Discussed in this essay:
Simpler: The Future of Government, by Cass R. Sunstein. 260 pages. $12. Simon & Schuster.
Why Nudge? The Politics of Libertarian Paternalism, by Cass R. Sunstein. 195 pages. $25. Yale University Press.
Valuing Life: Humanizing the Regulatory State, by Cass R. Sunstein. 236 pages. $25. University of Chicago Press.
As Cass Sunstein tells the story in Simpler, he nearly destroyed his courtship of his future wife Samantha Power by confessing on their first “predate interview,” in 2008, that his fondest career wish was to be appointed head of the Office of Information and Regulatory Affairs.
[S]he asked me, “If you could have any job in the world, other than law professor, what would it be?” As I later learned, she was hoping to hear that I would play in the E Street Band with Bruce Springsteen or start at shortstop for the Boston Red Sox. Instead I said, apparently with a dreamy, faraway, what-could-possibly-be-better look, “Ohhhh, OIRA.”
Sunstein got both the girl and the gig. But what sort of man would covet heading OIRA as his dream job?
OIRA was created late in the Carter Administration, but it was Ronald Reagan who first put it to political use. In 1981, Reagan directed all executive branch agencies to submit proposed regulations to OIRA for review by cost-benefit analysis. No agency rule could become final until cleared. Not surprisingly, the office quickly became a favorite end run for industry; OIRA could be counted on to delay, weaken, or simply veto proposed rules. The head of OIRA thus became the administration’s top anti-regulatory official.
Cass Sunstein is one of America’s most prolific and admired legal scholars, the author of more than thirty books and hundreds of journal articles. He spent twenty-seven years teaching law and political science at the University of Chicago, where he befriended fellow law professor Barack Obama. Sunstein joined the Harvard law faculty in 2008, but he soon went on leave to join President-elect Obama’s transition team. In September 2009, he became the head of OIRA, a position he held until August 2012.
As he recounts in Simpler (published in early 2013 and just released in paperback), Sunstein hoped to use OIRA to advance three cherished objectives. He wanted to increase government’s transparency, make government more user-friendly, and regulate lightly via incentives, disclosures, and prods rather than commands. By the time he left office, OIRA, whose deliberations are secret, had become the graveyard of more direct measures to regulate abuses of markets. Sunstein writes, with evident pride, “the Obama Administration issued fewer regulations in its first four years than did the Reagan, George H. W. Bush, Clinton, and George W. Bush administrations in their first four years.” In his modest aspirations at a time of big challenges, Sunstein served as a kind of role model for his boss.
Sunstein is a man of charm, wit, and ingenuity, and has a love of logical puzzles and paradoxes. During his years in Hyde Park, he embraced the Chicago economic model’s core conviction that free markets express both economic efficiency and human liberty. Yet, in more interventionist moods, Sunstein was also capable of celebrating the other Hyde Park, as he did in The Second Bill of Rights (2004), which praised Franklin Roosevelt for measures he took to counteract the insecurities of the market economy.
For more than a decade, Sunstein’s passion has been the idea that markets may yet be reconciled with government intervention — if the government will respect individuals’ freedom to choose. His phrase for this approach is “libertarian paternalism.” For Sunstein, the sublime expression of this oxymoron is the nudge, a concept that he first proposed in an article he coauthored in 2003 and has lovingly refined in three books, beginning with Nudge in 2008. When the government regulates by command, according to Sunstein, the state defies the choices of individuals and thus commits the sin of paternalism. But when government deftly manipulates “choice architectures,” individuals are still free to choose — and are more likely to behave like the rational beings cherished by Chicago economists.
A favorite Sunstein example is the 2006 Pension Protection Act, which prompts people to opt in to retirement plans and requires conscious effort to opt out. By rigging what Sunstein calls “default rules,” the government can subtly encourage people to do the right thing without negating their liberty to do otherwise. Sunstein prizes the disclosure of information as a kind of nudge, on the premise that the more people know, the more they are likely to act in their own rational self-interest.
This framework has won Sunstein respectful reviews and a wide audience. However, much of it turns out to be either misleading, logically contradictory, or marginal to what matters.
To read Sunstein, you would think that government regulates because bureaucrats don’t trust people to act in their own self-interest. In Simpler, he flatly declares, “No sensible person believes that public officials should be making people’s choices for them. They shouldn’t.” But denying choices to ordinary people is not why a democratic government regulates. The necessary target of regulation, typically, is not misperception by “people” but misfeasance by corporations that individual consumers are powerless to remedy — and that leads to economic outcomes that are inefficient as well as unjust.
