"they believe they are doing good and so not constrained by what they themselves would consider proper principles of morality and honesty "

From David Friedman:

"Rationality, Nudges and Slippery Slopes

In order to explain and defend the economic approach to human behavior one must justify the assumption that individuals are rational, that they tend to take the actions that best achieve their objectives. One argument I have long made is that, while rational behavior is not a complete description of how humans act( TRUE ), it describes the predictable part of their action( CAN'T IRRATIONAL ACTION BE PREDICTABLE? ). In most situations there is one correct way of acting to achieve an objective and lots of incorrect ways someone could act. Unless one has a theory of what particular mistake someone is going to make, the best approach is to treat the mistakes as random error, to predict his behavior on the assumption he is rational while realizing that the prediction will sometimes be wrong.

So far as I know, neither Cass Sunstein nor Richard Thaler ever read either of the books in which I made that argument. But their recent book Nudges offers a rebuttal. Using evidence from behavioral economics, they argue that irrational action is not merely random error. There are patterns to it, predictable ways in which individuals act that are inconsistent with the economist's assumption of rationality( I AGREE ). Thaler and Sunstein propose that those setting up alternatives for someone else to choose among—"choice architects" in their terminology—can and should take advantage of those patterns to nudge the chooser into making the choice they think he ought to make, the choice he would make if he were fully rational. This is the approach that I described in an earlier post as "soft paternalism" and that has been described elsewhere as "libertarian paternalism." It is paternalism because it is getting people to act as someone else thinks they ought, libertarian because it leaves the individual free to act in a different way if he wants to—a nudge, not a compulsion( YES ).

The argument as stated is persuasive and interesting. As the authors point out, any time you are offering someone else choices—whether "you" are a government agency, an employer, or a firm selling something—you are necessarily deciding in what form to make the offer, hence engaging in choice architecture. If you are going to do it, you ought to know what you are doing and do it in a way designed to produce the result you want to produce—in their case, choices that result in the chooser better achieving his own goals.( A GOOD POINT )

The libertarian part of the proposal depends on leaving the individual free, at no significant cost, to make the choice you don't want him to make. But if you don't want him to make that choice, it will be tempting to make it more and more difficult—to require him to fill out forms, file them in the right place, perhaps even to neglect to tell him that forms exist to be filled out, that the alternatives you don't want him to choose are available. There is thus a serious slippery slope problem, making it possible for libertarian paternalism to be used as the justification for government actions that end up as paternalism, or compulsion for other purposes, that is far from libertarian. The point occurred to me when I read the book. It was reinforced by a real world experience at about the same time.

It was the beginning of my daughter's first year at college and the college sent us a bill, a list of charges and a total we were to pay. One of the items in the list, included without explanation, was ten dollars for the "Green Edge Fund." Being curious, I did an online search to find out what it was. It turned out that it was a fund to subsidize environmental projects by students. It had been voted in the previous year—as an optional ten dollar per pupil payment.

"Optional" means that you don't have to pay. We sent in our check minus the ten dollars and I sent an email to the president of the College, pointing out that he was billing parents for money they did not owe. I received back an apologetic email from an administrator, explaining that the program was a new one and they had not yet gotten everything set up properly.

A month or so later I received a bill from the College for ten dollars. I wrote back to the office that sent the bill, pointing out that they had billed me, and all other parents, for ten dollars we didn't owe, that rather than my owing them money they owed money to all of the parents who had paid the ten dollars. I also sent an email to the administrator. A few weeks later, I received second bill for ten dollars—shortly followed by an email from the administrator telling me that the matter had been taken care of and I could ignore the bill.

Recently we got our bill for the second semester. It included a form for our daughter to sign and hand in during the first two weeks of the semester requesting a waiver of the charge for the Green Edge fund. The form contained a description of the fund—put in terms of how the money would be used, not how they hoped it would be used—that I suspect most students and faculty at the college would regard as fraudulent advertising if it were the product of, say, the phone company.

