The Trouble with Libertarian Paternalism

CHICAGO – There are many arguments against government paternalism: apart from limiting individual choice (for example, the choice to remain uninsured in the current health-care debate in the United States) and preventing individuals from learning, history suggests time and again that the conventional wisdom prevalent in society is wrong. And, since governments typically try to enforce the conventional wisdom, the consequences could be disastrous, because they are magnified by the state’s coordinating – and coercive – power.

A clear example is financial regulation, which in many ways is a form of paternalism. In the US, the low risk assigned to senior tranches of mortgage-backed securities made them attractive instruments for banks to hold, given the relatively high return they offered. But they proved far from safe, despite the prior conventional wisdom. And, because the regulator had pronounced them safe, far too many banks overloaded on them, rendering them even more risky when the banks tried to sell them at the same time.

Other examples of the danger of the coordinating power of government paternalism abound. As I drive to downtown Chicago, I pass a series of high-rise housing projects, meant in their time to be the miracle cure for homelessness, poverty, unemployment, and crime. Today, they are seen as the best way to concentrate and perpetuate many of those ills.

Not only were the housing projects kept a safe distance from areas that had good jobs, but, with few residents experiencing stable families and livelihoods, there were not enough local examples of success to guide young people. As a result, many went astray.