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Regulation, Behavior, and Paternalism

Speaker: Cass R. Sunstein, Robert Walmsley University Professor, Harvard Law School; Former Administrator, White House Office of Information and Regulatory Affairs
Presider: Thomas J. Bollyky, Senior Fellow, Global Health, Economics, and Development, Council on Foreign Relations
July 10, 2013

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THOMAS BOLLYKY: Thank you all for coming on a beautiful day to this discussion. I'm Tom Bollyky, senior fellow for global health, economics, and development at the Council. I'm very pleased to welcome you to this event on "Regulation, Behavior, and Paternalism."

I decided to hold this event really for two reasons. The first is that our speaker, Cass Sunstein, just published an excellent new book, entitled Simpler: The Future of Government. It's well worth a discussion here.

For those of you that aren't familiar with Cass or his work, he has been a law professor for 25 years, first at the University of Chicago and now at Harvard University, and has reputation of some renown in those settings. He is also a remarkable writer. He writes on technical topics, regulation, cost-benefit analysis, behavioral economics, the types of topics that you would think would drive people away from books, but he somehow manages to make these discussions in these books rigorous, thoughtful, clear, and broadly accessible. And that's a remarkable feat for those of us who aspire to write on similar topics. If you haven't read his past books – Infotopia or Nudge or Risk and Reason – you should.

The same is true for his latest book. It develops some of the themes of his earlier books on behavioral economics and cost-benefit analysis but also introduces them into a bit of a memoir format. It also talks about the challenges of moving into public service and trying to implement these ideas, some of the successes that occurred from that process, and some of the lessons learned. So it's well worth a read.

The second reason I wanted to host Cass here today is that a lot of the ideas he has written about have become newly important in international policy circles, particularly in global health and international trade. People are looking to behavioral economics and nudges as a potential low-cost, more industry-friendly solution to a changing global health landscape in which the dominant health risks are now behavioral, such as tobacco use, high blood pressure, diabetes, obesity, heart disease, and cancer, which are all on the rise in developing countries, and a time when donor resources for global health are increasingly scarce. So they're looking to nudges and behavioral economics as a potential way forward.

But Cass's ideas are also becoming important in international trade as well. As tariffs have declined over the last few decades, regulation plays an increasingly dominant role in defining the patterns of international trade. And in that context, people are looking at the work that Cass has done on international regulatory cooperation and cost-benefit analysis as a way of trying to achieve a more productive relationship between trade and regulation.

We're going to talk about his new book and these themes here today. I'm very pleased to do that. Just as a reminder, today's discussion is on the record. You can cite the information here, location of the Council as a source, as well as the identity of the speaker.

And with that, I turn it over to Cass Sunstein.

CASS SUNSTEIN: Great. Thanks for having me. And thanks, everybody, for coming.

I'm lucky enough to have been able to serve in the Obama administration as head of the Office of Information and Regulatory affairs (OIRA). I can tell you a bit about what that office does.

But I thought I'd back up a little bit and give you three empirical findings that to me are stunning. I think not one of them is in the book. But then I'll give you a set of concepts, each of which is in the book. And then I'll give you one kind of pointer, which certainly helped to organize my own thinking in government and subsequently.

So empirical finding number one: if you're interested in getting people to save for retirement, there are a few things you might do. And offhand, one is to give people big economic incentives, where the government gives people money if they enroll in a pension plan. And as a long-time University of Chicago guy, that's the natural thing to do.

There's another thing you might do, which is a little more recent, which is to have automatic enrollment in a pension plan subject to essentially costless opt-out. So recently, in the United States and elsewhere, companies have been automatically enrolling people in a pension plan. But they can opt out just like that if they don't want their money to be in pensions and instead want take-home pay.

Here's the finding. In Denmark, we now have a lot of data, and it turns out that automatic enrollment has a much bigger effect in promoting savings than big-time economic incentives. That shouldn't be the case that the mere step of automatically enrolling people, which costs the taxpayers and employers nothing, has a significantly larger effect than big-time tax incentives. There's a clue there, I think, about the potential value of non-price interventions that cost little or nothing in changing behavior, not only nontrivially but more than the more natural and economically costly option.

Finding number two: there is a company in the United States that's now doing work internationally called Opower, which sends people a home energy report, which tells you basically how your energy use compares to that of your neighbor. And if your energy use is high, you were told that, and if your energy use is low, you're told that too. It also gives you information about how to reduce your energy use if you want to. But it's just paper, and you can ignore it and throw it out if you want. It has no economic consequences by itself.

