Monday, January 18, 2010

Whitman and Worstall: apply "new paternalism" logic to policymakers too

Lynne Kiesling

Glen Whitman has been posting excerpts from his Arizona Law Review paper with Mario Rizzo on the “new paternalism” for a while, and his most recent discussion has to do with the paternalist policy recommendations around the human tendency toward hyperbolic discounting. Hyperbolic discounting means that individuals tend to place more weight on nearer-term outcomes than might be deemed “rational” by some expected-value-based model, and the corresponding paternalist policy recommendation is to force people into the intertemporal substitution that increases the purported future benefit. There’s an enormous literature on this idea, and applications of this idea in many areas (including vehicle fuel efficiency, in which some people claim that hyperbolic discounting is a “market failure” — a claim that drives me completely batty due to its lack of logical content!), well beyond what I want to discuss here and now.

Whitman is making a more pointed argument, and an important one — if we cede this kind of decision-making to centralized policymakers and allow them to exercise the coercive power to force individuals into particular forms of intertemporal substitution, on what basis are we making that decision? If individuals in their private roles engage in hyperbolic discounting, isn’t it also logical to assume that policymakers are prone to hyperbolic discounting? And if they are, what are the implications of that tendency for the efficiency and the morality of the legislated, coerced outcomes? His post goes through several reasons why we should expect policymakers to have shortened time horizons, and I encourage you to read it.

Tim Worstall puts it much more colorfully than I am capable of:

So we should be shepherded to the right decisions by those wise enough to know what the correct, non-hyperbolic, discount rates are. That’s basically the libertarian paternalism for you right there. And as Whitman points out, that’s just great but who are the people who will be taking these decisions about what is the correct discount rate?

Yup, politicians. And do politicians take decisions based upon the correct discount rates or are they also subject to this hyperbolic discounting? Was that howls of laughter I could hear? Splutters of indignation perhaps? For yes, of course, when we look at how politicians actually run any of the long term schemes which they currently have power over we see that they’re vastly worse at this than we little sheep are. Look at civil service pensions, roaring out of control as far as the eye can see into the future because years ago it was easier to buy political support or buy off industrial unrest by promising what could never be afforded. The untold off-balance sheet promises that have been made that will impoverish our grandchildren just to get one politico or another through a difficult election. The hocking of the future in that every few year electoral scramble to get the right bums on the right benches at Westminster.

For the failure of this libertarian paternalism, the hole in this argument about hyperbolic discounting, is that we as individual humans may well be imperfect: but those who would rule us are worse by this measure. I know of no adult who lives their life with a final horizon of only the next election and I know of no politican with a horizon of longer than that next election.

Hear, hear.

[Via http://knowledgeproblem.com]

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