The problem with Nobel laureate Richard Thaler’s nudgonomics

With Sinclair Davidson

Economists have spent the last 240 years – ever since Adam Smith published The Wealth of Nations – trying to understand how decentralised economies work. In that time they have established that the price mechanism does a pretty good job of coordinating economic activity, and that profits provide excellent incentives to stimulate human action.

In the course of understanding how economies operate, economists have had to develop a working model of human behaviour, and various simplifying assumptions have been made. An example of such an assumption is that people are pretty smart, and best know their own self-interest. That is the so-called rationality assumption.

But, of course, there are many rationality assumptions. Standard economic theory maintains what can be described as ‘strong-form’ rationality. In this view of rationality, the human brain is an unlimited resource and can easily and quickly compute all outcomes and make choices that maximise satisfaction and well-being.

Then there is a ‘semi-strong form’ of rationality – bounded rationality – associated with 1978 economics laureate Herbert Simon. He suggested that people intend to be rational but that there are limits to rationality. Finally ‘weak-form’ rationality, associated with the Austrian school, suggests that people economise on their brain power as they would any other resource and make use of rules of thumb and heuristics to make choices and decisions.

So the notion that economists have a single dogmatic view of human behaviour and rationality is something of a straw man, if not actually a whipping boy when non-economists debate economists.

Enter into this milieu Richard Thaler of the University of Chicago, and the latest economics laureate awarded for his work in behavioural economics. Thaler is a worthy Nobel winner. He has successfully challenged the mainstream and standard assumption of strong-form rationality. He has brought respectability to what would have been heresy as recently as the 1970s. Many of the insights of his research agenda and his followers have been profound, others have been trivial. That is to be expected from any productive scholar and intellectual movement.

What is unexpected is how successful behavioural economics has been in a policy sense. Popularly and politically, Thaler is best known for his book Nudge, written with Cass Sunstein. This remarkable book both established a new theoretical framework for government intervention and successfully marketed it to the governing class.

Nudge was published in 2008. By 2010, the Conservative government in Britain had established a ‘nudge unit’ within the Cabinet Office. Many other governments have followed suit. The rapid leap that nudge theory made from seminar room to law-of-the-land has been unprecedented.

These days, lots of policies are routinely described as ‘nudges’, and the word is as much a political branding exercise as anything. But Thaler and Sunstein were very specific about what they meant by a nudge. As they describe it, we all have two ‘semiautonomous’ selves: the ‘doer’ and the ‘planner’. The doer is irrational – thinking only about the short term and gratuitous pleasures. The planner is rational – thinking about the future, focusing on getting healthy and saving money.

The planner makes the best choices; the planner makes the choices we don’t regret and would make again. In nudge theory, government should design systems that allow us to favour what our planner selves would rather do, rather than our reckless doer selves.

In this way, Thaler and Sunstein avoid one of the central critiques of the nanny state – the nanny state wants to impose its own preferences on others. Both the planner and doer’s preferences are our own. We still get to choose. Thaler and Sunstein describe nudge theory as ‘libertarian’ paternalism.

But it has some serious practical and conceptual problems.

Rather than just leaving choice to the market, nudge theory says the government should try to discern a set of best preferences from our worst ones – but not impose its own. Then it should regulate the economy so it favours the choices of our planner selves, but doesn’t force us into any specific choice. This sounds like hard work for a government.

More fundamentally, is it true that we have two separate, distinct selves? Nudge theory needs there to be two distinct systems so the government can choose between them. ‘Dual systems’ theory, as it was known in the psychological literature, has now been replaced by theories that describe our cognitive processes as a continuum or graphical space. The upshot is that it is not meaningful to say we have two sets of preferences – good ones and bad ones – but an infinite number of sets of preferences.

With this shift, psychologists seem to have coalesced around the weak-form Austrian view of rationality: that rationality itself is a matter of trade-offs and choices. One could even say this was Adam Smith’s view. People are a rich mix of passion, interest and sympathy – not all-knowing, rational calculators.

Thaler’s contribution has been to help return us to that understanding. But it’s a big leap from the observation that ‘people are not always perfectly rational’ to ‘bureaucrats can make us rational’.

Opening statement to Commonwealth Senate Select Committee on Red Tape inquiry into the effect of red tape on the sale, supply and taxation of alcohol

With Darcy Allen

The Institute of Public Affairs welcome the opportunity to appear before this inquiry. Red tape is one of the most pressing challenges facing Australia. A recent IPA estimate calculated that red tape costs us $176 billion in forgone economic output every single year. That $176 billion is more than we pay in income tax and it is the equivalent of Australia’s largest industry. Cutting red tape is one of the keys to ensuring our future prosperity; therefore the present inquiry into red tape is welcome. Liquor licensing in particular is a significant burden on Australian businesses. This is a red-tape problem not only for late-night venues but for thousands of cafes and restaurants across this country.

If we look to South Australia as an example, there are more liquor licences for restaurants than under any other category. Business owners spend millions of dollars in compliance costs each year and these pieces of red tape generate economic distortions that hold our country back. The central contribution of our submission is a broad, cross-jurisdictional analysis of liquor-licensing regulations. We have two main findings. First, that across various states there are multiple different types of liquor licences, sometimes over 10; and, second, many jurisdictions exhibit complex and tiered fee structures ranging into the tens of thousands of dollars. Based on these findings, we make three recommendations. First, Australian states and territories should seek to streamline the number of licence types to the minimum viable level. A wide range of different licence types acts to increase business uncertainty and thereby compliance costs. We see no logical reason that some states would require 13 different licences, for instance.