The little home energy report, which is very inexpensive to send around, has a bigger impact on energy use than significant increases in energy prices – indeed, comparable to a 5 to 20 percent increase in the short-term price of electricity. That's a testimony to the power of social norms in affecting behavior, power which is equivalent to the power of significant economic incentive.

Finding number three involves something we did work on in the government. In order to get financial aid, you have to fill out an application, the Free Application for Federal Student Aid (FAFSA) form. It's a complicated form, and the Council of Economic Advisers has estimated that its complexity has been so serious as to discourage thousands of people from filling it out of thus attending college. Research suggests that an effort to simplify the FAFSA process has as big an impact in increasing college attendance among poor people as a several thousand dollar increase in the subsidy to attend college. Two options – simplify the form; give everyone a few thousand dollars extra – the same impact. It's a stunning finding about the power of simplification.

Those are the three findings. Here are three concepts for you.

I don't know how many of you have seen the movie "Moneyball," with Brad Pitt or read the book by Billy Beane. The idea of "Moneyball" is don't use intuitions and anecdotes; use data and statistics. Said Billy Beane, in response to scouts talking about how good players look, saying that they look like a ball player. Billy Beane would say, we're not selling jeans here, and throw those people on the bad list unless they had good statistics to back up the prediction. In the Obama administration, we placed a high premium both on ex-ante cost-benefit analysis and on ex-post analysis. So regulatory "moneyball" means a highly disciplined, nonpolitical, interest-group free inquiry into the actual human consequences of what we're doing. While the Bush administration admirably had over $3 billion in net benefits for its first three fiscal years, the Obama administration has over $90 billion in net benefits in that period. A draft report recently came out showing the Obama administration's approximate $150 billion in net benefits over four fiscal years – a testimony to regulatory "moneyball."

The second concept is choice architecture. Here the idea is that whether you're in a poor country or a wealthy country, whether you're middle-class, lower-middle class, whether you're in Nigeria or Cape Town or Paris, there's an architecture behind your choices. So if you're interested in protecting your privacy or sharing your information or getting a mortgage or cellphone plan or interacting with the government, there's an architecture behind the choice, like a building architecture. And the architecture is often determinative of outcomes. It has a big impact.

So Google in New York recently found that its employees were gaining a lot of weight because the choice architecture in the cafeteria was calorie-friendly. Google redid the cafeteria so as not to eliminate the options but so as to make smaller plates, to make healthier foods more visible, to make the candy a little less accessible, but they could get it if they wanted it. So Google employees are much happier, and they're losing weight. So that is to say that whether outcomes go well or badly for us very much depends on choice architecture.

There's a very powerful passage from Esther Duflo, the MIT development economist, who says stop berating poor people for not taking responsibility for their lives and start thinking instead about the extent to which those of us who are well-off do well because if we do nothing, we're on the right track. For people who are struggling, if they do nothing, they're on the wrong track. That's the thing to focus on. And that's about choice architecture. And it needn't have anything to do with wealth and poverty. It can have to do with public health, with safety, with the ease and complexity of life.

Concept number three is libertarian paternalism. Not a very congenial term, I acknowledge, but the basic idea is that it's possible often to steer people in directions that make their lives go well through approaches that are choice-preserving, freedom-friendly, non-coercive, and non-mandatory. A canonical example of good-choice architecture, or good libertarian paternalism, is the GPS, which became available because President Clinton released the data. The GPS allows you to go your own way if you want. If you hate the suggestion, you can take your own preferred route, or you can turn it off. But you might get lost. And what it's trying to do is show you a good means to achieve your ends. There are countless areas that involve default rules, warnings, simplification, and education that involve social norms that are like a GPS. And if it's the right kind of paternalism, it's respectful of people's ends, and it allows them to select their own means also. But it gives them some sense of what the right means are. It might facilitate the easier course. So that's libertarian paternalism.

The last concept is human error. And as a long-time University of Chicago employee, I was struck for many years by the immense power of the rationality assumption and the Nobel prizes to which it led and the policy impact it had. But as a kind of clueless guy at the University of Chicago, I thought these people were celebrating human rationality; some of them were complaining about their dumb investments, they may be a bit overweight, or they may be getting divorced. So the idea of human rationality is at least not a complete picture of the behavior even of some of the primary exponents of human rationality, wonderful and rational though they certainly were and remain.

