--Walt Whitman, "Song of Myself"
Barack Obama is best described as a "visionary minimalist," according to Cass Sunstein, the man who will oversee all of the new president's regulatory policies. If this phrase seems an oxymoron, that's in character. Paradox is Sunstein's signature. A prolific intellectual and author or co-author of some two dozen wide-ranging books, Sunstein, 54, taught law and political science at the University of Chicago for 27 years before moving to Harvard in 2008. He could easily be Obama's first nominee to the Supreme Court.
Sunstein's new job is director of the Office of Information and Regulatory Affairs (OIRA), a powerful post first used under Ronald Reagan mainly to block regulations. OIRA's staff is required to apply cost-benefit tests to regulations, often overstating costs and undercounting benefits. Under Republicans, the office has been especially aggressive in thwarting environmental, safety, and health rules. Even in the Clinton era, the financial deregulators at Treasury rolled over the forces alarmed about systemic risks, and OIRA was no counterweight. Given that the economic collapse is emphatically a regulatory failure, how will Sunstein use an office that was explicitly created to stymie regulation?
His own history suggests a mixed verdict. Like Barack Obama, Sunstein is brilliant, principled, complex, and basically a liberal but also a seeker of common ground. Both men revel in being hard to pigeon-hole. In good University of Chicago fashion, Sunstein prefers market-like incentives to get businesses to behave themselves and consumers to optimize their well-being. This process is described as "libertarian paternalism," another characteristically Sunstein oxymoron meaning subtle government interventions that prompt consumers to make the decisions they would voluntarily choose if they were as smart as he is.
Sunstein's latest book, Nudge, co-authored with University of Chicago economist Richard Thaler, observes that ordinary people make ill-informed financial choices because they lack adequate time or knowledge or because the deck has often been stacked in favor of bad consumer decisions by self-serving merchants. There are really two kinds of people, Sunstein and Thaler puckishly write, "Econs" and "Humans." Econs are the hyper-rational creatures imagined by University of Chicago economists. Humans are the rest of us. Econs, somehow with infinite time, carefully weigh every economic decision. Humans decide on the fly and make systematic mistakes. By using public regulation not to dictate outcomes but to alter "choice architectures," enlightened government can help consumers to make better decisions, both for their own well-being and to discipline producers. Thus does libertarian paternalism make markets work better.
A favorite Sunstein example is the 2006 Pension Protection Act, which changed the default option for workers whose employers offered tax-deferred savings plans. Under the law, workers now must choose to opt out, rather than opt in, which was the previous rule. This simple constructive "nudge" has dramatically increased both employee participation and savings rates.
Within the University of Chicago bubble, Sunstein is a liberal outlier and provocateur, tweaking his more fundamentalist colleagues about their unrealistic assumptions--but then cycling back with his own sublime restatement of creative government use of market incentives. However, in the context of the wider regulatory challenges facing the Obama administration and the collapsing economy, the entire sensibility seems a little too redolent of the rarified air of Hyde Park; a little too directed at provoking the irritation or grudging admiration of Chicago colleagues; a little too apologetic about the affirmative use of government; and perhaps too elegantly miniature for the immense crisis we confront. Sunstein is like a man who trained for a chess match and finds himself thrown into a triathlon.
As this article was going to press, Sunstein was awaiting Senate confirmation and declined all requests for interviews. (It should also be said that Sunstein was on the founding editorial board of this magazine and over the years has written several admirable pieces for the Prospect.)
Today the challenge of regulating capitalism is not one of subtle fine-tuning but of rebuilding basic public safeguards after a catastrophic free-market orgy. Can this be reconciled with Sunstein's ideal of regulatory minimalism?
In a discussion on transformative presidencies held last September at the John F. Kennedy Presidential Library and Museum in Boston, Sunstein described Obama as "someone who has spent a lot of time at the University of Chicago and someone who very much appreciates the power and the values associated with free markets. He wants to use them rather than to reject them."
Perhaps projecting his own views onto his president, Sunstein also said of Obama:
He wants to ... rely on markets and to tell the skeptics, "We are going to use market incentives. The Republicans were right all along to reject command-and-control regulation, and Paul Krugman hated that, [but] the Republicans were right on that. We're going to take on the market enthusiasm in the interest of our goal, which is less reliance on forms of energy that simultaneously endanger national security, hurt the economy, and threaten to change the world's climate."