Our second recommendation stems from the fact that many jurisdictions are characterised by excessive and complex liquor licence fee structures. The fees for application and renewal of liquor licences are progressively tiered from the cheapest to the most expensive licence, based on factors such as venue capacity and patron numbers. Some states even apply complex multipliers based on these factors. We recommend the structure of the licence fee system across Australia be flattened. By ‘flattened’, we mean: to reduce the difference between the lowest and the highest licence fee. There is no clear reason why the current fee structure is tiered, apart from the chance to raise more government revenue.

Our final recommendations concern licensing more broadly. We recommend that all Australian jurisdictions shift their regulatory resources away from licensing, first towards enforcing the basic principles of the regulation of liquor on operating businesses. That is to say, we should proceed by enforcing defections from agreed, simple laws, rather than increasing the red tape and compliance burden, which collectively impacts all businesses. Indeed, this broad principle, if applied to many Australian industries, would help ameliorate Australia’s growing red tape problem. Thank you for your time. We welcome any questions you may have.

Cigars and the plain packaging effect

In the 176 page report into smoking produced by the Preventative Health Taskforce — which Labor used as a blueprint for plain packaging — cigars are mentioned just twice. Once, buried in a footnote to a graph showing declining smoking rates across blue and white collar groups; and once in a piece of draft legislation written not for Australia, but for the United Kingdom.

The public health activists who wrote that report were interested in people who, they believed, had so little free will that colours and logos were enough to swing their decision of whether to smoke cheap cigarettes.

Premium cigars — the sort that sell in Australia for upwards of $30-$50 for a single cigar — are a luxury product. The consumers of premium cigars are highly informed about what they are buying. The cigars have to be carefully stored in carefully calibrated humidors that replicate the humid conditions of the countries in which the tobacco is grown — a dried cigar tastes burned and worthless, and bringing a single cigar back to life can take days.

The stereotype of the addicted and helpless consumer that has driven so much anti-smoking policy does not apply to cigar smokers. They are a special consumption good — an indulgence. Cigar manufacturers like to say their products are part of the special moments in the lives of their customers. They’re for celebrations or contemplation. Few people do, even could, smoke a cigar daily. When we talk about cigar consumption, we are not talking about a major health crisis for which extraordinary regulatory measures might be justified.

Nevertheless, when the government first moved ahead with plain packaging — described in their 2011 consultation paper to ‘make cigarettes less appealing, particularly to young people’ — cigars were included in the definition of tobacco products. Labor’s health minister, Nicola Roxon declared that:

Whether you are talking about cigarettes, cigars or pipe tobacco, all are addictive and all are harmful.

Australia’s few cigar bars had closed thanks to state laws which banned indoor smoking. Now, with plain packaging, Australian cigar retailers are forced to strip the colourful bands on cigars and replace them with the drab, olive bands with the name of the cigar printed in a regulated font. On top of that, changes to the Tobacco Advertising Prohibition Act 1992 (implemented less than a year after plain packaging) prevent online retailers from showing almost any information about the cigars they are selling. The only legal information is a cigar’s name, price and country of origin. Online retailers are not allowed to show any details about a cigar’s flavour or characteristics — let alone images of the cigar.

The flipside of being a luxury good is that branding is all important. Cigar aficionados talk about the aesthetics of the product as much as the flavour. Different regions prefer different aesthetics — European markets tend to prefer lighter coloured cigars, even though there is no discernible difference in taste. Cigar manufacturers tend to be family run down the generations. They are supposed to ‘taste’ of the region they come from, like good wine.

The look and branding of the cigar is a big part of its pleasure. That isn’t something to be derided. The American writer Virginia Postel has argued compellingly that the ‘frivolous’ aesthetics of consumer goods are in fact extremely important and valued parts of the human experience.

When the Gillard government replaced the highly stylised cigar bands with olive paper, they made it clear that to ‘make smoking history’ (the declared position of the Preventative Health Taskforce) was to deliberately go after a centuries-old human pleasure.

While plain packaging of cigars may have been an afterthought, their eventual inclusion goes to the paternalistic heart of the policy itself. Plain packaging is not about helping people make better choices. It is about eliminating those choices.

Plain packaging and the developing world

To make smoking history would be to end the cultivation and production of tobacco. Tobacco grows best in tropical locations and the best cigars come from countries that are both hot and humid.

While Cuba has the international cultural cache for quality cigars, the real hub of premium cigar manufacturing is in the Dominican Republic. The Spanish speaking Dominican Republic is a case study in institutional stability — sharing half of the island of Hispaniola with the French speaking Haiti, it has relatively stable democratic institutions and an economy which grew at 7 per cent in 2015. Just an hour and a half flight from Miami, the Dominican economy is heavily reliant on the US economy and sustained by its two big export industries — mining, and tobacco, nearly 90 per cent of which is sold in the form of premium cigars.

In other words, the Dominican Republic is a tobacco economy. There are 135,000 Dominicans cultivating, commercialising, processing, manufacturing and supplying tobacco, and the tobacco industry represents 1.3 per cent of the country’s GDP. Cuba has the cultural cache for hard-to-obtain premium cigars, thanks to the American trade embargo, but the Dominican Republic has 44 per cent of the market.

So while it is rare that Australia and the Dominican Republic interact, Australia’s plain packaging legislation has brought the two countries into a fundamental conflict of interests. To eliminate brands from premium cigars is to threaten a substantial part of the Dominican Republic’s economy. Australia is — or was — only a small part of the Dominican tobacco market. But the introduction of this Australian pioneered paternalism in larger economies across the world (the United Kingdom, for example, is set to introduce plain packaging this year) has made the Australian introduction a key policy contest.

