The Truth About "Libertarian Paternalism"

Shockingly, I think my co-author Mario Rizzo got the better of Richard Thaler in their debate on libertarian paternalism! However, I think people unfamiliar with “libertarian paternalism” could easily be confused, because it might seem like they’re arguing about two different things. Thaler continually relies on thoroughly innocuous examples of libertarian paternalism, especially default enrollment in savings plans – by private employers, with no government involved. Mario, on the other hand,repeatedly presses Thaler to defend more intrusive interventions by the state. The uninformed reader might think Mario is trying to change the subject.

But he is not. If you read Thaler and Sunstein’s “Libertarian Paternalism Is Not An Oxymoron,” you will find all of the positions that Mario imputes to them. This is not just Mario “ranging over other work of Thaler and Sunstein” to find other policies they advocate, as one commenter suggested, because all of these policies are offered as examples of libertarian paternalism.

Specifically, S&T say all of the following would constitute instances of a libertarian paternalism, so long as people are allowed to voluntarily opt out:

1. A legal presumption of “for cause” rather than “at will” termination in employment. (p. 1175)
2. A legal presumption of guaranteed vacation time. (p. 1175)
3. A legal presumption of certain on-the-job safety levels. (p. 1175)
4. A legal presumption of automatic enrollment in savings plans. (p. 1176)
5. A legal presumption of non-discrimination on the basis of age in employment. (p. 1176-77)

To be fair, S&T do emphasize, for these legal defaults, that it would remain possible for people to opt out of the default rule. But later in the same paper, they characterize more constraining policies as also consistent with libertarian paternalism, including:

1. The Age Discrimination in Employment Act (ADEA), which allows the employee to sign a “knowing and voluntary” waiver at retirement of its protections – but for the waiver to be valid, it must meet a series of requirements, including a consultation with a lawyer, a 21-day waiting period, and a 7-day revocation period. (p. 1186-87) Thus, having introduced the idea that it’s okay to change the default, S&T move on to imposing larger and larger burdens upon the exercise of the exit option.

2. The Model Employment Termination Act, which replaces “at will” with “for cause” termination. This right can be waived by agreement – but only if the employer agrees to provide a severance payment (equal to one month’s salary) in the event of a not-for-cause termination. Of this policy, S&T say that it’s “less libertarian than it might be. But freedom of choice is nonetheless respected.” (p. 1187) But this policy does not respect freedom of choice. It absolutely bars people from writing contracts that allow at-will termination without a severance payment.

3. The Fair Labor Standards Act, which prohibits hourly employees from working longer more 40 hours per week, but allows them to waive this maximum in return for time-and-a-half pay. (p. 1187) Note that employees cannot waive the maximum number for hours for any lower rate of pay.

4. Cooling-off periods, such as the FTC’s mandatory cooling-off period for door-to-door sales. (p. 1187-88) For these cooling-off periods, S&T do not even mention the possibility of opting out. (Interestingly, in the debate Thaler admitted that a cooling-off period is unlibertarian – but then why is it included in his paper on “libertarian paternalism”?)

Now, the fact that these government-imposed policies don’t respect freedom of choice does not necessarily make them bad policies. We could have interesting debates on all of these policies – but that is what Thaler refused to do in his debate with Mario. The debate was supposed to be about “libertarian paternalism,” a term that Thaler himself has said includes all of the above policies, and yet he declined to defend any of them (except for a sentence or two in defense the cooling off period). If he favors these policies, he should fess up and defend them forthrightly, and he should stop trying to characterize them as “libertarian” when most of them clearly are not.

More later.