This kind of libertarian paternalism is highly creative as far as it goes. But to pursue the example of the employees helpfully "nudged" into joining savings plans, the deeper problem today is that fewer companies offer pensions at all, and tax-deferred savings schemes such as 401(k)s (which aren't real pensions) are taking a beating from the stock-market collapse. Systemic reform requires more than a nudge; it may even require dreaded commands and controls like the expansion of Social Security.
By the same token, financial reform will likely take more than nudges. Sunstein's idea of choice architectures is aimed largely at naive Humans. But the systemic abuses were perpetrated by Econs--sophisticated insiders who cooked up system--threatening inventions such as credit-default swaps. Such transactions were exempted from regulation on the premise that consenting adults knew what they were doing. However, some market innovations are so inherently dangerous that they may simply need to be prohibited.
In Nudge, which appeared in 2008, Thaler and Sunstein even had a kind word for sub-prime loans, arguing that "subprime lending ... offers credit to those who could otherwise not borrow." But in fact, about half of sub-prime loans went to people who qualified for conventional loans--they were steered to sub-prime because the lender stood to make more money.
Command and control, as an all-purpose University of Chicago pejorative, gets a bum rap. Even in normal times, the command to drive on the right and stop for red lights works better than any system of market incentives. By the same token, repairing the financial collapse will very likely take a blend of better incentives and outright prohibitions.
Sunstein has written on a stunning range of topics, from animal rights and feminism to cost-benefit analysis and the Internet. He so enjoys the role of heretic that it can be difficult to tell when he is just provoking and when he really means it--sometimes even for Sunstein himself. His astonishing productivity on complex subjects occasionally leads to glibness. In Nudge, he and Thaler write glowingly of the market-enhancing value of mandatory disclosures: "Before the phaseout of ozone-depleting chemicals, warning labels were required for products containing such chemicals." The alert reader has to be paying careful attention to notice that these dangerous chemicals were not "phased out" thanks to market incentives. They were banned by government, and not without political struggle. In Nudge, invoking the economic benefits of greater "choice," Sunstein and Thaler also make a classically Chicago argument that consumers should be allowed to trade away their right to sue for medical malpractice in exchange for lower premiums, without acknowledging the different effect on the rich and the poor, who would be more likely to take the offer and suffer the consequences.
This kind of reasoning, especially Sunstein's qualified embrace of cost-benefit analysis, has alarmed many liberals. In his 2003 book, Risk and Reason: Safety, Law, and the Environment, Sunstein acknowledges that the benefit of a particular regulation, for example an Environmental Protection Agency rule regulating arsenic in drinking water, could vary from $13 million (well below the cost) to $3.4 billion (far above the cost), depending on the economic assumptions used in the model. But on balance, Sunstein considers cost-benefit tests a useful tool as long as greater weight is given to potential benefits. Critics respond that when something as momentous as climate change is at stake, cost-benefit measures, such as imperfectly informed consumers' "willingness to pay" current costs, are misleading and dangerous. After Sunstein's appointment was announced, a group of scholars from the Center for Progressive Reform wrote that the test of "willingness to pay" for regulatory protections is inappropriate "when the benefit in question is a non-market good--the value of a child's health or clean drinking water, for example."
Economist Joseph Stiglitz, who won the Nobel Prize for insights not unlike Sunstein's about the systematic mistakes of economic actors dealing with imperfect information, takes the inference in a very different direction. Stiglitz flatly counsels more regulation, with no apology to Chicago economists. But in the party of Obama, critics like Stiglitz have not been invited to the dance.
Many of Obama's early responses to the crisis of deregulation have already been far stronger than mere nudges. He has reversed some of the Bush administration's more extreme directives, such as the countermanding of stronger clean-air regulation. At a Jan. 30 White House event on working families, Obama issued three orders making it easier for unions to organize. His budget requires states to broaden unemployment-insurance coverage or lose federal funding. Some might call these command-and-control regulations. Circumstances have required stronger medicine than market incentives.
In his first major presidential speech on regulation, given Feb. 26, Obama declared that "the choice we face is not between some oppressive government-run economy or a chaotic and unforgiving capitalism. Rather, strong financial markets require clear rules of the road, not to hinder financial institutions, but to protect consumers and investors, and ultimately to keep those financial institutions strong." This sentiment is surely visionary--and far from minimal.
