A Stitch in Haste

(Cross-posted previously at Overlawyered.)

President Bush has signed H.R. 4, the Pension Protection Act of 2006, into law.

The bill is mostly sound and fury, signifying nothing. The Pension Benefit Guaranty Corporation will be "saved," even though we were repeatedly assured until now that there was in fact nothing to "save" it from. Private employers will be required, over time, to go from 90% funding to 100% funding of their pension plans -- which is nothing more than hollow accounting gimmickry. And the real volcanoes under the city -- public employee pensions -- are not addressed at all. Neither of course is the Social Security crisis.

But one afterthought of the bill is worth looking at:

Employers can encourage their workers to save by automatically enrolling them 401(k) retirement accounts.

This proposal has been bouncing around for years. A good primer on the subject is available from the Congressional Research Service.

The phenomenon of 401(k) under-participation has been cited, repeatedly, as an example of "irrational behavior," especially when the employer matches employee contributions. "Who would turn down free money?" Yet people do, in surprisingly large numbers.

And it is a small step indeed (for a politician, at least) from observing "irrational behavior" to calling for paternalism to correct it -- i.e., passing laws compelling people to be "rational."

Libertarians, and I'm guessing many Overlawyered readers, love to get indignant over paternalism. Motorcycle helmet laws and seatbelt requirements come to mind, as do the War on Tobacco and the War on Obesity. Why exactly should the government care if a motorcyclist chooses to undertake the "irrational" risk of not donning a helmet? What right does the government have to compel you to watch your weight?

Typically the non-libertarian response is that the helmetless motorcyclist has no "right" to risk, "unnecessarily," the consumption of healthcare resources (i.e., an emergency room) should he be injured in a way that would not occur had he been wearing a helmet. This argument gains traction under a system of publicly financed healthcare.

To which the libertarian response is typically, "Well, we shouldn't have publicly financed healthcare!" But that's another blogpost.

Let's circle back to 401(k) enrollment. Under the new PPA, employers will now be authorized to automatically enroll new employees in a 401(k) plan -- but with an opt-out provision. In other words, whereas before an employee had to take action to get into the 401(k) plan, now she must take action to get out of it.

Clearly such a plan is a paternalistic undertaking. Who cares if an employee is too stupid, or too myopic, to enroll in a 401(k) plan? That's her problem, right?

On the other hand, a provision such as this is probably so minor, so unobtrusive, that it's hard for even the most dedicated libertarian to oppose it. Even if a particular employee accrues no benefit from the policy (i.e., she doesn't want to be enrolled), the cost (i.e., the time and effort to opt out) is arguably so minuscule as to deserve an exemption from any libertarian indignation.

On the other other hand (it's the economist in me!), a proposal to mandate 401(k) enrollment without an opt-out provision would of course be an impermissible infringement on personal autonomy. The government has no legitimate basis to force people to save for their retirement. (Of course, when the government forces workers to pay for other people's retirements, then it's called "Social Security" and is considered perfectly hunky-dory. Go figure.)

To summarize, although it is not a proper function of government to proscribe "bad" decision making, perhaps a few isolated, objectively defensible carve-outs can be allowed in which the government makes it just a little bit harder to make a "bad" decision. Perhaps. Stated differently, a paternalistic exception that actually proves the libertarian rule should probably be embraced and not shunned.

(In Part Two I will examine another fashionable "financial paternalism" trend -- banning so-called "payday loans" and similar schemes.)

(Cross-posted previously at Overlawyered.)

In Part One, I proposed the following heuristic regarding paternalism:

To summarize, although it is not a proper function of government to proscribe "bad" decision making, perhaps a few isolated, objectively defensible carve-outs can be allowed in which the government makes it just a little bit harder to make a bad decision. Perhaps. Stated differently, a paternalist exception that actually proves the libertarian rule should probably be embraced and not shunned.

But does this qualify as such an exception?

In a payday loan transaction, the lender makes a small advance (typically $100-$500) to its customer, agreeing to hold a personal check for the loan amount plus a fee until the customer's next payday. ... The borrower receives cash immediately. Fees charged can range from $15 to $30 on each $100 advanced, although the typical fee is at the lower end of that range.

The fee may seem modest when presented as a dollar amount, but when calculated as an annual percentage rate (APR), the cost is relatively high. A charge of $15 to borrow $100 for 14 days amounts to an APR of 391%. A survey by consumer advocates found APRs on 14-day payday loans ranging from 390% to 871%.

No fewer than five separate bills were introduced in this session of Congress to limit or even ban payday loans. No fewer than four federal financial regulatory agencies, including the Federal Reserve, have launched investigations of the practice. Not to mention the states.

There are many other examples of financial market proscriptions in the name of paternalism — usury, loan sharking, "refund anticipation loans," and that perennial favorite of libertarians, "price gouging" — that all attempt to block voluntary transactions by competent adults.

