An article in last month’s New Republic described Richard Thaler as the “intellectual guru” behind Barack Obama. Thaler is the father of the behavioral-economics movement, director of the Center for Decision Research at the University of Chicago, and the co-author of Nudge, a new book promoting a political “third way” called libertarian paternalism.

When I asked him what position he would like in an Obama administration, he said he wouldn’t be interested (except perhaps as the spouse to the ambassador to St. Barts), though he’d be willing to be the Secretary of Nudging.

Thaler was also my professor, dissertation adviser, and mentor over the past decade or so as I was a Ph.D. student in Finance at the University of Chicago’s Graduate School of Business. (I graduated last year.)

He is also one of the most remarkable people I have ever met.

I am a hard man to sway. I came to the University of Chicago after being a trader at Long-Term Capital Management. I had heard about behavioral economics and its use of psychology in finance and I was pretty sure it was rubbish. But in one of the best open-minded decisions I ever made, I took Prof. Thaler’s course my first semester there. He was incredibly persuasive, and it literally changed my life. Looked at in the new light, the purely rational approach was really just a subset of the behavioral approach.

Would the same thing happen with his book? Would I shed my purely libertarian beliefs as easily and as permanently as I shed my purely rational ones? After all, rationality and libertarianism often travel together (as demonstrated by Ayn Rand). See for yourself below, though I will give you a hint: Libertarianism is not a subset of libertarian paternalism.

Nudge itself can serve as a fascinating apolitical read, for example, as a self-help book or as a way for a company to benefit its employees through subtle cues to help them choose what would be better for them anyway in things like savings decisions or picking lunch: choice is preserved for those who want low savings or fatty fries, but the defaults are higher savings and healthy salads.

But it is the political realm that makes libertarian paternalism most controversial, at least to me. As a new political movement, it’s not even clear what the official stance is on many issues. How does a libertarian paternalist stack up against the standard political groups?

To answer, I put Thaler through the World’s Shortest Political Quiz, the first time libertarian paternalism has been placed on the political map. The quiz is composed of five questions about personal issues and five about economic issues and you can either choose agree, maybe, or disagree. See the results below and in depth on the next page. You can take the quiz yourself at www.theadvocates.org/quiz.

Personal Issues
Government should not censor speech, press, media or Internet.	Agree
Military service should be voluntary. There should be no draft.	Agree
There should be no laws regarding sex for consenting adults.	Agree
Repeal laws prohibiting adult possession and use of drugs.	Agree
There should be no National ID card.	Maybe

Economic Issues
End "corporate welfare." No government handouts to business.	Agree
End government barriers to international free trade.	Agree
Let people control their own retirement; privatize Social Security.	Maybe
Replace government welfare with private charity.	Maybe
Cut taxes and government spending by 50% or more.	Maybe

Where did Thaler think he would end up? “I think I’m somewhere to the right of Ron Paul.” He exclaimed a delighted “Yes!” when he found out he was labeled as a libertarian, but then he corrected the quiz results. “But,” he said. “I’m a libertarian paternalist.”

Maymin: You say you want to bridge the gap between Democrats and Republicans, but you have two elephants on your cover and no donkey.

Thaler: [Laughter]

Maymin: What’s up?

Thaler: Yeah, well we couldn’t find a picture of a donkey nudging so we went with the elephants. It’s funny we did get some complaints from Democratic friends saying, “Why did you put a picture of elephants on the cover?” But we think that the image of the mother elephant nudging the baby sort of captures what the book is about, because the baby’s free to go wherever she wants.

Maymin: I’ll tell you why libertarians have a problem, and it’s that the word “liberal” used to mean someone who is for freedom and liberty.

Thaler: Right.

Maymin: But then FDR started calling himself a liberal. The meaning changed and us freedom-loving Americans were forced to contrive this new word, libertarian. And it feels like you have kind of taken that word away from us too.

Thaler: Right, but we’re using it as an adjective. So, it’s not like we’re calling ourselves libertarians. We’re calling ourselves libertarian paternalists. And so it’s meant to be a modifier. So, if I say, I’m serving you Japanese-French food, I’m not claiming to serve you Japanese food.

Maymin: Okay, but if you say you’re serving non-food food, then it gets confusing. So if libertarian is modifying paternalism, how can it be libertarian in any meaningful sense?