Market trades are mutually beneficial — benefi cial to the consumer of a good, and beneficial to the producer of a good. When governments ban or prevent those trades, both consumers and producers are harmed.

The Dominican Republic is one of four countries arguing in front of a World Trade Organisation dispute resolution panel that Australia has restrained trade by eliminating the ability of cigar manufacturers to differentiate themselves and convey the premium nature of their products.

The other countries are Honduras, our close neighbour Indonesia, and Cuba. (It ought to be embarrassing that we are contesting a restraint of trade case against a communist nation). More than forty other nations have joined the dispute as third parties. As many Australians would be aware, plain packaging has been upheld in the High Court — in its 2012 ruling, the court did not consider plain packaging to be a taking of intellectual property that would require compensation. In December 2015, the Australian government won a further dispute with Phillip Morris in a Hong Kong court pursuant to a 1993 trade agreement with Hong Kong by contesting that the court had jurisdiction.

But the WTO case is the most substantial and long running case. A ruling is expected some time in mid-2016. WTO cases are rarely unambiguous wins or unambiguous losses for the parties contesting them. However, a loss for Australia would be politically complicated.

WTO rulings are not binding, and the instinctive reaction of the Australian government might be to brush it aside. After all, Australians’ health must come first. But Australia benefits from the WTO framework — as an open, mid-sized economy highly integrated in world markets, we have a clear interest in ensuring other countries are open to trade, and comply with the agreed-to WTO rules.

And where the previous two cases pitted Australia against a multinational tobacco firm, the WTO case has Australia against a group of developing nations. Of the four parties, the Dominican Republic is the most prosperous, and even then Australia’s GDP per capita is 11 times that of the small nation.

Australia has argued that plain packaging is not discriminatory against trade — it applies to domestic and foreign tobacco products alike — and that it has been imposed to fulfil (in the words of the WTO’s Agreement on Technical Barriers to Trade) the ‘legitimate objective’ of the ‘protection of human health’. Fundamentally, the question at the WTO is the same one plain packaging faces domestically: does the elimination of branding advance human health? The developing nations argue it does not. The Australian government argues that it does.

Both parties are working with a highly contested, limited evidence base created in the four years since plain packaging was introduced. Complicating this, the keeper of that underlying data — which is, of course, the Australian government — has an interest in the outcome.

So has plain packaging worked?

Whether a public policy has achieved its goal depends on how that goal is initially defined. The Tobacco Plain Packaging Act stated that its intention was to improve public health by discouraging smoking through the reduction of the appeal of tobacco products. Over the last few years, a series of graphs and data points have been released by the government to show that the policy has achieved this goal.

Each time they are dutifully praised by public health activists as the definitive evidence of success. But as the IPA’s Sinclair Davidson writes:

Unfortunately, and despite assurances from the Australian government and the Australian public health lobby, that evidence is simply non-existent.

There is a fundamental problem with any claim of the success of the policy — the sharp increases in tobacco excises introduced almost at the same time as the plain packaging legislation. This makes it hard to disentangle the effect of plain packaging from the effect of other anti-smoking measures. And it is fairly well agreed that excise hikes are the most effective — that is, punitive — way to reduce smoking rates.

The latest effort to demonstrate that plain packaging has been a success was the February 2016 release of the government’s plain packaging Post-Implementation Review. The review featured an econometric regression that purported to show a sharp increase in the decline in smoking after the 2012 plain packaging changes. Smoking rates have been declining for decades. The policy question is whether any given intervention increases the rate that decline occurs.

The underlying data which informs the review’s econometrics is — unsurprisingly — unavailable. But, using tools that can roughly extract the data from a graph, Davidson notes that the decline was steady after plain packaging, and has only increased in response to the huge boost to the excise a year later.

The developing countries’ case against Australia rests on this question. And that means a big part of the economic growth of a Caribbean nation is hostage to how a panel of WTO technocrats assesses a highly contested, highly uncertain, politically tarnished and intellectually questionable econometric vignettes.

Governments don’t like their legislative interventions to be questioned after the fact. By increasing the excise dramatically after introducing plain packaging, the Gillard government ensured that any answer to the question of whether or not plain packaging works is unlikely to ever meet a consensus. But however the WTO rules this year, the application of plain packaging to premium cigars is a revealing instance of regulatory overreach and consequences.

A questionable health measure applied to a luxury product only enjoyed by informed consumers, that threatens the livelihood of thousands of workers in a developing country. Paternalism at home can mean job losses abroad.

A Nudge In The Right Direction? How We Can Harness Behavioural Economics

The Turnbull Government last week announced the formation of a behavioural economics unit inside the Department of Prime Minister & Cabinet.

The unit has a real title (Behavioural Economics Team of the Australian Government) but everyone is calling it the “nudge” unit, after the book Nudge, by Cass Sunstein and Richard Thaler.

The nudge unit could backfire badly or be incredibly good. At its worst, it will provide new excuses for petty meddling and over-regulation. At its best, it will lead to a fundamental rethink of the authority of government-appointed experts and the dangers of political power.

The idea behind behavioural economics is to bring psychology back into economics. You’ve probably heard the caricature of economic thinking that it assumes all people are “rational”. At its simplest, behavioural economics tries to identify patterns and circumstances where our choices aren’t perfect – when they are irrational or inconsistent.

For instance, we tend to rationalise our opinions, looking for evidence to confirm pre-existing views rather than threaten them. We imagine we are more competent – better informed and more skilled – than we actually are. We are loss averse: we fear losing money or status more than we enjoy gaining them.

