David R. Henderson  

Henderson on Thaler and Sunstein

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Another issue on which TS [Thaler and Sunstein] are silent--and should not be--is the issue of income tax withholding. The U.S. federal government moved to withholding during World War II because that was when it changed the income tax from a "class tax"--that is, a tax on high-income people--to the "mass tax"--that is, a tax on all but very low-income people. Afraid that people would be faced with a huge tax bill if they were required to pay their taxes annually or quarterly, the federal government implemented an "installment plan," requiring employers to withhold taxes from their employees' paychecks. I remember having a discussion about this in the late 1970s with Thaler, when he and I were both young assistant professors at the University of Rochester. We both noted that, because of withholding, many people do not seem aware of how much they really pay in income taxes and that, if they get a big refund, they think they are not paying much. This is the kind of bias that, in other contexts, TS decry. They seem to want people to be aware of the real cost of various things and not to under- or over-estimate. So a straightforward way to do that with taxes is to end withholding. If people were required to pay taxes on an annual or quarterly basis, they, especially high-income people, would become more aware of the cost of government and would likely estimate it to be higher than they now think it is. The result would likely be more resistance to government expansion. It's pretty clear that libertarians would like this outcome. And, given TS's basis for libertarian paternalism--people's systematic tendency to misestimate based on readily available data--and their alleged libertarianism, they should like both the process that leads to the result--namely, people having better information--and the result itself. Yet they say not a word about tax withholding.
This is from David R. Henderson, "Libertarian Paternalism: Leviathan in Sheep's Clothing?", Society, June 2014. Although I recommend my own article (duh), I don't recommend that you pay $39.95 to read it. If you are affiliated with a university, you can probably get it free on line. Notice, by the way, that they made a mistake in the abstract. The last word should be "more," not "true."

Another excerpt, under a subsection titled "The Invisible Gorilla:"

Libertarians are also particularly well situated to take the TS thinking in a new direction where TS seem to fear to tread: applying the insights of behavioral economics to a particularly powerful group of people, namely, government officials.

Let me explain. In a fascinating chapter, "Invisible Gorillas and Human Herds," Sunstein tells about an experiment in which people who were asked to watch a video and count basketball passes totally missed seeing a gorilla in the midst of the players. The lesson for businesses, individuals, and governments is, he writes, "that we are all at risk of missing a lot that is happening in the background (and possibly even the foreground) of our lives." Indeed.

That brings me to the 800-pound gorilla in the room--government--and a large irony in Simpler that Sunstein seems unaware of. In one passage, he notes that he delayed getting vaccinated for H1N1. Why do I highlight that fact? Because it illustrates a fundamental contradiction. Sunstein's delay shows that even he is subject to the thinking that he wants the government to "nudge," or outright coerce, us out of. He even admits, just four pages earlier, that for many people, "including those who work in government, what may matter most is today, tomorrow, and next week." Yet, he wants us to trust these selfsame government officials to make major decisions--about drugs, medical care, cars, and cigarettes, to name only a few--for us. If those government officials can't be trusted to take the long view when their own wellbeing is at stake, why would Sunstein think that we can trust them to do so for a nation of strangers?

The very insights that TS have about human behavior apply even more strongly to the humans in government because, besides being human and having the limits that regular humans have, they have even less incentive than the average human has to make good decisions about our lives. If something in our lives goes wrong, even badly wrong, due to a government official's decision, the government official typically bears very little cost for that bad decision. That explains why government so often makes bad decisions.



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COMMENTS (18 to date)
ThomasH writes:

It's not clear what mistakes people make because they do not realize how much income tax they are paying and the harm the do to themselves because of that mistake compared to the harm that might occur if they did not save enough from each paycheck to pay a quarterly tax bill net of the good from profitably investing the quarterly tax payment until due.

I think withholding passes the ST "nudge" test.

ThomasH writes:

The whole piece seems to misunderstand the point of ST. ST do not argue that in every conceivable instance government officials can nudge people in ways that they on reflection might be happy (or ought to be happy) being nudged in, but that sometimes it is possible. Certainly the cognitive limits and incentive structures applying to government officials are relevant to judging if letting government officials give a a nudge is a good idea or not. The considerations are not different from consideration of any other regulation.

