agree for purposes of this post that the law forbidding private storeowners, hotels, and other merchants to discriminate on the basis of race was morally justified under the institutional conditions of the day.  

The problem, from my perspective, is that the cost of making exceptions to general principles is not sufficiently appreciated. Benefits may exceed costs in a particular case, but if these costs are not fully recognized, the course of action taken may lead to bad decisions down the road. 

New Paternalism, Regulation and Cass Sunstein

by Mario Rizzo

The New York Times magazine has an interesting, if somewhat uncritical, article on Cass Sunstein, the Obama regulation czar. The “best” part is the section about me:

Some scholars dislike the strong, if subtle, governmental hand that is embedded in this last proposal. It seems more forceful than a nudge. “Once you get to a point where you have automatic enrollment, you raise the question, What kind of fund?” Mario Rizzo, a professor of economics at New York University, says. “The problem is that if you were enrolled automatically, you could complain later that you’d been put into either a too-risky or a too-conservative fund. So then you micromanage that and you say you have to have a balanced fund. But pretty soon you’re on a slippery slope, where you’re dictating people’s retirement choices.” Rizzo told me about an academic study of gift-giving that found that most people would value cash more highly than the gifts they get for holidays; if even your friends and family can’t figure out what you want, he asked, how can a distant bureaucrat? “Sunstein is very taken with the need for experts,” Rizzo says. “But it turns out experts are subject to these cognitive quirks, too.”

New Paternalism: Odds & Ends

by Glen Whitman

The Cato Unbound discussion on new paternalism has come to a close, but I want to address a few loose ends that came up during the exchange.

The Demand for Evidence

Richard Thaler has demanded empirical evidence that the new paternalism has led to slippery slopes. Given that the new paternalism is a relatively new phenomenon, I certainly don’t claim that the slope has already occurred.

I do claim that slippery slopes are real, that slopes are most likely when certain features are present, and the new paternalism has many of those dangerous features.

Historically, there can be little doubt as to the existence of slippery slopes. Examples that came up during the Cato Unbound forum included the run-up to Prohibition, the escalation of the drug war, and the gradual encroachment of smoking restrictions. I believe an honest examination of other, non-paternalist domains yields similar conclusions. For instance, after passage of the 16th Amendment, the vast majority of people paid no income tax at all, and the top marginal tax rate was only 7%. We all know how that turned out. A much more complex story could be told about early interventions in healthcare that laid the groundwork for more extensive intervention later.

Cafeteria Marvels

 by Mario Rizzo  

The market is a “marvel.” What does that mean? According to Marcus Tullius Cicero, the Roman orator and senator, a marvel is something contrary to or surpassing common understanding.  

In that sense, the market is a true marvel – so much so that it even surpasses the understanding of many economists.  

Richard Thaler (a University of Chicago Business School professor) and Cass Sunstein (a Harvard law professor and Obamian regulatory czar) have illustrated the benign qualities of paternalism with a curious example of cafeteria food placement. (An interesting and important exchange between Glen Whitman and Richard Thaler – among others – is now taking place at Cato Unbound.)

The Most Important Thing You Can Read

by Mario Rizzo

My frequent coauthor, Glen Whitman, has the lead essay on new paternalism at Cato Unbound this month. There will be responses by Richard Thaler (Chicago), Jonathan Klick (U of Penn), Shane Frederick (Yale).

This is the most important thing you can read this month — better than anything anywhere else in the blogosphere, world wide web, and all traditional media publications. Except posts at Think Markets, of course.

Hayek’s Knowledge Problem, as Applied to New Paternalism

by Glen Whitman

Mario Rizzo and I have recently published another article on the new paternalism, titled “The Knowledge Problem of New Paternalism,” in the BYU Law Review. (Mario briefly blogged about it here.)  The article lacks an abstract, but here’s a lightly edited portion of the introduction:

The “new paternalism” spawned by behavioral economics faces a severe knowledge problem akin to the knowledge problem that Friedrich Hayek argued afflicts centrally-planned economies. If well-meaning policymakers possess all the relevant information about individuals’ true preferences, their cognitive biases, and the choice contexts in which they manifest themselves, then policymakers could potentially implement paternalist policies that improve the welfare of individuals by their own standards. But lacking such information, we cannot conclude that actual paternalism will make their decisions better; under a wide range of circumstances, it will even make them worse. New paternalists have not taken the knowledge problems that are evident from the underlying behavioral and economic research seriously enough.

New Paternalism on the Slippery Slopes, Part 11: Avoiding Paternalist Slopes

by Glen Whitman

This will be the final installment in my series of excerpts from Mario’s and my article on the slippery-slope potential of new paternalism. The comments on the posts have been minimal, so I’m uncertain how helpful this series has been. Since I’m considering doing the same with a closely related article Mario and I have just published, please let us know what you think.