The bill did not include any mention of the fact that the College had, in the previous semester, charged parents for some tens of thousands of dollars that they did not owe, nor any offer of a refund to any parent who wanted it.

As it happened, my wife went to the same college thirty-some years earlier—and had had a similar experience. In her day it was a one dollar per student charge to support one of Ralph Nader's PIRGs. A student could get out of it by going to the right office on the right day and telling them he didn't want to pay it. On further enquiry, we discovered that the one dollar per student "donation" was still there, although there did not seem to be any effort to inform parents or students that they had the option of not paying it.

An optional charge where the default choice is to pay it is the sort of thing Sunstein and Thaler propose, a nudge in the direction of doing what those responsible believe, possibly correctly, that most of those nudged would want to do if they took the time to think about it. But the people constructing the choice architecture know what result they want to get, they believe they are doing good and so not constrained( HOW DOES THIS FOLLOW? ) by what they themselves would consider proper principles of morality and honesty in a commercial context, so it is very easy to make the "wrong" choice more and more difficult and obscure until what is optional in theory becomes mandatory in practice."

There is a difference between a nudge and misleading or fooling someone. In order for slippery slope arguments to be valid, the two terms held to be equivalent need to be indistinguishable. A nudge and a ruse seem different and distinguishable to me.It is always tempting for people to exaggerate or fudge or blur their arguments, even when purporting to be based on reason or experiment. The answer is to hold people to standards of fairness and decency. We might want to begin with the financial industry.

More On Arbitrary, Inefficient, And Creative Destruction

I want to return to Krauthammer's post which David Boaz references, because I feel that I can make a clearer point about it:

"First, the arbitrariness. Where do you stop? Once you’ve gone beyond the financial sector, every struggling industry will make a claim on the federal treasury. What are the grounds for saying yes or no?

The criteria will inevitably be arbitrary and political. The money will flow preferentially to industries with lines to Capitol Hill and the White House. To the companies heavily concentrated in the districts of committee chairmen. To clout. Is this not precisely the kind of lobby-driven policymaking that Obama ran against?"

See, what makes him think that time began with the financial sector? It never occurs to him that anything preceded TARP, say. So that, TARP itself appears arbitrary, stupid, and based on cronyism, as I've listed these qualities myself. So, the first question is: Was TARP itself arbitrary? Was it created ex nihilo? Does the word bara figure into its wording? Or is it on a continuum of government actions, and needs to be analyzed as such? It isn't enough to declare, "Let's begin with TARP".

Now, one way to create at least the semblance of a principle out of TARP is to say something like the following: We declare that we will intervene when the financial sector is in trouble, because it's more important than any other sector. Fine. What's the financial sector? How does it work? And you can't mean by it something as vague as that it's banks, loans, etc. How about just giving me your explanation of how Lehman failed, and why the markets reacted as they did. I'm not asking you to blind me with science or be Willem Buiter, but you have to show me at least that you've some real idea of why TARP was necessary and how it was supposed to work. Otherwise, you're not really in a position to judge if it's more important than the automotive industry or not.

My disagreement with Krauthammer is not about the importance of principles and reasons in these decisions to intervene, I simply believe that TARP itself was abitrary, stupid, and reeked of cronyism, or, at the very least, since I'm in the finacial sector, I damn well know how important it is. There's nothing wrong with his worries, only about his analysis of the current crisis.

Consider this post:

"Sunday, October 19, 2008

"It's all very Rube Goldberg-esque,"

A great post by Peter Whoriskey and Zachary A. Goldfarb in the Washington Post called "Financial Rescues Can Set Off New Problems":

"Every action the government takes has cascading effects on the market, and they're not always easy to predict," said Jim Vogel, an analyst at FTN Financial. "The government has to have time to catch up."

Follow the bouncing ball of unintended consequences.

"Further into the future, some economists predict even more profound consequences from today's interventions.

By fostering the belief the government will rush to the rescue whenever a major financial institution begins to falter, federal officials may be creating what many economists call a "moral hazard." That is, those institutions may be more willing to undertake risky investments.

