Nudging regulation in the right direction

One of President-elect Barack Obama’s most interesting nominations is Cass Sunstein, his pick to head OMB’s Office of Information and Regulatory Affairs.

Cass Sunstein, a Harvard University law professor and Barack Obama’s pick to head OIRA.

We’ll profile him in next Monday’s Federal Times — like I did this week with Nancy Killefer, Obama’s new chief performance officer — but a few early thoughts:

Sunstein is a law professor at Harvard University; before that, he taught at the University of Chicago. He’s an old friend of the president-elect from his UChicago teaching days. And he’s written extensively on government regulation, including his most recent book, Nudge.

The book makes the case for what Sunstein calls “libertarian paternalism.” You might think that sounds like an oxymoron. But Sunstein, and his co-author, UChicago professor Richard Thaler, say it offers a “third way,” something between being simply pro- or anti-regulation.

In many domains, including environmental protection, family law, and school choice, we will be arguing that better governance requires less in the way of government coercion and constraint, and more in the way of freedom to choose. If incentives and nudges replace requirements and bans, government will be both smaller and more modest.

So what’s a “nudge”?

Take the problem of retirement plans. Many employers are phasing out their pension plans, and most Americans don’t put enough money into their 401(k)s. To fix this, the authors suggest Congress pass a law making 401(k) plans “opt-out” rather than “opt-in” — your employer automatically enrolls you, unless you request otherwise.

You’re still free to decide whether or not to save for retirement. But the government “nudges” you towards saving.

But how does this apply to regulatory agencies? In some cases, it’s clear. The authors support a “cap-and-trade” system to combat climate change. The government would auction a certain number of “pollution credits,” and companies would need to buy enough credits to cover their carbon emissions. Light polluters could sell their credits to heavier producers, creating both a disincentive to pollute and an incentive to stop polluting.

Again, “libertarian paternalism”: Companies are free to pollute, but the government “nudges” them towards less pollution.

(FYI, the president-elect supports a similar idea.)

It’s less clear how Sunstein feels about areas of regulation like occupational safety. The authors deal with this only briefly, at the end of their book, noting that many occupational safety laws are not libertarian — an employee cannot trade his right to worker’s compensation or protection from asbestos in exchange for a higher salary.

We agree that flat bans are justified in some cases, but they raise distinctive concerns, and, in general, we prefer interventions that are more libertarian and less intrusive.

What does all this mean for OIRA? You’ll have to pick up the paper next Monday…