Less wrong economic policy

Gordon Seidoh Worley

Yesterday I heard an interesting story on the radio about US President Obama's pick to head the Office of Information and Regulatory Affairs, Cass Sunstein. I recommend checking out the story, but here are a few key excerpts.

Cass Sunstein, President Obama's pick to head the Office of Information and Regulatory Affairs, is a vocal supporter of [...] economic policy that shapes itself around human psychology. Sunstein is just one of a number of high-level appointees now working in the Obama administration who favors this kind of approach.

[...]

Through their research, Kahneman and Tversky identified dozens of these biases and errors in judgment, which together painted a certain picture of the human animal. Human beings, it turns out, don't always make good decisions, and frequently the choices they do make aren't in their best interest.

[...]
"Merely accepting the fact that people do not necessarily make the best decisions for themselves is politically very explosive. The moment that you admit that, you have to start protecting people," Kahneman says.
[...]

The Obama administration believes it needs to shape policy in a way that will keep us all from getting hit by trucks — health care trucks, financial trucks, trucks that come from every direction and affect every aspect of our lives.

At the risk of starting a discussion that will be wrecked by political wrestling, I'm always hopeful when I hear about governments applying what we learn from science to policy. Not to say that this always generates good policies, but it does generate the best policies we have reason to believe will be good (so long as you ignore the issue of actual politices that might get in the way).

Cass Sunstein, President Obama's pick to head the Office of Information and Regulatory Affairs, is a vocal supporter of [...] economic policy that shapes itself around human psychology. Sunstein is just one of a number of high-level appointees now working in the Obama administration who favors this kind of approach.

[...]

Through their research, Kahneman and Tversky identified dozens of these biases and errors in judgment, which together painted a certain picture of the human animal. Human beings, it turns out, don't always make good decisions, and frequently the choices they do make aren't in their best interest.

[...]
"Merely accepting the fact that people do not necessarily make the best decisions for themselves is politically very explosive. The moment that you admit that, you have to start protecting people," Kahneman says.
[...]

The Obama administration believes it needs to shape policy in a way that will keep us all from getting hit by trucks — health care trucks, financial trucks, trucks that come from every direction and affect every aspect of our lives.

Based on London experience I'm quite strongly opposed to congestion pricing.

First, cost of operating the system are enormous. Of £929.8m in 2001-2007 revenue, TfL got ridiculously low £275m in net income, and after subtracting capital costs it's barely positive return of £10m. If you add transaction costs on charge payer side, the ratio of revenue to waste is even higher.

This makes congestion charge one of the worst ways of raising money. This billion pounds is pure loss. Taxing alcohol and cigarettes on the other hand is one of the cheapest ways of getting extra revenue.

And second, there's very little evidence that this billion of pounds had significant impact at traffic in London. For example "A report by TfL in early 2007 indicated that there were 2.27 traffic delays per kilometre in the original charging zone. This compared with a figure of 2.3 before the introduction of the congestion charge.", so it failed quite spectacularly at long term way to reduce congestion. There are some shifts in traffic patters, but they don't seem to have terribly much impact.

These results surprise me, as I expected significantly better revenue to waste ratio (at least 4:1, not 1:4), and significant impact on congestion levels. But I feel proven wrong and now I'm strongly against congestion charges.

Thanks for the info, it does dampen my enthusiasm a bit, but I'm still an advocate for carefully considered congestion pricing.

The cost of a well designed system should fall over time because of improvements in technology.
Congestion pricing can already be implemented on highways at very low costs. Even if it were currently impractical for a large area like the one in London, there is still much to be gained by implementing it where it is already inexpensive to do so.
One big improvement would be to charge more (or only charge) during rush hour. In some cases this makes administration and enforcement more expensive but I'm convinced we can drive the costs down.