"It's all very Rube Goldberg-esque," said William O'Donnell, the head of U.S. interest rate strategy at UBS, referring to the cartoonist famed for devices that work in indirect and convoluted means. "You're never quite sure what any one action will do."

Really. Who'd of thought it?"

The real question is the following: Given how TARP has been planned, marketed, and implemented, can one make a case for intervening in the automobile industry based on this precedent? I say that there is. I'm not saying that it's conclusive. There are good reasons to oppose it, but the case is far enough along that it needs to be argued out, and there is a viable argument for such intervention. It is not as Krauthammer and Boaz have argued. They haven't risen above the level of worries and nostrums to approach anything amounting to analyis. For example, at least compare this case to other similar government loans.

Okay, here's his second point:

"Second is the sheer inefficiency. Saving Detroit means saving it from bankruptcy. As we have seen with the airlines, bankruptcy can allow operations to continue while helping to shed fatally unsupportable obligations. For Detroit, this means release from ruinous wage deals with their astronomical benefits (the hourly cost of a Big Three worker: $73; of an American worker for Toyota: $48), massive pension obligations and unworkable work rules such as "job banks," a euphemism for paying vast numbers of employees not to work.

The point of the Democratic bailout is to protect the unions by preventing this kind of restructuring. Which will guarantee the continued failure of these companies, but now they will burn tens of billions of taxpayer dollars. It's the ultimate in lemon socialism."

Okay. Here it is clear that some businesses do survive bankruptcy. So, he seems to be claiming that the government intervention will keep the employees from the onerous terms of bankruptcy. This is a factual question. It isn't a question of principle. I have demands that I would include in any government intervention. Absent them, I would agree, they'll have to declare bankruptcy. But that's an argument about the conditions of the bailout, not whether one would favor a bailout or not. So, Krauthammer could be correct, but it's not obviously so.

"Democrats are suggesting, however, an even more ambitious reason to nationalize. Once the government owns Detroit, it can remake it. The euphemism here is "retool" Detroit to make cars for the coming green economy.

Liberals have always wanted the auto companies to produce the kind of cars they insist everyone should drive: small, light, green and cute. Now they will have the power to do it.

In World War II, government had the auto companies turning out tanks. Now they would be made to turn out hybrids. The difference is that, in the middle of a world war, tanks have a buyer. Will hybrids? One of the reasons Detroit is in such difficulty is that consumers have been resisting the smaller, less powerful, less safe cars forced on the industry by fuel-efficiency mandates. Now Detroit would be forced to make even more of them."

Now, I have no idea about this, and neither does he. For all I know, such a plan might work. To argue that it's not possible is beyond his knowledge. Time will tell, but it doesn't seem obviously unworkable, compared, say, to what auto makers have been doing up until the present. An idea stands or falls on its own. To argue otherwise, is poisoning the well, and fallacious. You can't simply say that it some people in congress favor it it's hopeless. Well, you can, but it's fallacious.

"Republican minimalism -- saving the credit-issuing utilities -- certainly risks not doing enough. But the Democratic drift toward massive industrial policy threatens to grow into the guaranteed inefficiencies of command-economy maximalism."

Slippery Slope Arguments are fallacious, as are Historically Inevitable Arguments, otherwise Marx would have actually been a scientist of history, but he wasn't, because there's no such beast.

Finally, one point about Brooks and Creative Destruction. This phrase has as much explanatory power as Effective Regulation. It's what we're looking for. Destruction might or might not turn out to be creative in a particular instance, and that is what actually occurs in the world. By and large, the ebb and flow of businesses does seem to work, but that platutude does excuse one from actually analyzing the case before you.

Some fires are indeed creative destruction, necessary for the proper maintenance of the natural world. Sadly, some are not. To walk to a fire, any fire, and proclaim aloud Creative Destruction, is pretty silly. So is claiming that same nostrum about the death of any particular business. Busineese do not all fail for the same simplistic reasons.