Tom West writes:

besides being human and having the limits that regular humans have, they have even less incentive than the average human has to make good decisions about our lives.

The set of biases that affect our personal decision making are completely different from the biases that affect our non-personal decision making.

Also, I suspect most people are far more careful about the decisions they make on behalf of other people than the decisions they make on behalf of themselves. After all, with personal decisions, you're the only one to suffer the consequences of your mistakes.

(Until you get married or have kids - then suddenly you have to take the same care in your personal decisions as would with others - an enormous loss of freedom.)

Governments can and do make all sorts of bad decisions, but I don't think your statement proves that they will be categorically inferior to personal decisions.

Glen writes:

I'd like to defend David's article against the arguments of ThomasH.

With respect to income tax withholding, the actions that might be affected by misperception of the size of taxes are those that relate to political action: voting for different candidates, engaging in tax protests, and so forth. Withholding is a nudge that specifically nudges people in the direction of tolerating larger government. That doesn't mean that the absence of withholding would have no ill effects, of course. But David is right that the absence of withholding would induce a better apprehension of the true cost of government.

With respect to whether government should be trusted with nudging, David is right that S&T have paid almost zero attention to this issue, and that when they have, they have treated the biases that affect government decisionmakers dismissively -- far more dismissively than the biases of private actors. With private actors, they're constantly pointing out the resulting harms and asking how to fix them. With state actors, they blithely wave off the issue -- essentially saying, "Yes, yes, we need to be careful. Policymakers need to look at all the best evidence and make a considered decision." But all of their statements with regard to private decisionmakers emphasize the tendency of people NOT to be careful, NOT to consider all the evidence, etc. Why don't they approach the question of empowering the state with equal concern for bias?

James writes:

The whole "nudge" concept is to let the paternalist wet the default option but allow individuals to choose another option if they please. It has nothing to do with timing. Whether taxes are withheld or paid once a month with the cable bill is definitely interesting but this is only a difference in the timing of two types of hard paternalism.

Wars in the middle east and the incarceration of nonviolent drug offenders are not default options that people can opt out of if they so choose. Only when the IRS stops using firearms, garnishment, etc., will we have a nudge based tax policy.

David R. Henderson writes:

@Tom West,
Also, I suspect most people are far more careful about the decisions they make on behalf of other people than the decisions they make on behalf of themselves. After all, with personal decisions, you're the only one to suffer the consequences of your mistakes.
Wow, Tom, I think you’ve put your finger on one of the views that most separates you and me on policy discussions.
By the way, there’s a way to test this. So, for example, you could look at how candidate Barack Obama spent money and hired software experts out of his campaign funds when it was his own candidacy at stake. Then you could look at how he spent government money and hired software experts for the health.gov site.
Or, you could look at how good a job HUD officials do at running public housing. Then you could look at how good a job they do with their own houses.
There are literally thousands of such comparisons you could make.

ZC writes:

@Tom West,
Also, I suspect most people are far more careful about the decisions they make on behalf of other people than the decisions they make on behalf of themselves.

Do you really believe what you wrote there, Tom? David gave a couple of great examples. If you need more, open any newspaper or watch the evening news. It's frightening to think that an educated person could believe such a nonsensical statement when evidence to the contrary abounds in daily life.

John T. Kennedy writes:

@Tom West

"Also, I suspect most people are far more careful about the decisions they make on behalf of other people than the decisions they make on behalf of themselves. After all, with personal decisions, you're the only one to suffer the consequences of your mistakes."

The principles of Rational Ignorance and Rational Irrationality teach us the exact opposite - that people are more careful about their decisions when they bear the costs of those decisions, and tend to indulge their biases when they don't bear the costs.

stubydoo writes:

Perhaps I have the wrong group of friends, but based on my observations there are far more people who overestimate their own tax bill than underestimate it.