In the final section of the paper, we offer a few suggestions about how to resist the slippery-slope tendencies of new paternalism (p. 737-739):

How, then, might we protect ourselves against paternalist slopes? We have three recommendations, addressed both to the new paternalists themselves and to those who might be persuaded by them. These recommendations are intended to lower the probability of adopting new paternalist policies to begin with, but also to help resist more intrusive policies after initial policies have been adopted.

1. Have Reasonable Expectations of Decisionmakers

One lesson of behavioral economics is that we cannot reasonably expect decisionmakers to carefully consider the full ramifications of their choices in light of the best available evidence. Instead, they economize on information by using choice heuristics, and they sometimes myopically focus on present and concrete problems while ignoring more distant and abstract ones. This is no less true of public decisionmakers (including voters, politicians, judges, bureaucrats, experts, and rent-seekers) than it is of private citizens. Indeed, the problem is likely worse for public decisionmakers, because they lack the incentives to discover and control their own cognitive limitations. Private decisionmakers at least face the costs and benefits of their own mistakes, and thus have an incentive to correct them.

It is therefore insufficient to ask policymakers to carefully weigh the costs and benefits of each new paternalist proposal. The “careful, cautious, and disciplined approach” advocated by Camerer and coauthors is rather unlikely to guide real-world policy. We should not expect policymakers to weigh all the economic, scientific, and psychological evidence objectively, to stand on nuanced distinctions, and to adopt policies that carefully target just those people who need help most. We should expect policies to be blunt instruments.

Regulators Ban Mom’s Banana Bread

by Chidem Kurdas

Last week, New York City’s  Panel for Educational Policy approved a new rule for school bake sales. Home-made treats are no-no, but pre-approved packaged products, the ones that are also in school vending machines, are fine.

The bake sale ban is supposed to reduce childhood obesity. An education bureaucrat explained that homemade goods can’t be allowed because it’s impossible to know their portion size and content.  You may add raisins to your banana bread and slice it thin, while I add walnuts and cut it thick.

Hence banana bread, cupcakes and anything else baked at home have been banished; but kids are free to gorge on Kellogg’s Frosted Brown Sugar Cinnamon Pop-Tarts, which come in portion-controlled packages and have known ingredients—in fact a long list of ingredients from high fructose corn syrup to yellow dye #6.

This is a vivid little example of how regulation in general functions and the impact it has in many areas of social life.

New Paternalism on the Slippery Slopes, Part 10: Rejoinder to Objections

by Glen Whitman

Some new paternalists have recognized the slippery-slope objections to their approach, and they have made some effort to respond. But we find the responses insufficient (p. 735-737):

In their book Nudge, Sunstein and Thaler recognize the slippery-slope objections to their policies, and offer three responses. We reply to their responses here.Sunstein and Thaler’s first response is that the slippery-slope argument “ducks the question of whether our proposals have merit in and of themselves.” They say if the initial interventions are worthwhile, then we should “make progress on those, and do whatever it takes to pour sand on the slope.”

Our claim is not that slippery slopes are the only objection to the new paternalism. Various other objections have also been made (and referenced in the introduction to this Article). The slippery slope is an additional argument against the new paternalism.

The idea that we should “make progress” on the initial interventions, and then do what we can to “pour sand” on the slope, is a variant of the usual (and, we think, hackneyed) response to all slippery-slope arguments: that we can simply “do the right thing now, and resist doing the wrong thing later.” But if the slope argument is correct, there is a causal (albeit probabilistic) connection between initial interventions and later ones. Saying we should move forward on those initial interventions is akin to saying we should do something because it promises present benefits, while ignoring the potential costs in the future. Ironically, it is just this sort of error in private decision-making that most new paternalists think cries out for correction. The slope risk must be counted among the costs of the initial intervention.

New Paternalism on the Slippery Slopes, Part 9: Framing in Public Policy

by Glen Whitman

And after another long interruption, I’m finally going to finish my series of excerpts from Mario Rizzo’s and my article, “Little Brother Is Watching You: New Paternalism on the Slippery Slopes.” There are three more posts, including this one.

As discussed in an earlier post, the new paternalists use the notion of framing — that is, the idea that people’s choices respond to seemingly irrelevant differences in how the choice situation is presented — to justify a variety of policy interventions. But what happens when we apply the notion of framing to the choices of the policymakers themselves? There is a natural human tendency to frame decisions narrowly “because immediate and concrete effects are more psychologically accessible than remote and abstract ones” (p. 726), and this tendency has worrisome implications for public policy. Specifically, paternalist policy-makers will tend to ignore the indirect and longer-term and implications of their policy choices (p. 726-727):

Narrow framing leads decisionmakers to consider choice-options simply as they arise, framed by present circumstances, the crisis of the moment, and perhaps the activities of rent-seekers. Their actions will often be ad hoc solutions to particular problems, and the narrow framing produces a tendency not to see important interrelationships. In Kahneman’s words again, “[t]he decision of whether or not to accept a gamble is normally considered as a response to a single opportunity, not as an occasion to apply a general policy.” For example, the interaction of biases may be ignored. This means the problem is not simply one of discounting long-term effects, but also of discounting effects that occur through longer and more complex chains of causality.

