A number of readers emailed, tweeted, sent carrier pigeons, etc. to ask what I had to say regarding a recent NYT op-ed piece by George Loewenstein and Peter Ubel that discusses the limitations of using behavioral economics to drive policy. The authors summarize their central thesis as follows:
But the field has its limits. As policymakers use it to devise programs, it’s becoming clear that behavioral economics is being asked to solve problems it wasn’t meant to address. Indeed, it seems in some cases that behavioral economics is being used as a political expedient, allowing policymakers to avoid painful but more effective solutions rooted in traditional economics.
Loewenstein and Ubel then go on to use the mandatory calorie labeling plans in places like New York City as an example of a case where “fashionable” behavioral nudges are being written into policy at the expense of more substantive and (theoretically) effective legislation. (Seriously, it’s just easier to read the article and then come back here.) There are two things that are important to keep in mind when mulling over the article’s logic.
First, the divide between behavioral economics and traditional microeconomics is not nearly as wide or as clear as the wording in the above quote implies. Put simply, the difference between traditional and behavioral economics is that traditional economics assumes that individuals are always able to maximize their long-term utility and aren’t swayed by silly things like discrepancies between short-term and long-term happiness, the framing, wording or context of their choices, self-control problems, cognitive limitations and the like, and behavioral economics…well, doesn’t. (When economists refer to “irrational” behavior, you can roughly interpret it as “behavior in conflict with one’s objective long-run utility or well-being,” though personally I tend to envision a hysterical 1960′s Betty Draper-type female.) In the calorie labeling example, the rationale is that people are making “bad” choices because they are either unaware of the characteristics of the products they are choosing from (rational but ignorant) or they are willfully ignoring those characteristics and seeking immediate gratification at the expense of long-term happiness (irrational). Any Economics 101 course will tell you that a required condition for markets to be efficient (read, value-maximizing for society) is that consumers have full information about the products they are considering consuming. In this way, the calorie-labeling legislation is helping to push the fast food market in the direction of efficiency as much as anything else. What’s so behavioral-y about that?
This is why I get annoyed when the calorie-labeling laws are reported as failures. A failure at what exactly? The law was supposedly put in place in order to give people easy access to information so that they can make better choices for themselves, and it certainly succeeds in this regard. It’s not really the law’s fault that people still want their Big Macs and super-size fries even when they have the calories staring at them in the face. (It’s also kind of funny to see the upper middle-class mostly white lawmakers struggle with the notion that not everyone is obsessed with being as thin and wrinkle-free as possible. Just wait until this sort of issue reaches the House of Representatives and Nancy Pelosi gets her hands on it.) Maybe those people still eating the Big Macs are being irrational and are going to regret it later, or maybe- shocker- the Big Macs are utility-maximizing despite the squishiness that they induce. If policy-makers are attempting to enact legislation under the guise of “saving people from themselves,” they should at least consider the possibility that people actually are doing what is best for them and don’t need or want to be saved. It’s interesting to note, however, that studies have reported that the calorie-labeling laws have caused people to make healthier choices for their children, which (weakly) suggests that people may still be having trouble making the best long-term choices for themselves but is far from being conclusive evidence.
The second, and more important, point is that the framing of the difference between the two lines of policy thought as “behavioral” versus “traditional” masks the inherent functional differences between the policy ideologies. When a government uses information and choice architecture to encourage what it feels is good behavior, it is subscribing to a philosophy of libertarian paternalism (yes, that’s actually a thing) whereby the regulator is nudging without restricting consumers’ options in any way. For example, the consumer has exactly the same set of choices available to her regardless of whether calorie counts are on the menus or not. Because of this feature, it’s hard to argue that this sort of legislation is significantly bad for anyone- here, the worst-case scenario is that some people keep eating unhealthy food but are no longer blissfully ignorant and instead feel guilty. This is different from, say, a tax on fast food, which would raise the price of food and thus limit the choices available to consumers. Given this difference, why shouldn’t lawmakers try to achieve their goals via legislation that doesn’t impose monetary costs and doesn’t force people’s hands via the almighty dollar before resorting to the blunt kick in the pants that taxes usually end up being?
The idea of saving people from themselves is nice and all, but, in reality, the main motivation and justification for intervening in the fast-food market is that eating fast food imparts costs on the health-care system that end up being paid in part by people who didn’t specifically choose to live on Double Quarter Pounders with Cheese. (negative externatlities, in economic terms) Again, Economics 101 textbooks will tell you that when negative externalities are present in a market, putting a tax in place can actually increase overall societal welfare. The tax is theoretically helpful because it causes people to internalize the costs that their actions have on others, and these people produce and consume less of the thing with the negative side effects as a result. However, improving overall societal welfare doesn’t necessarily correspond with making everyone in the society better off- for example, requiring that a person be sacrificed so that his organs can save the lives of multiple individuals waiting for transplants would also increase this textbook definition of societal welfare, but we’d certainly think twice before implementing this sort of plan.
Are there reasons that a government should think twice about implementing a fast-food tax as well? The fact of the matter is that, by putting a fast-food tax in place, the government is raising the price of food. (This is true even if people end up switching away from the fast food.) The people who are going to feel this price increase the most are those who consume more fast food, and these people are generally of the lower-income variety, except perhaps for my friend Brian who takes his Ferrari through the Taco Bell drive-thru on a regular basis. I’m all for encouraging healthy eating and whatnot, but something doesn’t quite sit right when it comes to artificially raising the price of food for people who are likely struggling to feed their families in the first place, especially when the justification is that the rest of us don’t have to look at their fat as…er, so society doesn’t have to foot the bill on health care costs. (Yes, I also get that the people will live longer and healthier to some degree, but that’s sort of like saying “hey, you know how you’re struggling to get by and all? Well, guess what? We’re going to make life harder for you now so that you can keep struggling for longer. You’re welcome!!!”) It’s not surprising that the discussion usually takes a philosophical turn pretty quickly- one could argue that it’s not fair for poor people to pay $1 more for their food so that Bill Gates can put $1 less into the health care system, but it’s also not really fair that Bill Gates has to pay extra money into the health care system because other people chose to eat a ton of bacon cheeseburgers.
The other issue with bluntly using a tax to correct for the externalities of unhealthy food is that fast food is not like pollution- it’s not like I am adding some small amount to the costs of the health care system every time I have my chicken McNuggets. Therefore, taxing me each time I eat said McNuggets is not the right approach, and it is not necessarily the case that taxing in this way will even lead to an improved outcome for society. (For the wonks in the audience: The reason that a tax can be a good thing is that it decreases the cost of the externality by more than the deadweight loss that it creates. However, if the people that change their behavior due to the tax are in large part those who weren’t creating the externality in the first place, society will see the downside of the tax without a whole lot of the upside.) Maybe this is just me being bitter about having to pay because other people can’t handle their McNuggets, but I don’t really want to hear about most of these “sin taxes” until someone figures out a reasonable way to specifically tax excess consumption.
The bottom line is that designing good legislation that limits people’s choices and hits them where it hurts is harder than simply nudging people in the right direction. Done right, it might also be more effective, but from the above discussion it should be clear that “doing it right” is a tall order. Make no mistake, however, that the distinction is between easy and hard much more so than it is between “behavioral” and “traditional.”
To read more about nudges and libertarian paternalism, I recommend Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard Thaler and Cass Sunstein. You can also read a response to the NYT article on the Nudge blog here.