Many people presume that their tax bill equals their income multiplied by their top marginal rate - ignoring not just the graduated rate structure but also the deductions and exemptions. For a typical middle class person this error leads them to think they're paying more than double what they actually pay.

I'm all in favor of measures to increase the accuracy of people's beliefs (subject to considerations of reduced convenience and other costs of course), though in this case the effect may be the reverse of the one advocated here. Furthermore, I'm not sure how much more aware someone would become by having to write out a check than they already are when the information sits on their annual tax return (another document that they also have to put their signature on).

Tom West writes:

Well, I'm extrapolating from my personal experience and peer group. But certainly my professional efforts, which is work provided for others, is at a higher standard than the standards for my work for myself.

I'm fairly certain this is to a large extent true for all professionals. Of course, that doesn't prevent complete disasters from happening.

To the original point, I think there's lots of reasons that government projects can and do fail. My point is that I don't think that lack of caring makes government projects fail more often than lack of caring on a personal level.

By the way, I suspect that you, David, are an example of such an employee. You almost certainly care about your students getting a proper education more than they do. Moreover, I suspect that the vast majority of readers here are similarly inclined, doing their best work for others out of professional pride, rather than immediate reward/punishment.

I simply don't think the rest of the world is all that different from the people I meet and befriend every day in life.

ThomasH writes:

@Glen
I don't accept that paying taxes monthly instead of once a year or once a quarter leads to a MIS-perception of the amount of tax and consequently to being singularly insensitive to the size of government (as opposed, say, to insensitivity to how much one pays compared to carried interest earners).

Of course yearly tax payments would be more salient because they would be the only payment of that kind. Do I MIS-perceive how large my annual income is or how much I pay for my mortgage or electricity because I receive and pay them monthly?

Pajser writes:
Henderson: "If those government officials can't be trusted to take the long view when their own well being is at stake, why would Sunstein think that we can trust them to do so for a nation of strangers? "
Diet and exercise of the soldiers is planned by state officers. Average citizen plans his diet and activity for himself. The results: average soldier is in far better physical condition. If one limits himself on utilitarian arguments, he must conclude that state should plan diet and exercise. Why it works? Tom West answered - professionals make many decisions better than amateurs, even if amateurs make decisions about their own life; even if professionals are not very good in making decisions about their own life. Incentives are not perverse: planner is paid to do his job.
Henderson(from publication): "On the ethics, the elderly have no right to have the government forcibly take money from younger strangers who never consented to the deal and who, in fact, were not even born when the deal was made."
The right of the state to define laws does not follow from the consent of the citizens but from the right of the landlord to define rules tenants must accept if they want to live on landlord's land, even if they were not born when rules were established. (But I'd agree that right on social security is not property right.)
ZC writes:

@TomWest

What say you about the following:

- Do you think all the VA employees who were complicit in falsifying records, creating ghost clinics, etc to qualify for their own bonuses to the detriment of the health of others are as careless with their own healthcare?

- Do you think all the loan officers, bankers, etc. who signed off on subprime interest only loans are as cavalier with their own personal finance?

- Obama has requested $500 million dollars for 'vetted' Syrian rebels? You think he'll send a check to them from his personal account, too?

- Type words like 'guilty fraud' into GoogleNews and amuse yourself with the scores of unique results from across the US in just the last week. Public officials are especially glaring cases, like the New York Assemblywoman just convicted of marriage and bankruptcy fraud as well as campaign finance violations. Then there are the many cases of financial fraud/breach of fiduciary duty, prescription drug fraud, etc.

I'm glad all your friends are well-meaning, conscientious people, but ignoring that many in the world will stop at nothing to benefit themselves while harming others doesn't mean it doesn't happen. Incentives matter.

Brian S writes:

Pajser writes: "The right of the state to define laws does not follow from the consent of the citizens but from the right of the landlord to define rules tenants must accept if they want to live on landlord's land, even if they were not born when rules were established."

Above, Pajser expresses a belief that many people hold, either explicitly or tacitly, that lends legitimacy to many government functions. Pajser states that the state is akin to a landlord, which means, I'm guessing, that the state owns all the land under where state-made legislation applies. Similar analogies are that the state is like a university that owns the land included in the campus, or that the state is like the owner of a cruise ship.

