Topic: Tax and Budget Policy

Rizzo versus Thaler on “Libertarian Paternalism”

Earlier this month, a few of us at Cato had the opportunity to hear NYU economics professor Mario Rizzo discuss a paper he has been working on with Glen Whitman on the so-called “new paternalism.” Their conclusion is that there is nothing “new” about it, and that it collapses into plain old paternalism. Today, over at the Wall Street Journal’s Econoblog, Mario takes on Richard Thaler, who along with his University of Chicago colleague Cass Sunstein, is responsible for the notorious ”libertarian paternalism” pseudo-concept.

Mario, gets the best of Thaler, I think, despite the fact that Thaler is incredibly evasive and slippery in this exchange, basically refusing to address a number of Mario’s rather deep objections head on. He wants to keep the “libertarian paternalism” terminology while denying that he is offering a set of ideas that are in the same line of semantic business as either “libertarian” or “paternalism.” It’s hard to see the point of this, other than to rhetorically “nudge” people into thinking that paternalism is sometimes okay because it is sometimes “libertarian,” and to get people to think that even libertarianism can sometimes be “paternalistic.” 

It is surely true, as “behavioral economists” like Thaler have shown, that we have a tendency to make certain kinds of cognitive “mistakes” (relative to some impossible blackboard standard of economic rationality, at least) and suffer from certain weaknesses of will. And it may also be true that many workers will be glad to accept labor contracts that provide for work and compensation arrangements that help them structure their time or manage their money in light of these foibles. I guess if one insisted on abusing words, one could say that voluntary labor agreements are “libertarian” in the sense that they are uncoerced. (By the same standard, choosing to eat pistachio instead of rocky road ice cream is “libertarian.”) But if there is no coercion, there is no paternalism, since “paternalism” already means something. 

Here is how Thaler motivates “libertarian paternalism”:

People make mistakes, so sometimes they can be helped. It is possible to help without coercion. That is libertarian paternalism. The concept can be and is used in both the public and private sectors. For example, in London, pedestrians from abroad are reminded by signs on the pavement to “look right” because their instincts from back home are to expect traffic to approach from the left. No one is forced to look right, but fewer pedestrians are hit by trucks.

This is so broad as to be completely intellectually useless. If your kid is misspelling a lot of words, and then you teach them the “ ‘I’ before ’E’ except after ‘C’ ” rule, you’ve helped them correct mistakes non-coercively. Is that libertarian paternalism? A “watch your step” sign in restaurant? An instructional DVD that helps your golf swing? 

Mario, I think, gets it just right:

Libertarianism is a political philosophy that seeks to reduce the activities of the state to a very low level. It is very much about less government. Paternalism is a political or moral philosophy that seeks to override the actual or operative preferences of individuals for their own benefit, however defined, according to Donald VanDeVeer’s 1986 book on the subject. When applied to the actions of government, paternalism cannot be libertarian. It can only be more or less intrusive.

Does Richard wish to reduce his “libertarian paternalism” to the appropriate management of government-owned streets or other enterprises? In the London case, what people want is obvious: They don’t want to get hit by cars. London is doing what entrepreneurs generally do: satisfying actual preferences. London is mimicking the market.

[…]

Richard wants to use the word “libertarian” to differentiate his paternalism from the traditional variants. Yet he uses the word in a fuzzy way. He wants to define libertarian along a continuous variable – the cost of exercising the exit option. However, libertarianism, as every libertarian understands it, uses a bright-line test – who imposes the cost? The authors of the concept of “libertarian paternalism” have said that clearly intrusive/coercive interventions are consistent with it. See my previous post. And they have also said, explicitly, that there is no sharp line between libertarian and non-libertarian paternalism. Thus, Richard cannot claim that his standard creates a bright-line rule that would help us resist the slippery slope.

As Mario and Glen have titled the paper they’re writing: “Meet the New Boss, Same as the Old Boss.”

If you missed it, be sure to check out Glen’s Cato paper, “Against the New Paternalism: Internalities and the Economics of Self-Control.”

German Finance Minister Endorses Flat tax

Sounds like a great headline, but the details leave a lot to be desired. As a matter of fact, the German concept of a “flat tax” is an additional daily levy imposed on prostitutes, not a simple and fair system for all taxpayers. As a news report explains, German politicians are motivated by a desire to capture more revenue:

Germany’s Finance Minister Peer Stein [Ed. note: error in original report. the name should be “Peer Steinbrück”] wants prostitutes to pay a flat tax of 25 euros a day, according to a report in Tuesday’s edition of the daily newspaper Bild. Sex workers would still file an annual tax declaration and, according to the number of clients, the tax authorities would either reimburse them part of the daily tax – or oblige them to pay more, said the paper. … Prostitution has been legal in Germany since the beginning of 2002, and prostitutes in theory have social security cover, but like taxation, the system does not work well in practice. According to a 2003 report, the German taxman misses out on about 2 billion euros from prostitution.

A Rising Tide Lifts all Boats

Kennedy was right. Not Teddy Kennedy, of course, but his brother. President John F. Kennedy stated that a rising tide of economic growth generated benefits for all. A new study from the Congressional Budget Office looks at income trends for families with children and confirms JFK’s wisdom. The Wall Street Journal reviews the key findings:

A new study by the Congressional Budget Office says the poor have been getting less poor. On average, CBO found that low-wage households with children had incomes after inflation that were more than one-third higher in 2005 than in 1991. The CBO results don’t fit the prevailing media stereotype of the U.S. economy as a richer take all affair – which may explain why you haven’t read about them. … The poorest even had higher earnings growth than the richest 20%. The earnings of these poor households are about 80% higher today than in the early 1990s. … CBO says … earnings from work climbed sharply as the 1996 welfare reform pushed at least one family breadwinner into the job market. … earnings for low-income families have still nearly doubled in the years since welfare reform became law. Some two million welfare mothers have left the dole for jobs since the mid-1990s. Far from being a disaster for the poor, as most on the left claimed when it was debated, welfare reform has proven to be a boon. … The report also rebuts the claim, fashionable in some precincts on CNN, that the middle class is losing ground. … every class saw significant gains in income. … the CBO study found that, with the exception of chronically poor families who have no breadwinner, low-income job holders are climbing the income ladder. When CBO examined surveys of the same poor families over a two year period, 2001-2003, it found that “the average income for those households increased by nearly 45%.” That’s especially impressive considering that those were two of the weakest years for economic growth across the 15 years of the larger study.