"First, the arbitrariness. Where do you stop?": In Politics, It Would Be Where You Agree To Stop

Here's an earlier post defending a bailout:

Sometimes posts are unintentionally humorous, especially when they're way behind the curve, or, have a view of human agency, and the politics based upon it, that is laughably theoretical. Here's an example from David Boaz on Cato:

"There have been plenty of criticisms here of neoconservatism and “national greatness conservatism,” but two of the occasional targets, Charles Krauthammer and David Brooks, have just published devastating critiques of the auto industry bailout. Here’s Krauthammer in the Washington Post:

First, the arbitrariness. Where do you stop? Once you’ve gone beyond the financial sector, every struggling industry will make a claim on the federal treasury. What are the grounds for saying yes or no?

The criteria will inevitably be arbitrary and political. The money will flow preferentially to industries with lines to Capitol Hill and the White House. To the companies heavily concentrated in the districts of committee chairmen. To clout. Is this not precisely the kind of lobby-driven policymaking that Obama ran against?"

The arbitrary gate was sauntered through quite a while back down the road. For one thing, these financial sector arguments are not obvious. Then, there have been so many changes of plan recently that arbitrary is a generous description, compared to say, oh, I don't know, frantic, say. There are a myriad of reasons that one could object to either the course of the bailout or even it's need on. I know that when people rank priorities in their own mind, they then seem obvious, but they aren't. In any case, politically you are into the realm of the arbitrary now, which means the power of constituencies matter. Oddly, in a democracy, if you spend money in one area, others are able to suggest that it would have been better spent in another. In other words, there's a kind of organic logic to the ebb and flow of politics in a representative democracy, that entails that the arbitrary knife cuts both ways, either we should stop now before it goes too far, or you cannot stop now because it will look arbitrary, stupid, and smack of cronyism, and , unless you're God, you will be suspect of having all of those human faults. To not understand the difference between politics and political theory, or economics and political economy, seems to be the common malady of pundits today. Here, for example, instead of running on about the reasons for this or that, as if you're writing a poorly thought out treatise, you should be surveying the political landscape and assessing whether or not, or, if so, you should compromise on the auto bailout to actually ease the political pressure for more spending. But no. You fancy yourself Kant, not a politician.

"Second is the sheer inefficiency. Saving Detroit means saving it from bankruptcy. As we have seen with the airlines, bankruptcy can allow operations to continue while helping to shed fatally unsupportable obligations. For Detroit, this means release from ruinous wage deals with their astronomical benefits (the hourly cost of a Big Three worker: $73; of an American worker for Toyota: $48), massive pension obligations and unworkable work rules such as “job banks,” a euphemism for paying vast numbers of employees not to work.

The point of the Democratic bailout is to protect the unions by preventing this kind of restructuring. Which will guarantee the continued failure of these companies, but now they will burn tens of billions of taxpayer dollars. It’s the ultimate in lemon socialism."

In political economy, efficiency is only one variable. It can be trumped by ethical, political, even theological reasons. Besides, in a free market sense, if employers agreed to terms that were ruinous, astronomical, and massive, that's their right. They own the place. All a free market generally tries to do is limit the damage of businesses going out of business, as thousands do every year, to the things actually owned by the proprietor. There's no guarantee of sagacity involved. I'm constantly amazed how teleology creeps in to every kind of explanation. In general there is more efficiency in the private sector as opposed to the public sector, but it is actually an empirical question that needs to be answered each time. Otherwise, it constitutes an object of faith. In this case, one can surely wonder whether or not bailing out the automakers is worthwhile, but there are more reasons to be considered than arbitrary, which was a wash at best, and efficiency, which, while probably true, needs to be measured. After all, these banking and automakers, such paragons of wisdom and virtue, were in the private sector. You need a little more evidence to prove to me that they're any smarter than people in government, but be my guest.