For an analysis & critique of this view, I recommend the article "Against Overlordship," by economist Dan Klein of George Mason University, published in the Fall 2011 Independent Review (open access). Here's the abstract:


For social democrats, the state is to the community what the landlord is to the apartment complex or the owner is to his hotel. The notion that all social affairs within the polity are enveloped within a contract with the state, which owns some kind of encompassing substructure upon which all else within the polity depends, is the unspoken premise of social democracy and progressivism.
Klein has a similar essay at Cato Unbound, where scholars debate his arguments. (cato-unbound dot org)

More thoughts: The validity the state-as-landlord analogy at least depend on establishing why the state can claim ownership of the land where its legislation is recognized to apply. It should also withstand the argument that law (as opposed to legislation), including laws that recognize property rights exist, can be recognized, and be defended without the state.

For examples see the work of Bruce Benson, e.g., his book The Enterprise of Law: Justice Without the State." George C. Leef has a review at fee dot org. Benson's articles are also on-line. They include "Enforcement of Private Property Rights in Primitive Societies: Law without Government" and "The Spontaneous evolution of Commercial law." See also Matt Ridley's The Origin of Virtue, Chapter 10, "The Gains from Trade." (I think that's the correct chapter.)

For completeness, if anyone cares, I also recommend the Cafe Hayek blog posts by Don Boudreaux titled "Law Is Not a Product of the State" and "A Fuller Understanding of Law." Boudreaux credits Hayek's Law, Legislation, and Liberty as a significant influence.

Tom West writes:

ZC, I am well aware that graft and fraud exist, both within and without government. But I don't consider them so common as to meaningfully impact my general desire for either government or private goods and services.

I do believe they should be vigorously exposed - I dislike panaceas.

I might also add that I *like* the idea of making it clear to taxpayers just how much money one pays in taxes. I *like* people to have more knowledge, even if it leads to outcomes I don't care for.

I would differ from Libertarians in that I would also demand the same transparency from private institutions.

However, I think withholding tax is necessary to prevent people from going deep into debt. The amount of misery it saves is worth the loss of information.

Tom West writes:

Brian S, thanks for the pointer to Klein's essay. As a social-democrat, I think he's pretty much nailed it, although I think "condominium board" might be more apropos that landlord.

My reading of Klein's article is that he believes that there is a fundamental definition of government, and our current government has stepped beyond it.

I'd argue that (democratic) government has always been what people believe it to be, and that there are no meta-principles beyond that. Changing it back isn't reverting to a fundamental definition, it's simply persuading enough people that that's what government should be.

In a democracy, a philosophy doesn't rule, people do. A successful philosophy might guide and persuade the populace, but it has no power in absence of the people who believe it.

We can all believe in fundamental principles, but the bitter reality is that they are functionally meaningless unless enough people subscribe to those principles.

Ruy Diaz writes:

Tom West wrote: "I simply don't think the rest of the world is all that different from the people I meet and befriend every day in life."

I take it you've never lived in a low-income neighborhood, then. Or taught in a school in said neighborhood. You are so, so very wrong.

Tom West writes:

Ruy Diaz,

My upbringing is indeed middle-class. However, I've not noticed a substantial difference in the work-ethic and moral standard between those of low-income that I interact with and my peers.

I haven't found any need to "count my fingers" when dealing with providers of low level services, for example. The professional pride of such providers has been well beyond my needs (they cared far more than I).

Moreover, to circle back to the original point, most government officials of any power are middle-class, anyway, so your point would be irrelevant, even if true.

Again, it's not that there are no bad people. It's just that I don't believe in designing society around the idea that everyone is intrinsically bad and I am the only one that can be trusted.

(And again, this isn't an argument that government is automatically successful - it's an argument that government failure does not mostly spring from lack of care by government officials.)

(As an aside, poverty *does* create desperation, however. That's why I tend to fall on the left of the spectrum.)

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