Thaler: Well, probably because by adding the adjective to the word paternalism we’re eliminating the part of paternalism that you most strongly object to. So in spite of the fact that you’re a libertarian, you’re a nice guy. And you know, I’ve never seen you, like, push old ladies down in the street or, you know, you don’t think that we should make poor people poorer. So I think helping people make better decisions is something that is unobjectionable, and that’s all we mean by paternalistic.
But when libertarians use the word paternalism, there is a sense in which libertarian paternalism is an oxymoron, and of course, we chose the phrase precisely because it seems to be contradictory and controversial. If we knew enough to write this book and didn’t pick a controversial word to describe it, we should bury our heads in the sand. So it’s an intentional oxymoron, or at least an ironic phrase.

And the way we get it, I don’t think that it’s an oxymoron or misleading because by paternalism, libertarians mean forcing people to do something, and of course, then there can’t be libertarian paternalism.

But what we think is, it’s about things like choosing the right default and, as you know, our argument is, well, you’ve got to pick one, there has to be a default, why not pick the one that you think is the better one by some criteria.

Maymin: So of the defaults in, say, Medicare prescription plans, you make an excellent case that there should be a better way of picking defaults than randomness or other things, but at the end of the day, Medicare itself is paternalistic. It’s forcing people who don’t want to be in the program to pay for other people’s benefits.

Thaler: That’s right, but, you see, this is why I think libertarians have less influence than they should. So let me really piss you and your readers off by scolding you.

Maymin: Please.

Thaler: Here’s what I mean by that. We have the prescription drug program. It was passed by a Republican president and a Republican dominated Congress. And in our book, we have nothing to say about whether having such a program was a good or bad idea. We’re agnostic about that. What we say is if you’re going to have such a program, then how should you do it?

So is it a good idea to maximize the number of choices? Now, some people take it as an article of religious faith that the more choices you have the better, and I think that should be an empirical question. Are people, in fact, better off when they choose from 50 plans than from 10 plans? Right? That’s a study-able question. And as you know, we studied the Swedish Social Security System, where they had 456 options. I think it’s safe to say that 456 is more than the optimal number of choices.

So, you know, back to my libertarian bashing, the partial privatization of Social Security, I think libertarians should applaud, but they might just say, “Well, we shouldn’t have Social Security at all,” but, that just leaves them out of the discussion. And renders them irrelevant. And what we’re trying to do is say, well, can we utilize some libertarian principles and get right into the middle of the debate. So libertarians, I think, are unfairly viewed as, you know, somewhere to the right of Donald Rumsfeld. And as we know, this administration has probably been the least libertarian administration in the history of the country. And so, the Republicans have no claim whatsoever to libertarian values. So I think what we’re trying to offer libertarians in this book is a way to stop being irrelevant and start being relevant. And, you know, sure you might rather have no prescription drug program and no Medicare, but that’s not where we are right now.

And it’s a question of what sort of Medicare program are we going to have, and what sort of Social Security are we going to have, and what sort of regulation are we going to have for mortgages? Saying the government should just get out is just making yourself irrelevant.

Boy, that was unexpected.

Maymin: [Laughter] Why?

Thaler: Well, I mean, I just hadn’t ever given that speech before.

Maymin: [Laughter] It actually taps into something deep that’s happening in the Libertarian Party now. In the last election cycle, they threw away this pure, wonderful, idealistic platform and made it a pragmatic thing of, you know, we should have school choice as opposed to no Department of Education, but that sort of thing.

Thaler: Right, right, right. That’s exactly what I’m saying. And, you know, it’s funny, I was at a fund-raiser with Obama…no it wasn’t, that’s not right. It wasn’t a fund-raiser for Obama, it was a fund-raisers for some woman who was running for Congress, but it was organized by a bunch of rich liberals who had supported Obama. And one of them was saying, “You know, we were all supporters of Barack for a long time, but then he went to Washington, and he became pragmatic!” And it was like they were saying “Oh, that’s so terrible.” And, you know, I was ready to kill them, because it’s that sort of thinking that gets you more of George Bush. So I think that a pragmatic libertarian candidate, that’s an appealing idea, and we’ve given them the platform.

Maymin: Actually, in a recent interview, your co-author, Cass Sunstein, says you are a libertarian, in the sense that you really don’t like government mandates and stuff. Is that true?

Thaler: You mean me personally?

Maymin: You personally.

Thaler: Well, I don’t think that I’m a capital “L” libertarian. But, I mean, the history of this phrase is that I was presenting a paper here at the University of Chicago on the “Save More Tomorrow” program, and a guy in the Economics Department was my discussant and he accused me of being a paternalist. Which as you know is the biggest insult that you can accuse anybody of being at the University of Chicago. And I said, “Well, I guess, but there’s no coercion here, so, maybe you should call me a libertarian paternalist.” That’s where it started. And, I don’t think a libertarian can have any objection to “Save More Tomorrow.”