"Democrats are suggesting, however, an even more ambitious reason to nationalize. Once the government owns Detroit, it can remake it. The euphemism here is “retool” Detroit to make cars for the coming green economy.

Liberals have always wanted the auto companies to produce the kind of cars they insist everyone should drive: small, light, green and cute. Now they will have the power to do it."

Is it an a priori assumption that they're going to be wrong? What if it turns out to be efficient? What then? Oops. Didn't see that in my models or theories? This isn't a mechanistic realm of argument, although so many people think it is. There is good reason to believe that they will make a pig's breakfast of it, but you don't know that. How could you? Otherwise, you'd be investing in cars and be a billionaire. After all, you already know what's going to work. I wish I could see the future so clearly.

"And David Brooks in the New York Times:

This is a different sort of endeavor than the $750 billion bailout of Wall Street. That money was used to save the financial system itself. It was used to save the capital markets on which the process of creative destruction depends.

Granting immortality to Detroit’s Big Three does not enhance creative destruction. It retards it. It crosses a line, a bright line. It is not about saving a system; there will still be cars made and sold in America. It is about saving politically powerful corporations. A Detroit bailout would set a precedent for every single politically connected corporation in America. There already is a long line of lobbyists bidding for federal money. If Detroit gets money, then everyone would have a case. After all, are the employees of Circuit City or the newspaper industry inferior to the employees of Chrysler?

It is all a reminder that the biggest threat to a healthy economy is not the socialists of campaign lore. It’s C.E.O.’s. It’s politically powerful crony capitalists who use their influence to create a stagnant corporate welfare state."

Hear, hear. The intellectual case for the bailout–if there was one–surely can’t survive these two clear and analytical critiques in the nation’s most influential newspapers. But then, protectionism couldn’t survive the analytical critique of Adam Smith in 1776, and yet it persists."

I've read Adam Smith. Believe me, he understood the difference between economics and political economy. Creative Destruction. That means some businesses go out of business, and other businesses are created. That's it. Calling it Creative Destruction reifies a simple description into a mechanical principle. Not. Once again, once reified, it takes on a teleological quality, outside the ken of human agency. Everyone will be glad to know that if the earth were desroyed today, it would simply be a matter, from the point of the physical universe, of creative destruction. Some planets are created, some are destroyed. That's the beauty of it. I hope everyone will get some solace from that.

There is some truth to the precedent point, but for the fact that this question exists in time, which is a continuum, and there have already been precedents. It's as if by putting his foot down, Brooks can say, " It all begins here!". Sorry, you're not that powerful. The automaker's bailout exists on a continuum of precedents. No analysis can prove fruitful without comprehending that simple fact. I've already made that point. That's the difference between politics and political theory.

Finally, God save us from slippery slope arguments. They're fallacious. In order for them to work, the two terms in the deduction need to be indistinguishable. Got that. You can't tell them apart. Period. The organic logic I'm describing is not mathematical or mechanistic, but akin to the flow of actual discourse as opposed to linguistic theory. You have to be in it to understand it, it cannot be reduced metamathematically, or to another abstract language. Such reductions aid our understanding, but do not comprehend it.

So, here's an example of organic logic. Contrary to what has been put forth, that, if we allow this auto bailout, the world will be bailed out like a mechanical process, it might work in exactly the opposite way by being the compromise that allows the opposition to agree with you and settle here, in this place, for now. And the reason that this can happen, is because, unlike a mechanical process, this one involves human agency, which is in no sense mechanical.

So, let's recap:

1) Arbitrary: True, but where on continuum? Cuts both ways.
2) Efficiency: Empirical matter. Must be explained. Not a priori.
3) Moral Considerations
4) Political Considerations

My own opinion:
1) At least as intelligent as TARP
2) Probably true, but not certain
3) In this case, given TARP, this seems a worthwhile bailout
4) More likely to end avalanche than continue it, but, if the avalanche continues, more of the blame lies with TARP and how it has been handled and presented

Doesn't this involve qualifying principles? Yes, that's what makes it politics, as opposed to political theory.