A world of internalities

The Economist (April 8, 2006) includes "The new paternalism: The avuncular state," a nice summary of the views of "behavioural" economists and the policy implications that follow.

Referencing company pension plans, the article cites a study of "soft paternalism" whereby the default was changed from the employee not in the plan (and he has to join but with minimal effort) to the opposite (and he can withdraw with minimal effort). The punchline is that the enrollment rate jumped from 49% to 86%, indicating a benign application of policy.

Who can object? There is always the slippery slope argument. One can imagine all sorts of intrusions being sold under the guise of SP. For example, the article mentions "internalities", a reference to how our demons can dominate our better angels. Taxes and subsidies could help the good side win.

Acquiesce to that program and the slippery slope becomes the precipice that no one wants. Most of my students have been weaned on the idea of an external cost (and an associated fix) around every corner. Economists have now compounded the problem by adding a world of internalities.