These quirks are, strictly speaking, cognitive errors. They mean we make worse decisions than we would if we were meticulously rational, profit-maximising algorithms.

Behavioural economists overstate the novelty of these findings. Pre-modern economists knew very well that people were motivated by more than money – what Adam Smith called the “passions”. But that sort of “humanomics” was lost when economics got all mathy. Economists are groping back to the earlier, richer picture of human motives and flaws. Behavioural economics is just one of the paths on the return.

All very interesting. But Sunstein and Thaler argue the lesson from behavioural economics is that policymakers should alter the environment in which we make decisions in order to help us make better choices. Not eliminate bad choices, as traditional nanny state paternalism suggests – just nudge us into making less bad ones. Nudging involves such actions like rearranging choice hierarchies and changing defaults so that better choices are more prominent.

In practice, however, these “nudges” are either trivial, or tend to be more like shoves. Policy inspired by behavioural economics is rarely able to find the sweet spot: passive, respectful interventions that also offer significant benefits.

Take, for instance, one of the most famous apparent nudges. In his Fairfax piece on Turnbull’s nudge unit, Peter Martin cites the case of officials at Amsterdam’s Schiphol airport who embossed images of little flies on the urinals. Now men have targets of what to hit. Spillage reportedly declined dramatically.

Yet, it is not clear how this is a manifestation of nudge theory or the application of behavioural economics to policy. What systemic cognitive error is being fixed here? As the economist Riccardo Rebonato points out, urinal flies are a “clever ruse”, not a “major breakthrough in social engineering”. Yet it is regularly trotted out as the classic nudge.

The Australian Tax Office has its own nudge program. Late taxpayers now receive a letter stating that, “When you pay this debt you will be joining the millions of Australians who pay their tax to support our country and Australia’s way of life.” Because humans are social animals who like to conform, payment rates have apparently increased.

Other ATO nudges are less impressive. Why, contra Peter Martin’s article, is sending text message reminders to late taxpayers a behavioural economics trick? Debt collection is one of the world’s oldest industries. Harassing debtors is not a new idea.

The reliance of nudge supporters on such trivial examples does not bode well for the usefulness of behavioural economics as a public policy project. The Schiphol toilets example comes straight from Sunstein and Thaler themselves. It’s the first real-world example of a nudge in their book.

But there is something very important the Turnbull Government could do with its nudge unit. The findings of behavioural economics should be applied to policymakers too. Politicians, advisors, policy consultants, bureaucrats, regulators and legislative drafters are all as susceptible to loss aversion, seeking evidence that confirms their prejudice, choosing irrationally, and assuming unwarranted competence as anybody else.

The nudge unit shouldn’t spend its time thinking of clever ways of government to regulate irrational citizens. It should consider the implications of the fact that the people in government are just as irrational as the citizenry.

This is, admittedly, new intellectual ground. The field of behavioural economics is a young one, and its significance for political behaviour has not yet been deeply considered. An early attempt from 2011 argues that viewing regulators as irrational as those they regulate would suggest a “humbler approach” to regulation is necessary.

Governments would do fewer things if they were less confident in their own abilities. But, then, overconfidence is one of the core cognitive errors.

Defending the nudge unit in parliament last week, Arthur Sinodinos said it would “test these concepts in a way that is consistent with our broader deregulationist philosophy”. But the nudge unit could be better than that. Used creatively, behavioural economics could underpin the entire deregulation program.

Alcohol And The Nanny State Inquiry: This Isn’t Just About Money

It’s one of the most cited numbers in Australian politics: alcohol costs Australia $36 billion every year in preventable death, illness, inquiry and lost productivity.

Unsurprisingly it has become a centrepiece of the Senate inquiry into personal choice and community impacts – you might know it as the “nanny state” inquiry – which began its hearings last month.

In their submissions to the inquiry, the Australian Medical Association, the Alcohol Policy Coalition, the Foundation for Alcohol Research and Education, the Public Health Association of Australia, the Royal Australasian College of Physicians, and the Australasian College for Emergency Medicine all cite the $36 billion figure to variously justify higher taxes on alcohol, or more controls over alcohol supply, marketing and licensed venues.

The media loves this number, mainly because they love big numbers.

Public health activists and academics love this number too, because they hate being called nanny staters and wowsers. The $36 billion figure is useful because it purports to take the question of whether government should regulate people’s personal choices out of the domain of morality and philosophy and into the domain of economics and rationality.

But it is absolutely meaningless in any policy-relevant way.

And it ironically reveals how philosophical questions cannot be separated from the debate over paternalistic restrictions on alcohol.

The figure comes from a 2010 study conducted by the Alcohol Education and Rehabilitation Foundation.

The 13 authors of the paper came to $36 billion by piling on as many “costs” of alcohol as they could imagine. They took the full kitchen sink approach. They included everything from the lost productivity of workers affected by alcohol, to the cost of hospitalisation of children who have been abused by adults believed to be affected by alcohol.

Even where the connection to alcohol is tenuous – the fact that some crimes are committed by people who have alcohol in their system does not mean that alcohol causes those crimes – they derived costs and added them into the big headline number.

It is a credit to their creativity that the authors managed to add a further $20 billion to the $15 billion social cost of alcohol found by a study published by the Commonwealth government in 2008.

But the policy question is not whether alcohol consumption has costs. All choices have costs. The question is whether those costs outweigh the benefits from alcohol consumption. Costs are meaningless if they are not paired against benefits.