Even Swiss Politicians Concoct Bad Tax Ideas

Proposals for global tax schemes normally emanate from places like Paris and Brussels. Swiss officials, by contrast, generally have a more sensible attitude – especially since they often are in a position of having to defend Switzerland’s fiscal sovereignty. But as Tax-news.com reports, one Swiss Minister wants a “tax on information” to fund global redistribution:

Swiss Communications Minister Moritz Leuenberger has suggested a ‘tax on information’ to help bridge the digital divide between wealthy countries with good communication infrastructure and poor countries where most of the population have no access to modern communications. Leuenberger revealed his proposal to a United Nations meeting convened to follow up on the World Summit on the Information Society (WSIS), held jointly in Geneva and Tunis in 2003 and 2005. … Leuenberger surmised that such a tax could be raised on information content which is paid for and computers.

A Positive Health Care Agenda for Free-Market Advocates

If you know any limited-government types who are looking for a positive health care agenda (off-hand, I can think of ten), be sure to let them know about a forum Cato is hosting on Thursday titled, “Health Savings Accounts: Not Entirely Consumer-Directed (Yet).”

HSAs are the most important step Congress has taken toward liberalizing America’s health care sector.   At this forum, I’ll be introducing a proposal that would let workers own every one of their health care dollars – not just the few thousand dollars that HSAs let them control.  Tentatively titled “large HSAs,” this proposal would:

  • Allow workers to control 100 percent of their health benefits dollars
  • Allow HSA holders to choose any type of health plan
  • Eliminate the tax code’s biases toward employer-sponsored insurance and excessive coverage
  • Cap the tax exclusion for employer-sponsored insurance and
  • Provide tax relief to those without employer-sponsored insurance, including the uninsurable.  

Joining me to comment on the proposal will be the CEA’s Katherine Baicker and Jason Furman of the Brookings Institution’s Hamilton Project. 

The forum will be held just two days from today, on Thursday, May 24, at 4pm EDT at the Cato Institute.  Click here to register or watch the event online.  Click here for directions and parking information. 

More Special-Interest Favors for Fannie and Freddie

Created by politicians and bolstered by aggressive lobbying, Fannie Mae and Freddie Mac are quasi-private companies with special access to funds and special regulatory exemptions. With the playing field dramatically tilted in their direction, these morgage-industry behemoths are accumulating ever-larger portfolios. In a genuinely unfettered market, this would be just fine, but this is not the case. Because of their special access to the Treasury, Fannie and Freddie create a heads-they-win-tails-we-lose situation for taxpayers. If Fannie and Freddie prosper, it is the consequence of government favoritism that results in the economy’s capital being misallocated. If they fail, there almost surely would be a bailout reminiscent of the S&L fiasco. There has been an effort to slightly curtail the risks caused by the Fannie and Freddie subsidies, but the Wall Street Journal notes that the one decent provision of the bill was removed. Not surprisingly, there is widespread expectation that the White House will approve a bill that actually makes a bad situation even worse:

Their amendment to Mr. Frank’s bill, which passed by voice vote Thursday night, guts the one provision that made it worth the effort. What’s left is a regulator who would lack the authority to limit the risk that Fannie and Freddie’s $1.4 trillion mortgage-backed securities portfolios pose to the financial system, plus a $500 million a year boondoggle that goes by the euphemism “affordable housing fund.” …That leaves the White House and Treasury with some decisions. Administration officials were cautious about the Bean-Neugebauer amendment when first proposed, but Fannie and Freddie’s friends are betting the Administration wants a deal enough to accept even a bad one. However, a “reform” that does nothing to reduce the problem of putting so much housing risk into two companies, and which also includes an annual $500 million donation to “housing” activists such as Acorn is worse than the status quo.

Senator McCain’s Domestic Agenda

Sen. John McCain today laid out his domestic agenda in a speech before the Oklahoma State legislature.

The speech is noteworthy for two topics not mentioned by the Senator. First, he makes no promises about additional restrictions on campaign finance. Of course, he also does not promise any liberalizing reforms of government oversight of campaign spending, reforms that might appeal to Republican primary voters.

Senator McCain also omits any concrete proposals about cutting back the federal government. To be sure, he promises a government that is smaller and more efficient. He just does not say specifically what spending will be cut and which programs will be eliminated.  He does promise to spend more on the federal workforce. That does not seem likely to lead to a smaller federal government.

McCain praises business and suggests the federal government can become more like successful firms. He does not mention, however, how the burden of taxation might be eased on individuals and the businesses they create and manage.

“Reform” appears to be the theme of Sen. McCain’s domestic agenda. This brings to mind his hero, Teddy Roosevelt, hardly a exemplar of limited constitutional government. Perhaps we should be thankful that Sen. McCain has forsaken for now “reforms” like McCain-Feingold.

But it is hard to avoid the conclusion that McCain has given up on the idea of cutting back government in favor of individual liberty.  He wants instead a government run by people animated by “higher aspirations” and “dedication to the national interest.” In other words, Sen. McCain is a big government conservative without qualifications.