Is it worth noting that one cannot simply “opt out” of Thaler and Sunstein’s endorsed retirement programs (see endnote 15, chapter 6 of Nudge)? If employers wish not to participate in auto-enrollment, then they are exposed to costly legal liability and must expend costly effort filling out forms to attenuate this liability. If employees wish not to participate in retirement plans like a 401k, they are exposed to a tax penalty. So, even as the authors might prefer to see things, this intervention does indeed reduce the decision space of market actors.
It might be responded that this is merely another failure of the authors to live up to their stated principles – not an indictment of those principles themselves. But I have trouble imagining a situation in which “libertarian paternalism” is enacted by government yet nobody’s decision space is narrowed.
Perhaps the claim is that, if only the employer’s decision space is narrowed, then an intervention is “libertarian paternalism”, because only employees are actual market participants and only their choices matter for utilitarian considerations. Let us fashion a hypothetical law that attempts to respect this conception in order to expose the underlying fallacy. We might coerce businesses into auto-enrolling their employees in retirement accounts that had no tax-benefits over normal bank accounts. This would, supposedly, have no negative effect on employees because they would remain free to opt out of auto-enrollment.
The supposition is inadequate. First, we have the “single-click” cost. Thaler and Sunstein frequently profess the desire to guide consumers to certain outcomes while granting the right to opt-out by methods as simple as a single click of a computer’s mouse. A trivial cost is a cost nonetheless – it does not leave the decision space unchanged. I’m tempted to set this point aside, but the authors seem eager to impose quite a few “single” clicks, involving just about every decision people can make. As the clicks accumulate, they will fatigue individuals who consider opting out – anything but reflexive default acceptance becomes costly. Or if opting in is made just as costly as opting out, the clicks will introduce generally an unnecessary friction to human action.
More importantly, impositions on the choices of employers implicitly create costs for their employees. Thaler and Sunstein argue that people have strong status quo biases. In a market system, there could be good reasons for this bias. If companies tended to offer a certain compensation default, employees could fairly assume that other people in fact preferred to receive compensation in those terms. If this compensation package were not the market equilibrium, workers with status quo biases would experience greater satisfaction at competing firms offering a more preferred default.
If the government mandates a certain default, businesses lose the ability to communicate market default preferences to their employees. Not only do employees lose access to this information, they may be deceived into thinking that the new default is in fact the market default, rather than governmental compensation-fixing. Nor must market information be destroyed to make space for “expert” information. If people want to know how Thaler and Sunstein want them to receive their compensation, they can just read Nudge. But market information can only be communicated through the market.
So to say that these employees can reach the same decision point is true in a sense, but misses the bigger picture. One might as well say that a dart player could make all of the same throws while wearing a blindfold, or that monkeys on typewriters could technically reproduce Shakespeare. Deciding on a particular decision point is in itself a costly procedure, and libertarian paternalism deprives people of important information. The imposition of a rigid, un-chosen, government default interferes with the optimal operation of human choice.
I have difficulty unpacking arguments to the effect that we should think carefully about existing choice architecture, because choice architecture cannot be avoided. These seem to be two separate claims without any important connection.
It is the case that prices must exist in a market. It is not the case that “we” or the government must think about what those prices should be. Nor is it the case that the government is creating choice architecture or fixing prices when it abstains from creating choice architecture or fixing prices. There need not be any government decision in arranging cafeteria food locations or employee retirement, any more than cafeteria managers need to plan their customers’ retirement plans or retirement planners need to design cafeterias for their customers! Some decisions need not be made by people with no connection to those decisions.
As I argued at great length below, paternalists have no grounds for picking out “better” outcomes. They do not need to make most choices for consumers. And if they need not make choices that cannot on objective grounds be said to improve outcomes, then they ought to abstain from interfering.