And as the economists Eric Crampton, Matt Burgess and Brad Taylor point out in an important paper, these sorts of social cost studies dismiss the benefits of alcohol by leaning heavily on an assumption that drinkers are uninformed or irrational, and therefore do not really “benefit” from drinking.

It’s a revealing move, because it shows how even this most rationalistic and economistic argument for alcohol regulation ultimately comes down to an assertion that people just don’t know what’s good for them – and that others do.

In fact, as the 2008 study found, the direct costs to the public healthcare system of alcohol consumption are much more modest: about $2 billion a year. This might still seem like a lot. But the government received more than twice that from the excise on alcohol sales: $5.2 billion.

You often hear in debates about paternalism that the government wouldn’t care about what we ate or drank if it weren’t for the fact that taxpayers pay for the consequences of those choices through the public health system. Hence we need to regulate alcohol and reduce alcohol consumption for the budget’s sake.

Even if the excise on alcohol didn’t more than recover the direct healthcare costs of alcohol, this would still be one of the most counterproductive arguments in politics.

First, the argument suggests that a public health system is incapable of handling the freely-made health choices of its customers. Second, it suggests that the corollary of public health provision is state control over our bodies and what we choose to put in our bodies. And third, it suggests that there is no “right” to public health care – rather that access to health care is contingent on making the correct health decisions.

Far from being a defence of the nanny state, this argument looks like a rather powerful attack on the notion of a publicly funded and universal health care system. I’m guessing this is not the intention.

Helping launch the nanny state inquiry last month Sam Dastyari told the ABC that “ideology has just been dead in Australia for too long. Let’s actually have some big debates, let’s have some different views”.

Like it or not, the debate about restricting what we drink, eat and otherwise consume cannot avoid ultimately considering deeper philosophical questions about the relationship between individual and government.

Opening statement to Commonwealth Economics References Committee inquiry into Personal choice and community impacts

With Simon Breheny

It is the view of the Institute of Public Affairs that paternalism is an unstable and illiberal basis for public policy. What do we mean by ‘paternalism’? It is important to be conceptually clear, because many policies have, rightly or wrongly, been lumped under the phrase ‘nanny state’. John Kleinig defines paternalism as when ‘X acts to diminish Y’s freedom, to the end that Y’s good may be secured’. That is, an outside person—in this case, the government—prevents you from doing something that you want to do and does so in your own benefit.

Today I am going to make three arguments about paternalism. The first is that paternalism has a long history. The belief that the state should control people for their own good is arguably the oldest political philosophy. But modern paternalism leans heavily on the findings of behavioural economics, which can be summed up simply as ‘people often make bad choices’. Under this argument, we are irrational: we underestimate risk, we employ wishful thinking, we discount information that conflicts with our beliefs. Many of these cognitive errors are predictable. Paternalism therefore uses the state to remedy or mollify them. In our view, this argument for paternalism is distinctly one-sided. Policy makers are as susceptible to the cognitive errors that are commonly attributed to consumers. Policy makers deploy heuristics. They also search for evidence to confirm their beliefs, and they are biased towards action in the face of unknown risk. Behavioural economics should make us more sceptical about paternalism than we previously were. Paternalist intervention should be seen as a trade-off between error-ridden consumers and error-ridden policy makers.

My second point concerns ignorance. Values are subjective, and it is a non-trivial task to determine people’s best preferences. Not everybody shares the same tolerance of risk. Some people prefer hedonism to health. Policy makers cannot assume that they are acting on behalf of people’s best interests when those interests are diverse and even unknowable. In their book Nudge, Cass Sunstein and Richard Thaler try to deal with the subjection by asking people what they would prefer in retrospect—that is, by asking people whether their past decisions were correct according to their own values. This way, they can try to divine people’s true or unbiased preferences. Unsurprisingly, people regret a lot of their choices. But it is not clear why retrospective preferences are more true than current ones. Why should our future selves have a veto over our current selves? After all, not all regret is rational, and our future selves are subject to cognitive error as well.

The final point I would like to make today is that paternalism is fundamentally undemocratic. Paternalism treats citizens like subordinates. The paternalist’s model of irrational individual choice is starkly at odds with the democratic philosophy of individual choice. We all believe as democrats that adult Australians have a moral right to make political decisions. We believe that Australian citizens have the minimum level of rationality and autonomy to choose who to vote for, which is one of the most informationally intensive decisions an individual is asked to make. My argument is that we are exactly as rational in the voting booth as we are in the supermarket; the voter is the same as the consumer. So, what are elected policy makers suggesting when they argue that their electors are incapable of making consumption decisions without the help of bureaucrats? Or, more fundamentally, what right do elected policy makers who derive their political legitimacy from that free and competent vote have to turn around and inform the voters that they are unable to make decisions about what they eat, drink and consume?

A Single Drink Puts Media Over The Limit

Tony Abbott skolled a beer this weekend.

The Australian press made sure this skol received the hyperbolic, wall-to-wall coverage it deserved.

No doubt you read about it in the Herald Sun, The Australian, the Canberra Times, the Sydney Morning Herald, the Courier Mail, the Guardian, the Adelaide Advertiser, or the West Australian.

You would have read that the Prime Minister was cheered on by a football team at Sydney’s Royal Oak Hotel. You would also have read that the act took him about six seconds, although whether this is a fast or slow pace for drinking a schooner in one go has unfortunately been left un-analysed.

And finally, you would probably have read that this was a bad example for a prime minister to set to young people. The Foundation for Alcohol Research and Education expressed concern that it sent the wrong signal.