Government intervention can thus be liberty-enhancing, a point Sunstein himself occasionally concedes in passing. A person with less need for vigilance against poisoned food or toxic drinking water, a consumer who doesn’t have to spend hours or weeks making sure that the mortgage company is not corrupt, a worker protected from the risk that the industrial machinery could kill him — these are freer citizens.
Sunstein contrasts light-handed nudges with more direct measures, known pejoratively in Chicago-speak as “command-and-control” regulation. But preventing major cases of corporate abuse or systemic market failure requires clear prohibitions and mandates: Toxic chemicals in the water or the air cannot exceed so many parts per million. Automakers must follow established safety standards and recall defective vehicles. Sometimes, market-like regulation, such as “cap-and-trade” markets in pollutants, can work, but government has to set acceptable pollution limits — the caps — first.
Sunstein routinely credits nudges with public benefits that actually resulted from direct regulation. He writes:
A lot of people are alive today because of nudges. Recall the remarkable fact that in 2011, the number of deaths on the highway was the lowest in recorded history. Many nudges helped to produce that happy result; they include educational campaigns, warnings, and public-private partnerships.
Somehow, Sunstein leaves out the highway regulations enacted in the five decades since Ralph Nader’s Unsafe at Any Speed (1965): laws mandating seat belts, air bags, padded dashboards, and rollover protection; safety standards for fuel tanks, tires, and steering systems; and limits on trucker driving time. If highway deaths are down, these command-and-control regulations get most of the credit. Public-private partnerships notwithstanding, virtually all of the regulations were resisted by the auto industry. Sunstein lauds a cute campaign featured on highway electronic signs warning motorists to click it or ticket! On closer examination, however, this program is a perfect example of a nudge that is dependent on two prior command-and-control laws — the law requiring automakers to install seat belts and the law requiring drivers to use them or pay a fine.
It’s not clear whether Sunstein commits such howlers because he means to deceive, or merely because of his giddy enthusiasm for the elegant genius of the nudge. Another example: in Simpler, Sunstein praises the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (known as the Credit CARD Act) for requiring several disclosures and simplifications and thus helping informed consumers to save money. “The act shows a good understanding of the importance of simplification, and it includes a lot of nudges,” he writes. But to read Sunstein’s account, you’d never know that the effectiveness of the act stemmed primarily from several direct prohibitions — against excessive fees and abrupt or deceptive rate increases — more salutary command and control.
Both Simpler and Why Nudge? (an adaptation of Sunstein’s 2012 Storrs Lectures at Yale) make inflated claims about the benefits and the novelty of nudges. Long before the Credit CARD Act of 2009, consumer advocates fought for the Truth in Lending Act of 1966, which required interest costs to be stated as a simple “annual percentage rate” rather than as a bewildering array of differently measured interest charges. The Credit CARD Act was a necessary update of the Truth in Lending Act, and it addressed new forms of banker deception.
Recent changes in the format of food labels, celebrated by Sunstein as a major breakthrough in nudging, are in reality a minor update of a more fundamental regulatory victory. The Fair Packaging and Labeling Act of 1968 required simple and standard food-label formats, a reform fiercely opposed by the food industry. It’s not that Sunstein-style nudges are useless. Clear labels and accurate information make for better-informed citizens. But the consumer groups and progressive legislators of earlier eras understood that disclosures were at best complements to direct prohibitions, not substitutes. The entire structure of securities regulation, dating to the 1930s, relies on disclosures to investors by publicly traded companies. But the law also explicitly prohibits insider trading, manipulation of stock prices, and other abuses. Of course, both disclosure and direct prohibition failed to prevent the 2008 financial collapse, because the regulatory process had been so thoroughly captured by industry.
One of the acrobatic feats of Sunstein’s recent work has been to turn behavioral economics from an impeachment of the Chicago School into something like an ally. Beginning in the late 1970s, a group of social and experimental psychologists and heterodox economists began challenging the market model of economic motivation by investigating how people actually made decisions. It turned out that most people did not behave like Homo economicus; they had multiple, unstable, context-dependent, contradictory sets of preferences. They both smoked and supported tobacco taxes on the premise that taxes would make them less likely to smoke. They “irrationally” left tips in restaurants that they knew they would never patronize again, out of a sense that this was the right thing to do. (A pioneer of behavioral economics, the psychologist Daniel Kahneman, was awarded the Nobel Prize in economics in 2002 for work he completed with the late Amos Tversky.)