The Price of the Mega-State

by Mario Rizzo  

The recent Supreme Court decision that “ruled that the government may not ban political spending by corporations in candidate elections” is a true victory for freedom of speech.   

What many people do not realize, however, is that both sides in this dispute had important and valid points. The terrible truth of the matter is that a large complex government is incompatible with political and personal freedom. It is not just the economic freedom in various sectors that is threatened by a large welfare and regulatory state. (Most classical liberal-oriented economists well understand the effect on economic liberty.) However, those other freedoms that modern-day social democrats (aka “liberals”) value are also threatened.  

New Paternalism on the Slippery Slopes, Part 8: Hyperbolic Discounting in Public Policy

by Glen Whitman

As discussed in a previous post in this series, the new paternalists often use the concept of hyperbolic discounting (roughly, excessive impatience) to show that people make systematic errors that could, in principle, be corrected by government intervention. But what if policymakers, too, are prone to hyperbolic discounting? That is the question raised in the next section of the paper (p. 724-725):

Policymakers can have short time horizons for various reasons. They might no longer hold office when future costs and benefits of their policies occur. Insofar as voters have imperfect memories, they might fail to fault policymakers for the ill effects (or credit them with the good effects) of policies they supported. Both of these effects give fully rational policymakers an incentive to discount future consequences.If policymakers are hyperbolic discounters, there is yet another reason they will tend to discount the future: because they apply especially high rates of discount when some costs or benefits are in the present (or near future).

Bonuses: An Annoyed Analysis

by Mario Rizzo  

I understand why many people feel it is unfair for bailed-out banks to pay big bonuses. But the simple truth is the banks were bailed out on the grounds that their possible failure was an issue of systemic risk. The collapse of the financial system was threatened. So the bailouts, as the story goes, prevented that. 

Thus the “American people” benefitted to the extent that the financial system was saved. And that, if accurate, is an enormous benefit to us all.  

New Paternalism on the Slippery Slopes, Part 7: The Inevitable Misinterpretation of New Paternalist Arguments

by Glen Whitman

Happy new year! After a holiday-induced hiatus, I’m now resuming the series of excerpts from Mario Rizzo’s and my recently published article, “Little Brother Is Watching You: New Paternalism on the Slippery Slopes.”

A number of our claims in the paper rely on the new paternalists’ arguments (which are largely based in behavioral economics) being misconstrued or misrepresented by other parties such as politicians, bureaucrats, and rent-seekers. We claim such people will often employ simplified, unsophisticated versions of the new paternalists’ arguments when crafting policy. Is this a fair line of criticism? We believe it is (p. 723):

Experts, and more broadly intellectuals like the readers of scientific and law journals, naturally respond to sophisticated argumentation. The complex interaction of multiple justifications is their favored milieu, the drawing of distinctions their stock in trade. Some of the claims of this Part might, therefore, seem anti-intellectual or unfair, because we are discussing the misinterpretation of the new paternalists’ arguments, rather than the new paternalists’ actual arguments. Why can’t the experts simply reject the simplification, distortion, and expansion of their justifications for policy?

New Paternalism on the Slippery Slopes, Part 6: Rent Seekers

by Glen Whitman

As discussed in the previous post, the “experts” in charge of implementing new paternalist policies will have a tendency to simplify their own theories to make them useful for crafting policy. That alone creates slippery-slope potential. But that potential is magnified by the existence of rent-seekers – that is, interest groups whose agenda is to change policy for their own interests. Such interests can be ideological, monetary, or simply personal. In the paper, we illustrate the power of rent-seekers to distort the facts and confuse the debate with two issues: environmental tobacco-smoke (ETS) and obesity. With respect to ETS, however, we have to run off a potential objection: that ETS is not really a paternalist cause at all, because smoke harms non-smokers (p. 714):

We should note that although policies addressing exposure to secondhand smoke (“environmental tobacco smoke” or ETS) are not strictly paternalistic, inasmuch as secondhand smoke can potentially harm bystanders, paternalist arguments have played an important supporting role. Most importantly, many actual and proposed anti-smoking regulations limit the ability of individuals who may not be bothered by smoke to expose themselves voluntarily to secondhand smoke as customers or employees of restaurants and bars. Furthermore, by creating a hostile environment for smokers, the ETS argument easily slides into the paternalistic. Thus, even some ETS arguments must be regarded as partially paternalistic either in intention or merely in effect.