Journalist Judith Ireland said Abbott was “supposed to be a vocal advocate against binge drinking”, and that this sort of macho behaviour seemed to go against his claim to be “also the Minister for Women”.

Another writer, Andrew P Street, immediately connected this single skol with the binge drinking”scourge that’s destroying Australian society, turning our young men into animals”.

It would be hard to invent a better symbolic clash between the Australian self-image as larrikin and the po-faced posturing of the media than Abbott’s drink.

It is now apparently impossible for any public figure to stray outside the incredibly tightly prescribed rules of behaviour – prescribed, not by the public, but by the press, who of course would be horrified if those standards were applied to them.

The idea that a politician’s personal behaviour influences the behaviour of the public is pretty dubious.

Nevertheless, Abbott violated no cultural norm, his actions pose no ethical dilemma, they were neither reckless nor self-harming, and they had no political, economic, or social consequences. It was one beer. Abbott is a fitness fanatic. He’s famous for having once ordered a light beer shandy with 60 per cent lemonade. The weekend’s skol would be barely worth mentioning in a colour piece.

Yet once we hear from earnest prognostications of public health lobbyists, downing a single drink in one go becomes symbolic of a deeper, dangerous, threatening moral panic about alcohol consumption.

Alcohol consumption and risky drinking has been steadily declining, as the statistics from the Institute of Health and Welfare have consistently shown. The proportion of Australians drinking daily is at a 20-year low, and young people are taking up drinking at a later age than ever before.

These facts contrast with the frenzied, and well-funded, anti-booze movement who pop up in the bottom half of every news story tangentially related to alcohol.

Take the suggestion aired over the weekend that the Abbott Government might make a step towards volumetric alcohol taxation in the May budget.

If you were designing an alcohol tax from scratch, you’d want it to be volumetric – that is, levied on the alcohol content, rather than the type of drink. But we’re not designing a tax system from scratch. In the middle of a budget crisis what is really being proposed is a simple tax increase on one specific good.

Yet the story was quickly filtered through a paternalist prism: “Cheap cask wine is a serious health issue in many communities,” one public health activist said.

Thus the Government might be able to dress up a tax hike that disproportionately affects poorer Australians as if it were a compassionate health measure.

Last week the NSW Bureau of Crime Statistics and Research (BOSCAR) released research suggesting the Sydney liquor licence lockout had achieved its stated goals by dramatically reducing the number of assaults in Kings Cross.

Determining cause and effect in a complex system is incredibly hard. But BOSCAR found that one of the possible reasons that the assaults declined is because the number of people visiting Kings Cross declined dramatically. Business groups say revenue in Kings Cross is down 20 to 50 per cent. The City of Sydney says footpath congestion in Kings Cross is down 84 per cent. And BOSCAR says foot traffic at night from Kings Cross station is down too.

Obviously shutting down Kings Cross was going to reduce assaults in Kings Cross. But this is an extraordinary disproportionate response to what was a policing problem.

HL Mencken thought that one of Australia’s best contributions to the English language was “wowser”. The word’s origins are obscure but some wowsers at the start of the 20th century liked to say it stood for “We Only Want Social Evils Remedied”.

Yet in going after social evils, Australia’s wowsers have rarely been able to avoid attacking the harmless, knowing choices of people who are perfectly capable of making decisions about their health, and who can distinguish between a prime minister having a joyful, boisterous single drink and serious alcohol abuse.

The WHO Has Failed The Ebola Disaster

What is the point of elaborate and expensive international bureaucracies if they are unable to deal with cross-border crises?

The United Nations’ World Health Organization (WHO) has completely botched the Ebola disaster sweeping West Africa.

That’s not my assessment, but the assessment of the WHO itself.

Ebola has now killed more than 4500 people, mostly in Liberia, Guinea, and Sierra Leone. It’s the largest outbreak of the virus in history.

Over the weekend the Associated Press published details of an internal WHO report outlining the organisation’s mistakes, information failures, staff incompetence, and governance problems tackling the crisis.

“Nearly everyone involved in the outbreak response failed to see some fairly plain writing on the wall,” the document apparently says.

The report isn’t public – it’s a draft – and WHO doesn’t want to talk about it until it has been “fact-checked”. But WHO’s failures have been publically and tragically evident long before now.

Months before WHO declared Ebola a global health emergency in August, aid agencies in West Africa were saying the disease was out of control.

In March, Médecins Sans Frontières was talking about “an unprecedented epidemic regarding the distribution of cases” in Guinea. WHO spokespeople actively rejected that characterisation.

Even as late as July 30 WHO leadership said it was “pessimistic” to suggest that the Ebola outbreak was an international health emergency, as this Washington Post article reports.

It wasn’t until August 8 that WHO finally relented and announced that the Ebola outbreak was “an extraordinary event” demanding an extraordinary response.

This is exactly the sort of crisis WHO was created to prevent. But it delayed, denied, and obfuscated for months.

WHO was formed at the end of WWII, but its roots stretch back to the mid-19th century.

It’s hard to think of a better candidate for international collaboration than infectious disease. Outbreaks of cholera in Western Europe in 1832 and 1849 led to the first international efforts on health. The reasoning was simple. Cholera, and other diseases like the plague and yellow fever, paid no heed to national borders. Controlling them would require cooperation.

This policy need remains. The Ebola crisis demands an international solution. Individual countries need assistance. Liberia is one of the poorest countries in the world. Ebola is one of the hardest diseases to manage. And cooperation is needed to prevent it from spreading. Ebola’s long incubation period – up to 21 days – means it can travel far from the place of infection.

So this is exactly the sort of crisis where international organisations should be proactive.

