Thaler on Ski Slopes and Mortgages

So what does it take to get me to blog these days? Having an opinion is no longer enough. Apparently I have to be actively irritated.

Richard Thaler is the newest contributor to the NY Times’ Economic View, where in his first column he uses behavioral economics to justify new financial regulations. In the process, he gets up to the same shenanigans that have become familiar to anyone who follows his work on “libertarian paternalism.” Specifically, he continues to disregard the distinction between public and private action.

Some critics contend that behavioral economists have neglected the obvious fact that bureaucrats make errors, too. But this misses the point. After all, wouldn’t you prefer to have a qualified, albeit human, technician inspect your aircraft’s engines rather than do it yourself?

The owners of ski resorts hire experts who have previously skied the runs, under various conditions, to decide which trails should be designated for advanced skiers. These experts know more than a newcomer to the mountain. Bureaucrats are human, too, but they can also hire experts and conduct research.

Here we see two of Thaler’s favorite stratagems deployed at once. First, he relies on a deceptively innocuous, private, and non-coercive example to illustrate his brand of paternalism. Before it was cafeteria dessert placement; now it’s ski-slope markings. Second, he subtly equates private and public decision makers without even mentioning their different incentives. In this case, he uses “bureaucrats” to refer to all managers, regardless of whether they manage private or public enterprises.

The distinction matters. The case of ski-slope markings is the market principle at work. Skiers want to know the difficulty of slopes, and so the owners of ski resorts provide it. They have a profit incentive to do so. This is not at all coercive, and it is no more “paternalist” than a restaurant identifying the vegetarian dishes.

Public bureaucrats don’t have the same incentives at all. They don’t get punished by consumers for failing to provide information, or for providing the wrong information. They don’t suffer if they listen to the wrong experts. They face no competition from alternative providers of their service. They get to set their own standards for “success,” and if they fail, they can use that to justify a larger budget.

And Thaler knows this, because these are precisely the arguments made by the “critics” to whom he is responding. His response is just a dodge, enabled by his facile use of language and his continuing indifference – dare I say hostility? – to the distinction between public and private.

Now, as for the financial aspects of all this. I’m not a finance guy, so I’m less qualified to speak here. The regulations he advocates might be desirable; behavioral justifications for paternalism might make more sense in this context than others. I’m not saying they do, but I’m open to the argument.

Still, something seems fishy about his argument here, which hinges on people being “fooled” by exotic mortgage contracts. Yes, there were some confusing mortgage deals out there, and I’m sure some people didn’t completely understand what they were getting themselves into. But did the lenders – the supposed experts – know any better? Remember that Thaler’s argument here is about letting the experts drive the decisions; that’s the whole point of the ski-slope story. Yet by all indications, the lenders were fooled, too. Both the debtors and the lenders were making the same bet: that housing prices would continue to rise, if not forever, then at least long enough to refinance. Or to put it another way, with respect to the major issue at hand, most of the debtors knew what they were doing: gambling. So while I’m sure some debtors were fooled by funky mortgage contracts, it’s hard for me to believe that was a major driver of the financial crisis.

But as I said, I’m not a finance guy, so maybe there’s more to the behavioral-paternalist angle in this context. I just wish Thaler would be straight-up when dealing with the arguments of his critics.