Maymin: When it’s within a company.

Thaler: When it’s within a company.

Maymin: Right, but that’s—

Thaler: Now, so let’s get the government involved. So there was the Pension Protection Act, and what it did is it nudged companies in the following way: It said, “If you offer a match, and Save More Tomorrow, and automatic enrollment, then we give you a free pass on the non-discrimination rules.”

So it didn’t say anybody had to do it. It just said, “We’re going to make your life a little easier over here if you do this.”
I don’t know how much you know about them, the non-discrimination rules just say that you’re not allowed to give more than X percent of the benefits to the highest paid workers. And in the 401k, since there’s a dollar max, then the only way you can be in violation of those rules is if you don’t get the low paid workers to join. Right? There’s no way to give the CEO a million dollar pension contribution.

So we do accomplish that goal because if you automatically enroll and automatically escalate, then the poor will save enough to get the company into compliance, and they just don’t have to bother to prove it. So I think that’s pretty admirable libertarian paternalism legislation, because it’s pushing a libertarian paternalism idea and it’s just nudging it.

Maymin: What about more complicated things, like, what about drugs, whether it’s marijuana or FDA drugs? What would be the libertarian paternalistic approach to that?

Thaler: Yeah, I mean, we didn’t write about those things. I think both of us tend to think that prohibition was a fiasco and that we should have learned our lessons and, you know, it’s pretty clear, that marijuana should be decriminalized. Now how far do you push that, I don’t know. You know, if there’s some drug that has a 90 percent chance to kill you, I don’t know what the libertarian position is on that.

Maymin: You own your body.

Thaler: Have I ever given you my sunlamp example?

Maymin: Sunlamp, no, I don’t think so.

Thaler: Sunlamps, I don’t know if they’re really popular any more, but they certainly used to be popular. You turn it on, and you close your eyes, and you stay under it for a few minutes to get a tan. Now, closing your eyes and having warm temperature is very likely to produce sleep.

So lots of people burned themselves. Now, so sunlamps should be equipped with a timer switch. Now, suppose that you can equip a sunlamp with a timer switch for a quarter.
I think that’s probably a good idea, because, now that’s not libertarian. That’s just like…

Maymin: You mean as a law or as a…

Thaler: As a law.

Maymin: Uh-huh.

Thaler: Now, there we’re going to get down slippery slopes, but if you say, “All right, I’m God, do I think that’s a good law or a bad law?” I think that’s a good law.

Maymin: On the basis of what, how do you decide what’s a good law and what’s a bad law?

Thaler: If the probability of error is very high and the cost you impose on people is very low, then I think there’s a case to be made. And so, like there’s this paper on what they call “asymmetric paternalism.” And that’s sort of their principle. That you want to help people, but while imposing the fewest costs on the sophisticated people. So you’re making everybody pay a quarter and some people would always bring their kitchen timer. But of course we know even the people who would usually do that would occasionally forget their kitchen timer and would occasionally burn themselves.

Maymin: Right. So it’s a cost benefit analysis, basically.

Thaler: It’s a cost benefit analysis, right? I can see that you would have trouble with that.

Maymin: Well, I would say that if it’s a just law, then it’s a good law. You can’t make laws that help plunder; you can’t initiate force against other people. That’s what makes a bad law. It’s a moral thing.

Thaler: Right, right, but you know, a 25-cent switch is not plunder.

Maymin: But you’re initiating force. I mean, if you mug somebody for a quarter, should you not be prosecuted?

Thaler: No, but you’re imposing costs of more than a quarter.

Maymin: Well, who’s to decide what the costs are? That’s the attraction of libertarianism is that it’s a moral stance.

Thaler: So these are precisely the issues that we duck in this book because we’ve decided to write a whole book on libertarian paternalism, and then as you know, in the “Objections” chapter we say, “Well, we can be criticized from the left and the right.” And the people on the left want to say, “Well, shouldn’t we have some pure paternalism?” And so my answer to them is, “Well, if you want my personal opinion, I think the sunlamp rule, I would personally be in favor of that.” But, we’re writing a book where we have a bright line and we’re going to stick to that.

Maymin: Okay, let’s talk about a specific thing, the mortgage stuff. In the Boston Globe, you described a proposal. You want to give aid, as you say, to those who were bamboozled.

Thaler: Yeah.

Maymin: But why should I pay for that if I didn’t bamboozle anybody?

