Naked Economics by Wheelan, Charles (best books to read .TXT) 📗

belief that individuals are rational (or at least more rational than government), meaning that individual citizens are the best judge of what is good for them, not the rest of us. If you like to sniff glue and then roll backward down the basement steps, good for you. Just make sure that you pay all your own health care costs and don’t drive a car after you’ve been into the glue.

The behavioral economists have provided plenty of ammunition for the opposite end of the continuum, where reasonable people argue that society can and should stop people from doing things that are likely to turn out badly. We have good evidence that human decision making is prone to certain kinds of errors, such as underestimating risk or planning poorly for the future. As a practical matter, those mistakes often do spill over to affect the rest of us, as we saw in the real estate collapse and the accompanying mortgage mess.

And there is a range of views in between (e.g., you’re allowed to sniff glue and roll down the steps but only while wearing a helmet). One intriguing and practical middle ground is the notion of “libertarian paternalism,” which was advanced in an influential book called Nudge by Richard Thaler, a professor of behavioral science and economics at the University of Chicago, and Cass Sunstein, a Harvard Law School professor now serving in the Obama administration. The idea behind benign paternalism is that individuals do make systematic errors of judgment, but society should not force you to change your behavior (that’s the libertarian part); instead, we should merely point you in the right direction (that’s the paternalism part).

One of Thaler and Sunstein’s key insights is that our decisions are often a product of inertia. If our employer automatically signs us up for some kind of insurance coverage, then we’ll stick with that, even if six other plans are offered. Conversely, we may not sign up for any plan at all if it requires some proactive behavior on our part—reading a benefits manual, filling out a form, going to a stupid human resources seminar, or doing anything else that involves time and effort. Thaler and Sunstein propose that inertia (and other decision-making foibles) can be used to some advantage. If policymakers are concerned about some individual behavior, such as inadequate retirement savings, then the libertarian paternalistic option is to make the default option one that automatically puts a decent amount of money from every paycheck into a retirement account. That’s the “nudge.” Anyone is free to choose another option at any time. But a shockingly high proportion of people will stay wherever you put them in the first place.

This idea has profound implications when it comes to something like organ donation. Spain, France, Norway, Israel, and many other countries have “opt-out” (or presumed consent) laws when it comes to organ donation. You are an organ donor unless you indicate otherwise, which you are free to do. (In contrast, the United States has an “opt-in” system, meaning that you are not an organ donor unless you sign up to be one.) Inertia matters, even when it comes to something as serious as organ donation. Economists have found that presumed consent laws have a significant positive effect on organ donation, controlling for relevant country characteristics such as religion and health expenditures. Spain has the highest rate of cadaveric organ donations in the world—50 percent higher than the United States.14 True libertarians (as opposed to the paternalistic kind) reject presumed consent laws, because they imply that the government “owns” your internal organs until you make some effort to get them back.

Good government matters. The more sophisticated our economy becomes, the more sophisticated our government institutions need to be. The Internet is a perfect example. The private sector is the engine of growth for the web economy, but it is the government that roots out fraud, makes on-line transactions legally binding, sorts out property rights (such as domain names), settles disputes, and deals with issues that we have not even thought about yet.

One sad irony of September 11 was that one simple-minded view of government—that “taxpayers know better what to do with their money than the government does”—was exposed for its hollowness. Individual taxpayers cannot gather intelligence, track down a fugitive in the mountains of Afghanistan, do research on bioterrorism, or protect planes and airports. It is true that if the government takes money out of my paycheck, then there are things that would have given me utility that I can no longer buy. But it is also true that there are things that would make me better off that I cannot buy for myself. I cannot build a missile defense system, or protect endangered species, or stop global warming, or install traffic lights, or regulate the New York Stock Exchange, or negotiate lower trade barriers with China. Government enables us to work collectively to do those things.

CHAPTER 4

Government and the Economy II:

The army was lucky to get that screwdriver for $500

By now you are probably ready to extol the virtues of bureaucracy at your next dinner party. Not so fast. If government were so wonderful, then the most government-intensive countries in the world—places like North Korea and Cuba—would be economic powerhouses. They’re not. Government is good at doing some things and tragically bad at doing others. Government can deal with significant externalities—or it can regulate an economy to the point of ruin. Government can provide essential public goods—or it can squander enormous tax revenues on ineffective programs and pet projects. Government can transfer money from the wealthy to the disadvantaged—or it can transfer money from common folk to the politically well-connected. In short, government can be used to create the foundations for a vibrant market economy or to stifle highly productive behavior. The wisdom, of course, lies in telling the difference.

There is an old joke, one of Ronald Reagan’s favorites, that goes something like this:

A Soviet