If actual human motivation contradicted what textbooks taught, there was a big hole in the standard model. But Sunstein’s recent work turns that implication on its head. What the economist Richard Thaler was asserting facetiously in the 1980s — regular people needed only to act more like Chicago economists — Sunstein posits literally and commends as a program. (Thaler is a coauthor of Nudge.) Markets don’t work as advertised, Sunstein insists, because of “behavioral market failures,” which he defines as failures “that stem from the human propensity to err.” This logical twist excuses markets for systemic catastrophes, sidesteps corporate malfeasance, and shifts the blame to individuals.
Unfortunately for the theory of libertarian paternalism, it was Sunstein’s fate to lead OIRA at a moment of massive structural embarrassments to Chicago economics — calamities not amenable to nudges. The financial crisis that helped ensure Barack Obama’s election in November 2008 was above all a collision of market failure and regulatory failure. Financial engineers had invented complex and impenetrable securities that mainly enriched insiders. Regulators, captive to industry influence and the ideology of deregulation, simply stopped keeping up with toxic innovations.
Rivaling the financial collapse as a systemic market failure is global climate change. Because of the great convenience of cheap carbon-powered energy and the fact that true costs to the planet are hidden and distant, markets price carbon too low and the economy uses too much carbon fuel. The market price, matching supply with demand, is “efficient” in the short run but calamitous over time. Any remedy equal to the crisis requires more than nudges.
Sunstein spent great effort at OIRA tinkering with the format of the fuel-efficiency stickers required on new cars. He did this to better inform consumers, on the theory that they will choose to save money by selecting cars that burn less gas. Sunstein hails this achievement over several pages of Simpler. But plainly, small acts of better-informed individual choice are not sufficient to mitigate carbon emissions. Gasoline is still far too cheap, and many consumers knowingly opt for gas-guzzlers. Cars burn far less fuel on average in 2014 than they did in 1974, but the gains are mainly the result of command regulation passed by Congress in 1975 (CAFE standards), which required automakers to double fuel efficiency to 27.5 mpg within a decade. In a brief, indirect acknowledgement of that reality elsewhere in Simpler, Sunstein boasts that Obama-era regulation increased the mandatory standards, if modestly.
Sunstein does recognize the need for direct regulation in some circumstances. He spends half a page, early in Simpler, taking credit for some agency rules that did survive the OIRA gauntlet: “We imposed strict limits on air pollution from power plants, saving thousands of lives annually as a result.” But, as we’ll see, no agency tangled with Sunstein more than the Environmental Protection Agency.
In both Simpler and Why Nudge?, Sunstein refers to a well-known behavioral study that demonstrates the human susceptibility to misperception. In the experiment, a group of volunteers is asked to pay close attention to a ninety-second video in which six people pass a basketball to one another. The assignment is to count and record the number of passes. In the middle of the video, someone in a gorilla suit strides across the court. Most volunteers, shown the video a second time, admit they never saw the gorilla the first time. They were too preoccupied counting passes.
Sunstein uses this experiment as an example of behavioral market failure: People who are focused on minor tasks often ignore what’s important. But with his fixation on gentle nudges in a time of market catastrophes, Sunstein is himself like the volunteer who misses the gorilla.
After Sunstein took charge at OIRA, regulations were often delayed and the average review time doubled. A total of thirty-eight rules were bottled up at OIRA for more than a year, and several energy regulations sat there for close to two. OIRA delayed or weakened efforts to regulate coal ash, a waste product from coal-fired power plants that can pollute waterways. After refugees from Hurricane Katrina became sick from formaldehyde fumes released by their FEMA trailers, Congress passed a law in 2010 requiring tighter formaldehyde regulation. The nation’s chemical companies mounted a campaign to challenge the EPA’s proposed rules, and OIRA duly undermined the regulation.
An emblematic case of OIRA delay involved bipartisan legislation passed by Congress in February 2008 and signed by President Bush in September 2008. The law, the Cameron Gulbransen Kids Transportation Safety Act, mandated updated “expanded vision standards” by 2011, which would lead to the requirement of backup cameras for all cars and light trucks. It was named for a toddler who was accidentally killed when his father ran him over while backing out of the family’s driveway.