Thaler: I mean, this is actually beyond the scope of our book, so we’re just talking about…this is like what we were talking about at the beginning. There’s going to be aid. You know, everybody in Congress is falling all over themselves to try and help. And, you know, I think you can make the argument about Bear Stearns, or your former employer [Long-Term Capital Management].

Maymin: [Laughter] That was a private bail out!

Thaler: [Laughter] That’s right. This one was mostly private but the government got involved in both cases. And you can say there are externalities. You know, the Bear Stearns shareholders certainly are not coming out whole any more than the LTCM partners did.

Maymin: This is the problem with pragmatic libertarianism: the fear of legitimizing the current state of affairs. You say that stabilizing the real estate market is a legitimate government goal. But what makes it legitimate?

Thaler: Well, I mean, in the same sense of stabilizing, exactly the same argument you can make for making sure that Bear Stearns doesn’t fail because what would that do to financial markets if all of a sudden there was this huge counter-party risk.

Maymin: So you’re basically in favor of the Bear Stearns bailout too?

Thaler: Again, I don’t have a professional opinion about that. I would say that, this is no worse than that—you can make an argument that there is some social good that came about because of that, and essentially that by irresponsible risk management, Bear Stearns was going to impose huge costs on lots of people, and what the Fed did was greatly reduce those costs and give some benefit to Bear Stearns, but not much.

Maymin: Okay, so let’s talk about the electronic stuff. Basically, if I understand it, you want to, essentially, augment the Truth in Lending Act to force mortgage brokers and others to provide an electronic file and a standardized form that lists every feature to ease comparison across providers. Right?

Thaler: Right.

Maymin: Now, will one of the columns in the standardized form be something like a comment or footnote section?

Thaler: All of the footnotes will be in there.

Maymin: Okay, so, they get a text area where they can say something that doesn’t quite fit into something.

Thaler: No.

Maymin: No? So there would be no further innovation in mortgages?

Thaler: You’d have to apply. So we haven’t written at length about how we imagine this working, but let’s talk about, say, cellphone plans, because it’s a little easier to understand. So suppose somebody comes up with the iPhone and it allows you to download songs, which didn’t exist before, so what we would imagine is that there would be a process whereby a cell phone provider would say, we want a new category, and we just want it added to the list of things that you can charge for. And for such applications, the presumption is that they would be approved.

Maymin: So people have gone from pleasing the customer to pleasing governmental officials?

Thaler: No, they just have to announce.

Maymin: What do you mean announce? If I just put it on my website that this is the new plan, is that enough?

Thaler: No, you would have to—and I don’t know exactly how this process should work—but they would have to agree, you’d have to get permission to have this new way of charging.

Maymin: But isn’t that terrible? I mean, before, if I want to offer you, personally, if I have some benefit to offer you, that’s it. But now, instead of just me and you agreeing, we have to involve a third party who has his own issues. Isn’t that the death of contracts? Imagine if this had happened before, you know, 30 years ago or something, when every, all mortgages were just 30-year fixed; we would have never had variable rate mortgages.

Thaler: No, that’s exactly wrong.

Maymin: Okay, why?

Thaler: Because the presumption will be that any kind of new innovation will be approved.

Maymin: But approved by whom?

Thaler: By…because the regulator is not saying what you can do and not do, all the regulator is doing is providing a way to make comparisons. So if you want to have a new kind of variable rate, or interest only mortgage, or any other kind of exotica, the only thing you would be required to do is explain to the regulator how this is going to work, so they can incorporate it into their spreadsheets. That’s all.

Maymin: So we become a country where we have to ask permission to innovate.

Thaler: No, we just have to report it. That’s all. I think you’re making the permission part…so look, for years, credit card companies were secretly charging people 3 percent on their foreign transactions and not revealing it. Or if it was revealed, it was deep in some fine print. So I don’t think they used to do that, they got this clever idea to do it, and they didn’t tell anybody about it. So, under our régime, they would have to announce it and not deep in the fine print. They’d have to announce it to a regulator because the regulator would have to write another line of code to include that in the electronic disclosure. I don’t think that is so bad.

Maymin: Have you spoken to political groups?

Thaler: We both spoke at [the neoconservative think tank American Enterprise Institute] last week. And that went very well. I think our message appeals pretty much across the board.
Most vehement objections are from libertarians and I think most of those come from people who haven’t read the book.

Maymin: Not all.

Thaler: [Laughter] I know.

Maymin: [Laughter].

Thaler: But I like you anyway.