jamesz

Who’s scared of paternalism?

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Eric has pointed me to the discussion that happened at Cato Unbound over libertarian/new paternalism. It went a bit like this:

Glen Whitman alleges:

New paternalist policies, and indeed the intellectual framework of new paternalism itself, create a serious risk of slippery slopes toward ever more intrusive paternalism.

Richard Thaler (a founding father of LP) replies:

[The] risk of the slippery slope appears to be a figment of Professor Whitman’s imagination… Slope-mongering is a well-worn political tool used by all sides in the political debate to debunk any idea they oppose. For example, when the proposal was made to replace the draft with an all-volunteer army, the opponents said this would inevitably lead to all kinds of disastrous consequences because we were turning our military into a band of mercenaries… Instead of slope-mongering we should evaluate proposals on their merits.

My favourite commentary on the debate was Robin Hanson’s:

As far as I’m concerned, all of these authors avoid the core hard problem. Yes paternalism can be a matter of degree, but even so we need principles by which to choose what degree of paternalism is appropriate in what context. Just repeating ‘More’ and ‘Less’ quickly gets tiresome. Such principles need to explicitly take into account the fact that organizations can give folks advice instead of limiting their choices.

It highlights how the argument often ignores the key normative question: how paternalistic should governments be? I’m constantly surrounded by people arguing from a fairly libertarian, utilitarian perspective so I’m curious about how the other half thinks. For instance, what’s the justification for trying to stamp out smoking? Which modern philosophers have supported positions that economists would refer to as hard paternalism, and why?

jamesz

The importance of economists

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In the comments of a recent post I claimed that philosophers and economists have little sway over important social policy decisions. Discussing the subject with colleagues I was pointed to this stunning quote by Keynes:

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.

I’d like to believe it but is there any empirical support? Not that I’d really want to kill such a beautiful idea with brutal facts.

jamesz

No free lunches in economic reform

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A recently released report from the Grattan Institute in Australia surveys ‘game-changing’ ways to increase GDP. Its conclusions on the priorities for economic reform are summarised in a diagram:

Notably, two of the three most urgent changes that they identify relate to lifting workforce participation. That’s a tricky topic because, while more labour might increase GDP, it also decreases leisure time. Read more

jamesz

More on slippery slopes and nudges

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In a follow up post about nudges and shoves Eric recommends a piece by David Friedman on slippery slopes that argues:

An optional charge where the default choice is to pay it is the sort of thing Sunstein and Thaler propose, a nudge in the direction of doing what those responsible believe, possibly correctly, that most of those nudged would want to do if they took the time to think about it. But the people constructing the choice architecture know what result they want to get, they believe they are doing good and so not constrained by what they themselves would consider proper principles of morality and honesty in a commercial context, so it is very easy to make the “wrong” choice more and more difficult and obscure until what is optional in theory becomes mandatory in practice.

Essentially, the argument is that once you start meddling with people’s choices it’s very hard to avoid imposing your own views of the world. The idea behind nudges is that you help people to make the best choice from their own perspective, not yours, but that’s very hard to do in practice.

As far as it goes, that sounds very sensible and Friedman is probably right that people trying to nudge others are likely to stray in paternalistic territory. However, what the argument is missing is a plausible counterfactual. The choice architects will still need to frame people’s choices in some way. If they use nudges as their guiding principle then they will attempt to frame the choice to maximise the expected benefit to the person making the choice. As Friedman cautions, the architect may not be very good at divining the preferences of others and may end up being more paternalistic than they intended. But the alternative is not that the choice disappears, or that it is not framed in some way. The alternative must be some other guiding principle for framing the choice.

One possibility is randomisation, but there are many instances in which that will result in terrible choices for most people becoming the default. It seems hard to justify that position. A more likely alternative is that the framer will use their own preferences to guide the framing of the choice. The outcome is likely to be rather paternalistic and not at all to Friedman’s liking! It’s all very well to suggest imperfections in the mechanism for framing choices but imperfection doesn’t mean it’s not the best of the bunch.

jamesz

Markets for speeding and networking

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In Texas you’ll soon be able to pay less than the price of a speeding ticket to go faster.

If you’re a young entrepreneur then you might want to pay to contact influential people and be guaranteed they’ll actually read what you write. A former NZ diplomat has co-founded an internet startup to allow you to do just that. Interestingly, much of the fee you pay to contact them goes to the charity of their choice.

Matt Nolan

Some thoughts on housing

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I see that the latest Barfoot figures are out, and they are pointing to fairly strong sales figures in the Auckland region.  That’s nice. There are also suggestions that this is indicative of a bubble or boom coming into the housing market.  However, it is important to look at a broader view of what is going on, not just house sales for one agency in Auckland, in order to get an understanding of the what is really going on.

When looking at the housing market, there are a number of little points we need to keep an eye on.

  • The regional split: We have commonly been told that Auckland and Canterbury have a shortage of property – all else equal this pushes up house prices in these regions.  This is something we have seen happen.
  • Borrowing to invest?: In 2003, households borrowed heavily and developers started building heavily.  Now we have the opposite.  Yes, in the year to April households borrowed 30% more (in gross terms) to buy housing.  Yes, this was $45.4bn.  However, the stock of mortgage debt rose by a more modest $2.4bn more – or by 1.4%, below the rate of inflation.  Even as house sales and prices have climbed, households have taken the funds from sales to pay back mortgages – not to spend or build more houses.  SO, while we could use the rising prices and investment in the mid-2000’s to point towards a bubble, this time we have limited investment and an underlying shortage of property driving up prices – this is not a bubble, this points to a failure somewhere in the building or credit markets.
  • Credit conditions:  Mortgage conditions have eased, and competition between banks (along with low wholesale funding rates) has driven down the cost for households.  This sounds similar to what was going on during the boom time.  But even so – we have pointed out that increases in NET borrowing have been low (or negative in real terms).  On top of this, for various reasons credit conditions are tight when it comes to building houses – increasing the value of existing housing.
  • Quality, income, and constraints:  As the productivity commission noted, there are significant issues currently impeding activity in the building industry – and thereby pushing up prices.

When this combination of factors is taken together, it feels like we have a situation which is “supply” driven, with a shortage or property driving up values.  This compares to any perceived “bubble” which would be “demand” driven, with expectations of capital gains leading to excessive investment and excessively high prices.

This distinction is important when it comes to the actions of the Reserve Bank.  There are three questions they need to ask when looking where housing appears within the context of their goals of inflation targeting and financial stability:

  1. Are current interest rates consistent with the level of general demand in the economy? If the lift in housing market activity is supply driven, this suggests that interest rates should be lower relative to a situation where it is demand driven, with the increasing borrowing that entails.
  2. Is the current stock of debt, and banks attitude to risk in general, taking into account the full social risk associated with these elements?  The RBNZ has introduced a range of policies to help ensure this is the case.
  3. Is the regulatory regime that the RBNZ implemented possibility having a greater impact on domestic demand, or the housing/construction market than was previously expected?