But WHO is directed by the World Health Assembly – an assembly of the health ministers and delegations of its 194 member states.

And that assembly is more interested in nanny state paternalism and sociology-masquerading-as-medicine than infectious disease.

The May meeting of the assembly opened with a speech by the Director General that WHO would “end childhood obesity” and focus on the health consequences of climate change and inequality.

The assembly spent its time talking about non-communicable diseases (cancer, diabetes and so forth), nutrition, and gender-based violence.

As the Ebola crisis has been developing WHO leadership has been hard at work hosting an anti-tobacco conference and pushing for increased cigarette taxes.

You may think these are all important topics. Yet they’re far away from what international health cooperation ought to be best at: the management of cross-border pandemics.

Non-communicable diseases demand national solutions. Pandemics demand international solutions. Resources are scarce, and WHO increasingly spends them on the former rather than the latter.

Nor is WHO’s distance from its core mission justified by any reputation for bureaucratic excellence.

The organisation has been criticised for decades for being heavy politicised, for its cronyism, for its excessive bureaucracy, and for its unwieldy structure. (So it’s a pretty typical United Nations body in that sense.)

One former WHO assistant director general wrote after the 2010 Haiti cholera outbreak that WHO was dysfunctional and coming “closer and closer to irrelevancy”. Global health academics write about WHO’s “crisis of leadership”.

Recent funding problems caused by the global financial crisis have led it to focus even more on non-communicable diseases. As for pandemics, WHO’s plan has been to promulgate health regulations and let individual countries sort themselves out. But this isn’t much help for poor countries like Liberia.

Now, as the New York Times reports, the entire pandemic and epidemic scientific team at WHO has just 52 permanent employees. Until this year it had just one Ebola expert.

WHO can complain about budget troubles all it likes but in a $4 billion organisation this is pathetic.

Thank God for civil society organisations like Médecins Sans Frontières.

Perhaps nothing WHO could have done would have prevented the crisis taking the course it has so far. Tackling infectious disease is hardest where institutions and infrastructure are worst, as they are in Liberia.

But that’s a hypothetical. The fact is, by its own assessment, WHO failed badly.

The Ebola crisis has exposed a dangerous weakness in the international security framework – a weakness caused by caused by bureaucratic incompetence and a deliberate decision to emphasise non-communicable diseases.

Neo-Prohibition Isn’t The Answer To Violent Crime

It wouldn’t be a moral panic without demands that the government do something.

And so it is with the alcohol-fuelled violence panic that swept New South Wales over the Christmas break.

Richard Denniss of the Australia Institute made a few proposals in the Sydney Morning Herald here. Governments could increase alcohol prices by increase taxes or imposing a minimum price. They could restrict pub opening hours. They could even set a maximum blood alcohol level for people in public places.

Such proposals are more or less the sort of neo-prohibition public health activists have wanted for years.

Today Barry O’Farrell announced a crackdown on alcohol venues, with mandatory bottleshop closures at 10:00pm, a 1:30am pub lock-out, and no pub service after 3:00am.

Let’s lay aside whether it is fair to restrict the liberties of all because of the idiocy of a few. It is utterly and despicably perverse that our immediate reaction to a highly publicised violent assault is to blame public policy, or market forces, or “culture” in general.

It’s classic guilt displacement, shifting the responsibility from the perpetrators of violence and onto society. That is, it’s not totally their fault they were violent. Alcohol vendors were plying them with liquor! Lazy politicians were neglecting their regulatory duties! Music videos have been glorifying drinking!

What does this imply for the moral responsibility of the perpetrators? After all, to punish somebody for an act they had little control over would be a travesty of justice.

Perhaps the number of bottleshops in a suburb should be a mitigating factor in sentencing. Of course, none of our latter-day prohibitionists have taken their logic this far. But such perverse reasoning is implicit when we seek social explanations for individual criminal acts.

The perversity increases when you realise that there is no alcohol-fuelled violence crisis. The rate of violence related to alcohol is stable, even declining. (This piece in the Guardian sums up the evidence for New South Wales nicely.)

Our alcohol consumption is steady, too. Australia’s per capita alcohol consumption has been hovering around 10 litres a year for the last few decades. (In the 1970s it was more like 12 litres.)

But regardless of whether it is trending up or trending down, it remains the case that the Australian public consumes a large quantity of alcohol, and gets into very few fights.

There are, as there have always been, brutal thugs who take pleasure from violence. The correct – and most direct – response is to target the thugs, not to fiddle with tax policy.

The relationship between alcohol and violence is not as clear cut as you might expect. Yes, much violent crime is caused by intoxicated people. The doctors and police are right. But figuring out whether alcohol actually causes the violence is quite hard.

Correlation, as we all know, is not causation.

The most common theory is that alcohol lowers inhibitions. It directly anesthetises the parts of the brain that we use to regulate our everyday behaviour. Alcohol changes us physically, and in a way that makes some people more aggressive.

From experiments in laboratory settings we know that people who consume alcohol exhibit more aggressive behaviour.

But the inhibition theory is not the only theory which could explain this.

Some experiments have shown that people tend to get more aggressive even when given a placebo. That is, when they are told they are going to have an alcoholic drink, but are secretly given a non-alcoholic tonic, they get aggressive anyway. Thus the ‘expectations’ theory suggests people get more aggressive when intoxicated simply because they expect to get more aggressive when intoxicated. They think aggression is more socially acceptable in a drunk.

There are other theories. The connection between alcohol and violence could be indirect. Intoxication reduces intellectual function, causing us to exaggerate provocation and to needlessly provoke others.