It is a basic principle of economics* that more choices lead to higher potential utility for consumers. Stated differently, restricting freedom of choice and freedom of contract always makes people worse off.

So what right, exactly, does a politician, regulator or bureaucrat have to say that a payday loan, even one with a stratospheric interest rate, is "wrong" for a given borrower in a given circumstance, and therefore ban it?

Note that the common, if indelicate, response that "people are stupid" is not relevant. That observation serves as a justification (perhaps) for labeling requirements and "Truth in ..." laws such as the Truth in Lending Act. More information, like more choices, can be a good thing, if the cost of presenting that information does not exceed the benefit it provides.

But that's not the same as a ban. Even a fully informed consumer who is perfectly willing to pay an "outrageous" (i.e., a usurious) interest rate is barred from doing so. Why?

It also can't be merely a manifestation of the general defense of "unconscionability" in contract law. "Unconscionabilty" is an "as applied" concept: unconscionable in what context? Umbrella proscriptions declare a contract invalid not "as applied," but facially. So the argument becomes circular: Such loans are unconscionable because they're, um, unconscionable? That's a no-go as well.

Perhaps it's an externality argument — A 390% APR on a payday loan might not offend the borrower, but it offends us, and we therefore are entitled to block it, not to help the borrower, but to help ourselves. "Will of the majority" and such.

That way madness lies. It is the ultimate slippery slope. If we can ban, for our selfish goals, an offensive interest rate imposed on others, then what other "offensive" strictly private activities might we start banning?**

So I ask again: What precisely is the justification for a government to ban voluntary, fully informed, fully private loans — or other private contracts, or other private activities generally?

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(*Which is why, apparently, some economists try to argue the exact opposite. Go figure.)

(**Some of you might be able to guess where I could go with this line of reasoning — see Lawrence v. Texas. Fans of Overlawyered might also think "foie gras.")

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POST SCRIPT: Not long after I finished this post, an interesting item popped into my news aggregator. I'll excerpt it here without comment --

Need cash to pay your next bill? Send us a text message, we'll send you the money in just a few minutes.

Such slogans are spreading in Finland and other Nordic countries, with barely a mention of the annual lending rates of up to 1,000 percent involved.

Lending cash to young people through SMS messages at rates banks can only dream of is becoming increasingly popular in Nordic countries, according to a survey conducted by Finland's financial watchdog. ... In Finland and 12 other EU countries these lenders are out of reach of financial regulators because they do not collect funds from the public, the watchdog said.

Those who accept a loan offer get the money transferred to their bank account just a few minutes after sending an SMS with their national identification number. For a two-week loan of 100 euros the payback is 120 euros, equivalent to an annual lending rate of about 1,000 percent, which would be illegal in some European countries.

Discuss.

Oh, wicked, bad, naughty, evil Lucent!

A widow rented a rotary dial telephone for 42 years, paying what her family calculates as more than $14,000 for a now outdated phone.

Ester Strogen, 82, of Canton, first leased two black rotary phones ... in the 1960s. Back then, the technology was new and owning telephones was unaffordable for most people.

Until two months ago, Strogen was still paying AT&T to use the phones — $29.10 a month. Strogen's granddaughters, Melissa Howell and Barb Gordon, ended the arrangement when they discovered the bills.
...
Lucent Technologies ... said customers were given the choice ... to opt out of renting in 1985. The number of customers leasing phones dropped from 40 million nationwide to about 750,000 today, he said.

"We will continue to lease sets as long as there is a demand for them," Skalko said.

Lucent is a bad company and must pay the penalty!

Or so the politicians and class action trial attorneys will claim. Mark my words — I'm guessing within a week.

Of course, my cable company, which until recently charged customers a monthly "rent" for remote controls, is arguably no better. Neither is Medicare, which requires my father to "rent," rather than buy, his nebulizer.

By all means condemn Lucent for this rather scurrilous practice. By all means note that unscrupulous business practices often do not end up being as profitable as they were originally thought to be (the so-called "doing well by doing good" thesis). By all means ask whether some sort of (admittedly paternalistic) "full disclosure" or "truth in phone leasing" rule might be desirable going forward.

But let's not pretend that there was anything patently illegal in what Lucent was doing. Without more, charging a price that people will pay for a service that they want is, or at least ought to be, neither a crime nor a tort.

A self-standing comment I left at a (very liberal) gay blogger's site over her outrage and disgust regarding supposedly "oppressive" policies by credit card companies:

Here's a radical idea: don't do business with them. These are, after all, voluntary private contracts among competent consenting adults.

Isn't "my outrage and disgust over it entitles me to prevent those who are not outraged and disgusted over it from doing it, despite the fact that I am in no way harmed by others doing it, apart from my outrage and disgust" the modus operandi of the anti-gay bigots? Why would you possibly want to borrow a page from their playbook?

Quite embarrassing worldview, IMHO.

Such are the incoherent reductio ad absurdums that inevitably result when one believes in sexual substantive due process but not economic substantive due process.

