My colleague Josh Wright and co-blogger Todd Zywicki have an important essay criticizing the Obama Administration's proposed new Consumer Financial Protection Agency (CFPA). The premise behind the CFPA is that consumers' choices need to be limited by government regulators because otherwise consumers are likely to make mistakes caused by their own cognitive errors.

Josh and Todd outline several serious problems with the CFPA proposal and the economic theory underlying it. Here are two others based on my own work on political ignorance.

I. Voters are More Ignorant and Irrational than Consumers.

First, the CFPA and other paternalistic policies will have to be adopted through the democratic process. But voters tend to be rationally ignorant about politics, and commit serious cognitive errors in analyzing the little information about politics they do know. Political ignorance and irrationality is likely to be far more severe than the cognitive mistakes consumers make. Voters intuitively realize that there is very little chance that their votes will actually influence the outcome of an election. As a result, they have precious little incentive to either acquire political information or to work to overcome their biases in evaluating what they do learn. By contrast, consumer decisions are individually decisive. If I decide to get a credit card or take out a mortgage, I can actually implement that decision without getting the agreement of over 50% of a large electorate. Good incentives certainly don't lead consumers to avoid ignorance and cognitive bias entirely. But they do cause consumers to be less ignorant and irrational than voters. Even people who follow politics closely devote far more time and effort to, say, choosing the right car or TV, than they do to deciding who to vote for president. For that reason, political decisions about paternalistic regulation are likely to be far more influenced by ignorance and cognitive bias than the consumer decisions paternalists seek to "correct."

II. Political Ignorance Increases the Risk of Regulatory "Capture."

Second, political ignorance opens the door to interest group "capture" of the CFPA or other agencies that will implement paternalistic regulations. Such regulations will necessarily be complex and difficult to understand. Rationally ignorant voters are unlikely to follow them closely enough to be able to tell the difference between effective regulations and harmful ones. As a result, it will be easy for interest groups and government officials to enact regulations that benefit politically influential businesses as the expense of the public under the guise of consumer protection. We have seen this pattern time and again with other regulatory agencies, such as those engaged in railroad, airline, public utility, and trucking regulation.There is no reason to believe that the new paternalistic regulatory agencies will be any different. Indeed, agencies implement paternalistic financial regulations are likely to be even more vulnerable to capture because of the complexity of the financial system (which makes political monitoring by ignorant voters even more difficult), and the presence of numerous powerful interest groups who have an incentive to do the capturing. Banks, credit card companies, real estate developers, and many others will no doubt lobby hard to capture the CFPA once it gets established.

Some advocates of paternalistic regulation, such as Cass Sunstein, recognize the dangers of ignorance and interest group power. They argue that these problems can be mitigated by delegating the regulation to experts insulated from political pressure. This solution creates serious dangers of its own, which I outlined in a post written two years ago. Moreover, any proposal to establish such an "independent" agency must itself first navigate a political process heavily influenced by ignorance and interest group lobbying. It's highly unlikely that it would get through Congress unscathed.

Expert advice is often useful in making difficult consumer decisions. On balance, however, it is better to trust experts chosen by consumers in a competitive market than to delegate coercive power to government-appointed experts who have neither the knowledge nor the incentives needed to genuinely improve consumer welfare.