OIRA managed to delay the rule that implemented the law four times between 2009 and 2014, which pushed back the effective date to 2018. Ray LaHood, a Republican who served as Obama’s transportation secretary until 2013, was a strong supporter of the law, and he sent final regulations to the White House for OIRA’s review on November 16, 2011. OIRA then did nothing for nineteen months, even though the executive order governing OIRA gives it a maximum of four months to act. Dr. Greg Gulbransen, the toddler’s father, eventually sued the government for failing to implement the law. The final regulation, published in March of this year, requires the cameras to be installed by 2018, a full decade after the law was passed. In the meantime, the auto industry has profited handsomely by selling these cameras as optional equipment.
By his own account, Sunstein aspired to run OIRA almost as a philosopher-king, untainted by politics. “On the rare occasions when members of my staff pointed out the views of interest groups,” he writes in Simpler, “I responded (I hope with humor, but also with a point), That’s sewer talk. Get your mind out of the gutter.”
But this narrative is either naïve or disingenuous. Under Sunstein, OIRA and the White House political office did a tacit tandem act. Obama’s advisers in the West Wing could cut the explicit political deals, while OIRA found technical reasons to delay or water down proposed regulations. This routine intensified under William Daley, whom Obama had brought in as a pro-business White House chief of staff after the Democrats’ 2010 midterm-election losses. Sunstein, meanwhile, could play the role of the piano player in the brothel, innocent of what was going on upstairs.
The nadir came when the White House overruled the EPA’s proposed ozone regulation. Ground-level ozone causes smog, which in turn causes severe respiratory problems, as well as heart disease. The main sources of ozone pollution are power plants, factories, and vehicles. The Clean Air Act explicitly directs the EPA to reduce atmospheric pollutants to a level consistent with public health, irrespective of cost. The Supreme Court affirmed this mandate in a 2001 decision in which Justice Antonin Scalia, no less, wrote that the EPA could regulate pollutants such as ozone without a cost-benefit analysis. The vote was 9–0. The EPA normally revises its standards every five years, but the last ozone standard dates to 2008. It was set at 75 parts per billion, well above the 50 to 60 ppb recommended by the EPA’s scientific-advisory panel.
In January 2010, EPA administrator Lisa Jackson announced that she would set the ozone standard between 60 and 70 ppb, saying that the Bush-era levels “were not legally defensible given the scientific evidence in the record.” But in September 2011, Daley, after meeting with industry lobbyists, summoned Jackson to the White House and told her that the president was rejecting the EPA’s standard because the cost of compliance was too high.
“This was the worst thing a Democratic president had ever done on our issues,” said Gene Karpinski, the president of the League of Conservation Voters. In a statement about his decision, Obama cited “the importance of reducing regulatory burdens and regulatory uncertainty, particularly as our economy continues to recover.” Sunstein called the decision “highly controversial but unquestionably correct.”
Sunstein’s most recent book, published in October, is Valuing Life. The book, his third in two years, is mainly an exposition of how cost-benefit analysis works and the methodological challenges to its application. He notes in the introduction that the Obama Administration understood that “high regulatory costs could prove particularly harmful or unwelcome” during the “economically challenging time” following the 2008 financial crisis. But what were the economic costs of the inadequate regulation that led to the crisis and the stagnation that followed? This question is not addressed.
Sunstein is adamant that OIRA isn’t politicized — that it can’t be politicized, because it relies on science. When the president or chief of staff does get involved, Sunstein insists, it is out of concern for the burdens on business or alertness to the administration’s limited “bandwidth,” but never because of interest-group pressure. There is, he writes, “no political interference with science.”
Sunstein does acknowledge, in a wonderfully understated aside, the risk that OIRA might become subject to “epistemic capture” — i.e., dominated by people who emphasize the burdens of regulation and not its benefits. This capture, of course, has already happened: one study showed that the vast majority of OIRA’s meetings with outside groups were with lobbyists or advocates for industry.
Even without industry pressure putting a thumb on the scale, there are reasons to be skeptical of cost-benefit analysis as a regulatory tool. First, the value attributed to a human life can vary from less than $1 million to more than $20 million. A calculus that is so subjective can hardly claim to be scientific. Sunstein himself points to an interagency exercise in which the social cost of carbon was calculated at amounts varying from $4.70 to $64.90.
