Debating the nanny state

Most regulation is designed to prevent one party from hurting another. Environmental regulations help those whose health is harmed by pollution, often coming from industrial sources. Food safety regulation helps consumers who might become ill because of contaminated food. These regulations are designed to correct what economists call market failures. The market does not deal well with “externalities” like pollution, or cases of “information asymmetry” where people don’t know what goes into the food they consume.

{mosads}But another class of regulation is designed to prevent you from making decisions that will hurt yourself. Restrictions making it harder to consume substances well-known to be dangerous; cigarettes are one example of this type of regulation (putting aside the issue of secondhand smoke). Often such regulations are justified by arguing that the people who may smoke are either teenagers, and thus not yet capable of judging their long-term self-interest, or already addicted to cigarettes and thus not capable of resisting the need to smoke.

Another category of regulations in this class are energy efficiency regulations for appliances or cars, which raise the cost of these goods now but will save consumers in the longer run. These regulations are justified in part by reduced pollution (particularly greenhouse gases). But the largest benefits of these regulations, as estimated by the Departments of Energy or Transportation, are the benefit to consumers of reduced long-term costs.

This puzzles economists. If consumers are better off spending more on a car or a refrigerator today and paying less in electricity bills or for gasoline in 2017, then why don’t they just do so? The options (hybrid cars, low-energy air conditioners) certainly exist. How can the government claim a benefit by forcing consumers to save money in the long run? A potential answer comes in the field of behavioral economics, and it is quite controversial.

In a recent issue, the academic Journal of Policy Analysis and Management published a debate between two recent regulatory czars on this subject. Cass Sunstein was in charge of the Office of Information and Regulatory Affairs (OIRA) in the first term of the Obama administration. In a piece written with Hunt Allcott, Sunstein argues that occasionally people’s preferences vary in different contexts and there may be a role for government in making sure the context is one that brings out their true preferences.

Susan Dudley was the OIRA administrator in the second term of the George W. Bush administration. In a response to Allcott and Sunstein, she and coauthor Brian Mannix are much more skeptical about the ability of the government to show people what is best for them. Dudley and Mannix say that regulators who assume consumers are making mistakes are themselves making errors: “Regulators might be underestimating the costs experienced by consumers, including the lost value consumers placed on various desirable attributes of light bulbs, washing machines, and automobiles. They might be overly optimistic about the energy savings that will be realized, or the value that consumers place on those savings.”

Allcott and Sunstein acknowledge that, in the case of energy efficiency requirements, where the rationality of consumers is unclear, the government should proceed with a light hand. Government should, if anything, “nudge” individuals toward the correct decisions. More restrictive policies like product bans should be saved for clearer cases and taxes and information provision are better choices.

The phrase “I’m from the government and I’m here to help” is often spoken with significant sarcasm. The issue of when government can improve individual welfare by influencing the choices people make is not a simple one. It will play out in many of the regulatory decisions remaining in the Obama administration and beyond. The lesson from this debate is that we should examine regulations justified with this rationale with a particular skepticism.

Shapiro is an associate professor and director of the Public Policy Program at Rutgers University and a member of the Scholars Strategy Network.