But these theories only take us so far. It’s one thing to show in a lab that people who believe they are intoxicated people are marginally more aggressive than those who are sober. It’s quite another to draw policy conclusions from that finding.

The overwhelming majority of people drink without getting violent. (Some people just get more helpful.) In the real world, humans are able to regulate their behaviour even while intoxicated. Even if alcohol ’causes’ violence, it only causes it rarely, and in a tiny fraction of people.

Even drunk people make choices. Even drunk people can be moral. We are not machines. Public policy ought not to treat us like machines.

The more policy-focused researchers try to side-step this issue with macro-level studies that look at correlations between alcohol consumption in an area and incidents of violence.

That’s where we get the claims that bottleshop density facilitates violence, for instance.

But these studies often struggle to distinguish between other factors. The essential feature of bars and pubs and nightclubs and bottleshops isn’t that they sell alcohol. It’s that they bring large groups of young men together in close proximity.

Ultimately, the neurological, psychological, and sociological evidence about the relationship between alcohol and violence isn’t strong enough to get us away from a simple intuition: violent acts are caused by violent people, regardless of their level of intoxication.

As one paper from 2008 concludes, “alcohol may facilitate violent behavior among those who are already inclined to behave that way. It is also possible that violent adolescents sometimes use alcohol as an excuse for their behavior.”

So the idea that we would be trying to blur the responsibility of violent offenders with alcohol regulation is utterly, utterly repugnant.

It’s exactly what the thugs, and their lawyers, want us to do.

A Nanny State On IR Policy Is The Liberal Choice

In politics, sometimes it’s best not to go into detail. This is the lesson Eric Abetz learned after he explained part of the Coalition’s industrial relations policy last Thursday.

Abetz told the Australian that, under an Abbott government, the Fair Work Commission would not approve workplace agreements that raised real wages unless there had been “appropriate discussion and consideration of productivity” (paywall).

Why? So “lazy companies don’t just give wage increases because it’s the easiest thing to do.”

It is one of the founding assumptions of Australia’s system of industrial relations that workers are unable to negotiate with bosses in their own best interest.

Around this paternalistic assumption we have built a superstructure of industrial relations law, tribunals, and controlled wages unique in the developed world.

Now the Coalition seems to think some bosses are just as incapable of looking after their interests. And that a government regulator knows how to run a business better than the business itself.

If true, one wonders how the labour market functions at all.

The Coalition’s policy is patronising, illiberal, and fundamentally anti-market.

Now we know the true legacy of WorkChoices.

The fight over WorkChoices represents the moment the Coalition turned its mind from liberalising industrial relations to regulating it.

More on that in a moment. On Friday poor old Senator Abetz was accused by his colleagues of “freelancing” – that is, speaking only for himself – and advised to avoid interviews for the next few weeks.

But the Coalition’ official workplace policy document does, in fact, say “before an enterprise agreement is approved, the Fair Work Commission will have to be satisfied that the parties have at least discussed productivity as part of their negotiation process.”

If anything, Abetz softened the policy, suggesting Fair Work will only second-guess agreements if they give pay increases above inflation.

That’s how sensitive the Coalition is to the WorkChoices tag – even talking about its own policy is off-message.

Industrial relations has a special place in the Australian political compact. It is Labor’s raison d’etre; the world’s oldest party was born as the political wing of the union movement. Obviously they have a deep interest in wages policy.

In the Liberal Party there have always been free traders and protectionists, conservatives and liberals, fans of both big government and small. But one thing has bound the party together since conception – an antipathy to union power and prominence.

So Labor supporters recount our political history as a contest between employees (labour) and employers (capital). For Liberal supporters our history is a contest between sectional interests (union thugs) and the mainstream (Forgotten People).

Yet eight decades of the Australian Settlement concealed a few subtleties in the Liberal view.

For all that time, being opposed to union power and supporting greater market control over wage price setting was, effectively, synonymous.

When, during the Hawke, Keating, and Howard eras, labour law was slowly liberalised, this equivalence was superficially reinforced. As labour markets became freer, unions declined.

But then Kevin Rudd repealed WorkChoices. Rudd’s move was the first time since the reform era began that a liberalisation – in any sector of the economy – had been reversed. In 2007 Australia hit the market reform wall. This was very disorientating.

(I’ve described WorkChoices here as “liberalisation” because that’s what all sides of politics imagine John Howard’s policy was. In fact it was a complex regulatory takeover of workplace relations by the federal government. Still, perception is what matters.)

Now the Liberal Party has to figure out what its industrial relations priority is: to pursue a free market in labour, or to battle the unions.

Put another way, is Australia’s industrial relations dilemma that it is too highly regulated? Or is the dilemma that unions are too prominent?

After the 2007 defeat, there are many on the Liberal side who say the latter; many who imagine they are fighting a guerrilla war against the union movement. There are hints of this attitude in the Australian article. Abetz says the Coalition’s policy was developed “in response to unions ‘bragging’ that they had secured productivity-free pay increases.”

The Coalition’s solution to such hubris? Increase workplace regulation. If the government has to nanny lazy companies to reduce union power, then so be it.

Never mind that both sides of a mutually beneficial exchange should be “bragging” about the great deal they got.

It’s worth pointing out that unions would exist in a free society. They would have no privileged position in the law, and no coercive power, but, as Friedrich Hayek once wrote, everybody “ought to have the right to join a trade union.”

The dust from WorkChoices has settled. Now that Coalition is preparing to form government again, what does it really want for industrial relations? Labour market freedom, or just defeat of the union movement?