Rethinking the Economy

Richard Thaler is a very smart guy. He’s one of the founders of Behavioral Economics — the folks who argue that people aren’t calculators. So when he jumped into the healthcare debate over the public option, I was eager to see his take on the debate.

Unfortunately, he turned off his behavioral economist brain and delivered a boilerplate pro-free-market argument:

Here is a thought experiment: Can you think of a domain where a government-run business competes successfully with private-sector companies? … More generally, it is hard to find examples where government-run businesses compete with private companies and win. One reason is that governments are not very good at innovation….

But what about the often-stated fact that Medicare has much lower operating costs than private insurance companies?… this is not an apt comparison because the new public plan would have marketing and other administrative costs that don’t apply to Medicare with its captive market.

All of this leads me to conclude that if we impose sensible rules on the public option [e.g., that it isn't subsidized], it will neither save nor destroy the health care system because it will simply not get much market share. And if we do not impose those rules, the public option will hurt rather than help.

I’ll let other bloggers bang on his argument against government. There’s a more interesting issue here: why did Thaler ignore the strange role of Medicare in this debate?

As Thaler says,

We hear from the right that an insurance plan run by the government will drive all private-sector insurers out of business and be the first step toward socialism, if not communism.

And yet nobody on the right is saying boo about the biggest, baddest government-run insurance plan — Medicare.

Medicare hasn’t just turned into the third rail. It’s become non-government. At town hall meetings, in between denouncing imaginary government plans to kill off grandma people are yelling, “keep your government hands off my Medicare!”

For a Behavioral Economist, this should be like catnip. It’s about as un-calculator-like behavior is you can get. But Thaler doesn’t touch it. Why?

It may be because he’s conservative. But I think it’s also a sign of a fundamental flaw in most Behavioral Economist work.

Behavioral Economists are fascinated by the impact of our brains on how we think. But they’re mostly silent about the equally critical impact of other people’s brains — the institutions we work in, the political efforts to shape public debate.

If a Behavioral Economist like Thaler took political economy seriously, he’d have to make a very different argument. For example, he’d have to explain why if the public option won’t “get much market share,” are insurance companies pouring millions into strategies that, among other things, tries to convince people that Medicare isn’t really government? Because it isn’t just a lone nutjob at one town hall meeting who’s said it; this strange outburst has happened often enough that it’s probably on somebody’s list of talking points. And can’t be the insurance companies’ strategy to ensure they’ll still be able to compete; there are much less bizarre ways to argue for “sensible rules on the public option.”

You can certainly be a free-market cheerleader and take political economy seriously. But you have to work a hell of a lot harder than Thaler does here. And that’s why I think it’s crucial for liberals and progressives to force Behavioral Economists to take the next step in exploring how people aren’t calculators.