Second, cost-benefit studies often extrapolate from people’s reported “willingness to pay” for reduced risks. But poorer people, with fewer choices, tend to be less willing — or able — to pay to reduce their risks, and they tend to undervalue broad public-health gains — so the exercise has an implicit class bias. Sunstein writes:
Why should a worker in Beijing be subject to significantly higher death risks than a worker in Los Angeles? The answer is that so long as the distribution of global income has the form that it does, a system that gives Indian workers the same protection as American workers is not in the interest of Indian workers — assuming, as I do, that the cost of that protection is borne by the workers themselves.
Talk about paternalism! But this is the paternalism of the libertarian economist, not that of the government regulator, which makes it defensible and even scientific.
Third, cost-benefit analysis tends to systematically understate benefits. The benefit of environmental regulation, for instance, includes such difficult-to-quantify benefits as a slowing of global climate change, which has complex and interactive costs to multiple natural systems.
A bizarre misuse of cost-benefit analysis is now playing out at the Food and Drug Administration. Four years ago, economists at the FDA came up with the idea that the universally acknowledged health benefits of reduced smoking should be offset by counting the “cost” of reduced consumer smoking pleasure. (The pleasure of knowing that you are likely to live longer if you quit smoking was not included in the calculus.) The proposal, part of the regulations needed to carry out a law mandating tougher tobacco-package warnings, set off a battle between the FDA’s public-health staff and its cost-benefit economists. It also led to a dispute between the FDA and tobacco experts at the Centers for Disease Control and the National Institutes of Health. Eventually, during Sunstein’s tenure, the controversy reached OIRA, which sided with the FDA’s economists.
The regulation was duly issued, discounting public-health benefits on reduced smoking by 50 percent. In more recent proposals, the lost-pleasure factor was increased to 70 percent. The FDA’s chief economist, Clark Nardinelli, has contended that the appropriate offset is really 99 percent.
An insight of behavioral economics — that addiction contradicts the economic model of rational maximization of utility — has been turned on its head by the cost-benefit people. Health-destroying addiction, in this view, is indistinguishable from other pursuits of pleasure, while public education to promote health is costly paternalism. W. Kip Viscusi, a renowned cost-benefit economist, even published a paper contending that premature deaths from smoking should be scored as a benefit because of the costs saved by the medical system. As Sunstein has conceded in a different context, some benefits of regulation can’t and shouldn’t be quantified.
Valuing Life ends where it begins, pronouncing cost-benefit analysis “the best way we have of accounting for the consequences of regulation.” Sunstein concludes by trying yet again to bridge chasms of difference, invoking as heroes two Nobel laureates at opposite ends of the ideological spectrum: Friedrich Hayek, the godfather of modern libertarian economics, and Amartya Sen, one of the most astute and humane critics of the cruelty of free markets.
In January 2008, while Obama was still running in the Democratic primaries, Sunstein wrote a prescient piece about his friend for The New Republic. The article was titled “The Visionary Minimalist.” Sunstein wrote:
Barack Obama is widely regarded as a visionary because of his emphasis on “change” and his soaring rhetoric, but he also has strong minimalist tendencies. . . . Like all minimalists, Obama believes that real change usually requires consensus, learning, and accommodation — a belief directly reflected in many of his policies. . . . “Visionary minimalist” may sound like an oxymoron, but in fact — and this is the key point — Obama’s promise of change is credible in part because of his brand of minimalism. . . . For him, reconciliation is change, and it is also what makes change possible.
Sunstein’s assessment was spot-on. Neither a protracted economic crisis nor unprecedented Republican intransigence has changed Obama’s modus operandi. Had more liberals understood that risk earlier on, they might not have gotten their hearts broken. “Visionary minimalist,” of course, also describes the self-conception of Cass Sunstein. The sensibility pervades his writings about the proper role of courts and of interventions in markets. When Sunstein entered the administration as Obama’s top regulatory official, he governed in that spirit.
Whether Sunstein’s views influenced Obama’s or merely paralleled them, they epitomize the lost promise of the Obama presidency. Hard-core Chicago economists have ridiculed Sunstein’s nudges as paternalism in disguise, just as Republicans have spurned Obama’s overtures and seen them as a sign of weakness. Sunstein, like Obama, endeavors to bridge differences that are ultimately irreconcilable. Sometimes an elegant oxymoron is nothing but a simple contradiction. At a moment when capitalism needed a major overhaul, and the citizenry needed an inspiring leader, libertarian paternalism and visionary minimalism proved woefully inadequate as theory, policy, and politics.