At the same time, however, Obama has appointed regulatory officials more in the Sunstein mold. His Security and Exchange Commission chair, Mary Schapiro, used to head the financial industry's self-regulatory body, FINRA, which missed the major abuses that led to the financial collapse. His chair of the Commodity Futures Trading Commission (CFTC), Gary Gensler, while a Treasury undersecretary in the Clinton administration personally instructed then–CFTC Chair Brooksley Born to cease her efforts to intensify regulation of derivatives.
Yet, as they say in the law schools, circumstances alter cases. The intriguing question going forward is whether people with a prior commitment to the genius of markets, such as Sunstein, Schapiro, Gensler, Treasury Secretary Tim Geithner, and White House economic chief Larry Summers, can shift ground with changing times. Sunstein is not at liberty to give interviews, but his frequent co-author Richard Thaler tells me in an e-mail exchange:
The purpose of our writing Nudge was not to say that every problem can be solved by nudging alone. Rather, we thought of it as an exercise to investigate how much it is possible to achieve via choice architecture alone, without forcing anyone to do anything. Our conclusion is: much indeed. This is, of course, not to say that there should not be any "shoves." Drunk driving is banned, not merely nudged. So is asbestos in our ceilings. Kids are not allowed to take guns into schools. We approve of these bans, and others.
At the same time, Thaler adds in good Chicago fashion that if the last generation of regulators failed so badly, what makes us think their successors will do any better? "Regulators," he reminds me, "are Humans too."
The Chicago skepticism of government intervention tends to leave out one element--power. Some regulation is not just about making markets work better but about deliberately transforming relative economic and political power. And the presence or absence of effective and public-minded regulation is less about technical capacity and more about who governs. The rare eras of effective financial regulation (and expansive social investment) have occurred during periods when the usual power of economic elites was temporarily offset by the power of ordinary people unnerved by economic crisis and then mobilized by presidential leadership. This described Franklin Roosevelt, and it could also describe Barack Obama.
In this regard, Sunstein, paradoxically as always, is also a big fan of the other Hyde Park. In one of his most compelling books, The Second Bill of Rights: FDR's Unfinished Revolution and Why We Need It More Than Ever, Sunstein endorses Roosevelt's 1944 call for guaranteed economic rights--to a job, education, decent housing, and health care. Here, he writes as a highly interventionist left-liberal. Indeed, what makes Sunstein such a rich thinker is that in his wide-ranging explorations, he, like Walt Whitman, doesn't mind contradicting himself. Sunstein writes:
In a nutshell, the New Deal helped vindicate a simple idea: No one really opposes government intervention. Even the people who most loudly denounce government interference depend on it every day. Their own rights do not come from minimizing government but are a product of government. The simplest problem with laissez-faire is not that it is unjust or harmful to poor people, but that it is a hopelessly inadequate description of any system of liberty, including free markets. Markets and wealth depend on government.
This conception of economic intervention obviously goes far beyond "libertarian paternalism." Applied today, it would require a wholesale restructuring of the health system, over the fierce objections of potent private industries. It would mean "coercion" of the few for the broad benefit of the many. And it would place government squarely in charge of allocating very substantial resources. In this incarnation, Sunstein recognizes that it is not just government but market forces that often stunt human possibility.
How do we reconcile the massive government intervention of Roosevelt's Second Bill of Rights with the minimalism of Nudge? Are we for large-scale government intervention, or not? Well, sometimes we are, sometimes not, depending on the circumstances and the author's current interests and moods. Sunstein's intellectual mansion has many rooms.
Like Roosevelt, Barack Obama is a liberal at heart who is also a pragmatist. But where Roosevelt's advisers ran the gamut from orthodox to radical, Obama is relying mainly on brilliant economic moderates. Nonetheless, many of Obama's centrist intellectuals like Sunstein have more than a single sensibility. There is a whole team of rivals inside Cass Sunstein's head.
Roosevelt proudly claimed the liberal mantle. Obama, governing in a very different time, often dresses his liberalism as mere pragmatism, and his call for tougher regulation as nothing more than the perfection of markets. That is a bit of a stretch, but politically, the recipe may even work. Economically, it had better work.
