In an op-ed on the Obama administration's proposed Consumer Financial Protection Agency Act of 2009,
Richard Posner makes some important points about libertarian paternalists like Richard Thaler (and, although he's not mentioned. Cass Sunstein):
Mr. Thaler, whose views are taken seriously by the Obama administration, calls himself a “libertarian paternalist.” But that is an oxymoron. He is a paternalist with a velvet glove—as the agency will be. Through the use of carrot and stick, the agency will steer consumers to those financial products that it thinks best for them, whatever they naïvely think.
Posner notes that Thaler's views are based on behavioral economics, which, drawing on experimental economics and cognitive psychology, asserts that one can identify systematic departures from rational decisionmaking, even in market settings. (It's worth noting that Obama regulatory guru Cass Sunstein is a big believer in behavioral economics.)
Posner concludes:
Behavioral economists are right to point to the limitations of human cognition. But if they have the same cognitive limitations as consumers, should they be designing systems of consumer protection?
I'm more of a fan of behavioral economics than is Posner. I've acknowledged its usefulness and made use of its insights where appropriate. But I also agree with Posner that behavioral economics has important limitations as a regulatory tool. In my article,
Mandatory Disclosure: A Behavioral Analysis, 68 University of Cincinnati Law Review 1023 (2000), I argued that:
In addition to the standard prudential arguments in favor of limited government, which counsel caution in concluding that a purported market failure requires government correction, behavioral economics itself argues against presuming the desirability of intervention:
Proposals designed to address biases generally entail the intervention of judges, legislators, or bureaucrats who are [themselves] subject to various biases. The very power of the behavioralist critique—that even educated people exhibit certain biases—thus undercuts efforts to redress such biases. In addition, the decisions of government actors also may be adversely influenced by political concerns—specifically interest group politics. Thus interventions to “cure” bias-induced inefficiency may ultimately produce outcomes that are worse than the problem itself.
In other words, the claim that law can correct market failures caused by decisionmaking biases or cognitive errors treats regulators as exogenous to the system. Once the state is endogenized, however, regulators must be treated as actors with their own systematic decisionmaking biases. It thus becomes evident that behavioral economics loops back on itself as a justification for legal intervention.
So far, I see no evidence that the Obama administration is even remotely cognizant of the need to endogenize the government.