Far too much cyber-ink is being spilled regarding a new book by a noted legal scholar, Cass Sunstein, and an equally noted economist, Richard Thaler, called Nudge.

An excerpt from the book's introduction:

Many of the policies we recommend can and have been implemented by the private sector (with or without a nudge from the government). Employers, for example, are important choice architects in many of the examples we discuss in this book. In areas involving health care and retirement plans, we think that employers can give employees some helpful nudges. Private companies that want to make money, and to do good, can even benefit from environmental nudges, helping to reduce air pollution (and the emission of greenhouse gases). But as we shall show, the same points that justify libertarian paternalism on the part of private institutions apply to government as well.

The premise of Nudge, usually referred to as "soft paternalism" (or, outrageously, "libertarian paternalism") can be summed up with great ease:

You're stupid.
If "stupid" seems too harsh a word, then substitute "irrational."

You're irrational, for example, because you don't max out or even contribute at all to your 401(k) plan, even if your employer matches your contributions. You're irrational because you don't sign your organ donor card. You're irrational because you make all kinds of choices that are "wrong."

What (supposedly) makes Sunstein and Thaler different from any other two-bit hubris-drenched central planner wannabe is that they claim to define "wrong" not by their own subjective tastes and preferences, but by objective standards. To ignore a costless opportunity to get free money is, they submit, objectively irrational. To deny some innocent person access to your organs after you're dead is, they submit, objectively irrational. And so on.

What also (supposedly) makes Sunstein and Thaler different is that they claim not to want to coerce anybody to behave rationally. They do not want to force you to enroll in your 401(k) plan. They do not want to seize your body after you die. All they want is to rejigger the rules a bit so that you do not have to "choose to be rational" (e.g., by having to opt in to a 401(k) plan) but rather that you would have to "choose to be irrational" (e.g., by having to opt out of your 401(k) plan). Yes, they're going to be paternalistic toward you, but not at the point of a gun.

All they want to do is "nudge" you.

What of course does not make Sunstein and Thaler different, meanwhile, is that they want to be ones doing the nudging. Kip's Law prevails yet again.

Two things amaze me about the excessive hype over Nudge. First, it seems to me that the book's thesis is, at the end of the day, its own worst enemy. A complex, dual-disciplined (i.e., law and economics) theory that, when put to the test, can only generate a handful of de minimis policy recommendations — default opt-in to 401(k) plans, a presumption of consent in organ donation, etc. — can hardly be described as revolutionary — or, for that matter, useful. To the extent that the soft paternalists truthfully say, "this far, no further" (i.e., to the extent they are eager to assure us that their proposals are "no big deal"), then they only win by losing. If the debate is simply whether the entry for "soft paternalism" should read, "harmless" or "mostly harmless,"* then the soft paternalists have lost that debate before they've even started.

Second, and far more relevant in the context of Kip's Law, is that the debate is definitely not between "harmless" and "mostly harmless." No activist legislator, nanny-stater or other anti-freedom malcontent is going to take a theory like "soft paternalism" and invoke it only in the context of 401(k) plans and organ donation. Even if all you promise to do is "nudge," then suddenly you're going to start seeing lots of things that need "nudging."

The tax code is one giant nudge: nudging us into home ownership, child rearing, charitable donating, etc. Apologists for Social Security insist that it is merely a "nudge" into saving for retirement (indeed, Thaler was a leading advisor to President Bush on Social Security reform). Hillary Clinton insists that she is not a health care socialist — she just wants to "nudge" us into (compulsory) insurance programs (which, somehow, does not constitute "socialized medicine" — but that's a whole other blogpost).

Practically any incursion into personal autonomy can be repackaged as a "nudge" — from seat belt laws to the war on drugs. Some anti-liberty laws are "nudgier" than others, to be sure. But all derive from a belief that the government is legitimately authorized not just to protect us from each other, but also to protect us from ourselves — to "nudge" us.

Mario Rizzo, a noted free-market economist at NYU, puts this in terms of "slippery slopes" —

The new paternalism claims that careful policy interventions can help people make better decisions in terms of their own welfare, with only mild or nonexistent infringement of personal autonomy and choice. This claim to moderation is not sustainable. Applying the insights of the modern literature on slippery slopes to new paternalist policies suggests that such policies are particularly vulnerable to expansion. This is true even if policymakers are fully rational. More importantly, the slippery-slope potential is especially great if policymakers are not fully rational, but instead share the behavioral and cognitive biases attributed to the people their policies are supposed to help. Accepting the new paternalist approach creates a risk of accepting, in the long run, greater restrictions on individual autonomy than have been heretofore acknowledged.

Or you can just "opt out" of Rizzo and "opt in" to Lewis Black: Government is human beings.

More thoughts from Will Wilkinson.

Kip's Law: Every advocate of central planning always — always — envisions himself as the central planner.

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(*Explanation, for the uninitiated, here.)