Does the Supposedly Superior Expertise of Regulators Justify Libertarian Paternalism?

Some of the commenters on my last two posts criticizing libertarian paternalism accuse me of ignoring the possibility that such paternalism is justified by the supposedly superior expertise of government regulators. Actually, I have addressed this point in several previous posts, such as here and here. However, readers can’t be blamed for not taking the time to collect bits and pieces from previous posts scattered over a three year period. Therefore, it may be helpful to collect my thoughts on this point in a single post. To summarize, I think that the regulators’ superior expertise applies at most only to one-half of the relevant equation, that even with respect to that half it has serious drawbacks, and that consumers who need expert advice can usually do better by relying on the private sector.

I. Regulators Lack Expertise on the Subjective Benefits of Risky Activities.

Regulators may have greater knowledge than consumers about the health or safety dangers of risky activities. But they lack comparable knowledge of the benefits that consumers derive from those activities. A public health expert probably knows more than I do about the risks of drinking or smoking. But only I know how much enjoyment I derive from having a beer or puffing on a cigarette. This is especially true when we remember that preferences about such things vary widely. I get zero utility from smoking and (unusually for a Russian) very little from drinking alcohol. Many other people have very different experiences. With respect to the subjective benefits they get from risky activities, consumers actually have vastly greater expertise than regulators do. In a classic 1945 article, F.A. Hayek emphasized the importance of this constraint on expert knowledge:

It may be admitted that, as far as scientific knowledge is concerned, a body of suitably chosen experts may be in the best position to command all the best knowledge available—though this is of course merely shifting the difficulty to the problem of selecting the experts. What I wish to point out is that, even assuming that this problem can be readily solved, it is only a small part of the wider problem.

Today it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge. But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active cooperation.

This kind of ignorance might not be a problem for traditional paternalists, who sought to make individuals do the “objectively” right thing without reference to their own preferences. Libertarian paternalists such as Richard Thaler, however, emphasize that they seek to “make people better off as judged by themselves.”

II. Limitations of Regulators’ Analysis of Risk.

Even with respect to estimating health and safety risks, government regulators function under severe constraints. Regulators are not philosopher-kings who can implement whatever conclusions they reach through objective analysis. Rather, they are constrained by political pressure. In a democratic political system, regulators’ decisions will be heavily influenced by public opinion. And voters have very strong incentives to be ignorant about public policy and irrational in their analysis of the limited political information they do have. Both of these limitations of voters are likely to impose severe constraints on the quality of paternalistic regulation. Ironically, leading libertarian paternalist Cass Sunstein has done important work documenting the ways in which irrational public opinion reduces the quality of other forms of regulation (see e.g. here). Paternalistic regulation, libertarian or otherwise, suffers from this weakness as well.

Expert regulators are also vulnerable to interest group pressure. The more complex and technical the regulations they administer, the greater will be the opportunities for interest group lobbying and “capture” of the regulatory process, since rationally ignorant voters will have great difficulty in monitoring the experts performance. Ironically, expert regulators will be least likely to function as truly disinterested experts on precisely those issues where expertise is most needed.

Finally, government experts have major cognitive biases of their own, just as consumers do. And the regulators have less incentive than consumers to try to combat their own prejudices.

Given these three dangers, it is no surprise that government experts have a long history of making dubious risk analyses that were then used to justify costly and intrusive paternalistic policies that turned out to cause far more harm than good. As economist Edward Glaeser pointed out in his important 2006 critique of libertarian paternalism:

Paternalism has been used to justify government actions and rhetoric towards alcohol, drugs, homosexuality, religion-related activity, slavery, and even loyalty to the government itself. The nineteenth century crusade against alcohol brought Prohibition, which appears to have had only a modest impact on alcohol abuse while supporting a large, violent, underground alcohol-based economy. The fight against other drugs is more defensible, but the advocates of marijuana legalization argue that the costs of this government policy far exceed the benefits. Governments have attacked homosexuality for centuries and often used paternalistic rhetoric for doing so….

Most disturbing, governments are often persuaded that service to themselves is indeed the highest of callings, and that as a result for paternalistic reasons people should be induced to serve and be loyal to the government. In the United States, this form of paternalism has been pretty benign at least by world standards (pledges of allegiance, jailing critics of World War I). Places with fewer checks and balances, like Nazi Germany or Soviet Russia, turned to paternalistically justified prostate policies with awful results. Some paternalistic policies have had positive benefits, but much of the time, paternalism has been pretty harmful. Social welfare may be well-served by a general bias against paternalistic interventions.

III. The Advantages of Relying on Private Sector Experts.

None of this proves that we don’t need experts. To the contrary, there are many decisions where we can benefit from expert advice. However, the private sector offers a wide range of opportunities to avail ourselves of such advice without incurring the risks posed by government coercion. I addressed this point in more detail in one of my very first posts on libertarian paternalism:

[I]t is essential to recognize that individual consumers don’t have to rely on government for expertise. They can hire their own experts in the market or rely on more knowledgeable friends and acquiantances. When I get seriously ill, I go to a doctor. When I decide how to invest my money, I rely on the advice of friends who work in venture capital and investment banking. The real question is not whether we are going to rely on experts to help us make decision, but who gets to choose the experts and whether or not the experts will have veto power over the final decision on what to do…..

If instead of each individual choosing his or her own experts, there is a single set of specialists chosen in democratic elections, then the quality of the decision is likely to be impaired by political ignorance….

Of course the experts could instead be chosen by nondemocratic means and insulated from political pressure. Yet, in the absence of democratic control, it will be difficult to ensure that the experts are actually serving the interests of the people as opposed to their own. By contrast, experts hired in a competitive market have better incentives; they know that if they pursue their own interests at the expense of the consumer’s, they are likely to be out of a job……

Finally, both democratic and nondemocratic means of choosing government experts have a common weakness: both eliminate the option of dispensing with experts entirely. For some people, that may well be the best choice…

The second major shortcoming of government-appointed experts relative to those hired in the market is the fact that government coercion deprives the consumer of the right to make the final decision. If I hire an expert in the market, I retain the right to reject his advice and pursuing a different course of action. This is a vitally important option.