What people in research have uncovered is systematic ways that human beings depart from the rational actor model. People tend to be unrealistically optimistic; about 90 percent of people have been found to believe that they're safer than the average driver and less likely to be involved in a serious accident. There's actually a neurological foundation for unrealistic optimism; they've located it. About 80 percent of the population is susceptible to unrealistic optimism. There are some good Darwinian reasons why that might makes sense; it promotes activity and entrepreneurship. But it can also lead us to take insufficient precautions.

We also know that people sometimes neglect the long term. They think of it as "Laterland," the place which they might never visit. And we know also that there is actually a part of the brain that helps explain the extent to which people fixate on "now" as the place that they occupy.

We know too that people sometimes don't deal well with probability. In the aftermath of a terrible event, say a terrorist attack, people sometimes exaggerate the likelihood of a similar event in the near future. When a bad event – call it a fiscal crisis – has not occurred in the recent past, people tend to think that the risk is low, possibly close to zero. That's the availability heuristic, as it's called. People tend to think that a page will have more words with I-N-G as the last three letters than will have N as the second to last letter, but that can't be true. (Laughter.) But it's because I-N-G words are easily accessible and available. So we need some choice architecture that helps combat some of the dangers associated with human error which can lead to individual and social trouble.

The last point I'll make is to give you a little example or catchphrase. The U.S. government long had a very famous icon for healthy eating called the food pyramid, which was around for a long time. And if you look at the food pyramid, there's someone, gender unclear, shoeless, walking to the top of a pyramid, which is a white space. The white space at the top might be thinness, might be mortality, might be heaven. It's unclear what it is. The foods are bunched together at the bottom. It's not clear what any of them are. It's a baffling icon, though it was produced by very intelligent, well-motivated people trying to supply a lot of information in a picture.

We got rid of that and replaced it with something called the food plate, which you might have seen. It has been extraordinarily successful. And it essentially says make half your plate fruits and vegetables, then you're most of the way home. The food plate is getting international attention.

And I often thought, in government and since, with respect to multiple problems, plate, not pyramid. Plate, not pyramid. If you're interacting with fellow citizens or with people in other nations or trying to be helpful, pyramid is often a problem because people respond to ambiguity and vagueness by saying, "I'll think about something else." If you give them something clear, then there might be progress. In fact, I had a friend who was involved in a complicated negotiation long ago in which before the negotiation – a high-stakes negotiation, I should add – a good outcome looked doomed. It looked like nothing could be obtained. And then things worked out, and when I talked to him afterwards, I said, "What happened?" And the response was, "Plate, not pyramid." The negotiation ended up becoming workable once my friend put specifics on the line to which "yes" or "no" could be said rather than vague general stuff to which vague stares would be possible.

So the excitement about this is that we've had a generation plus of productive thinking about economic incentives, price instruments, rational actor-based models for dealing with social problems. And that's produced a great deal of learning. But the repertoire of tools that we now have has expanded greatly. Consider the first three findings, which suggest that in an economically challenged time, there are going to be countless opportunities for making people's lives healthier and longer and promoting public policy goals of every sort under the sun without spending a nickel.

MR. BOLLYKY: Great. That's terrific. One of the things you talk about in your book is that there are circumstances for nudges and circumstances for mandates or taxes that might shift economic incentives. I was wondering if you could articulate what the characteristics might be of a problem that might need a mandate or a shifting of economic incentives through taxation versus some of these low-cost nudges.

MR. SUNSTEIN: So the master concept is social welfare, and the best way we have to discipline that analysis is to consider costs and benefits. And on the standard account, which I think is correct, you want a mandate which may take the most flexible form possible in the face of externalities.

Say you have a case where you know there's a pollution problem and the polluters are creating adverse health problems. If health problems are created for the population, nudges can be helpful, in form of disclosure, but there's a case for a mandate. So if there are third-party effects, that's the canonical case for a mandate. Nudges or choice architecture may be complimentary to that.

If it's a case where the only question is, "Are people making good choices for themselves?" you should, as spelled out by John Stuart Mill in his great essay "On Liberty," have a very strong presumption against coercion -- let people go their own way. But that's not to say to rely on such choice architecture as in place today. It might be there's a better choice architecture for people.

Notice the way I phrased it is not we should impose choice architecture where there wasn't any before, because there's no imaginable world which lacks choice architecture. There is choice architecture, and if people are suffering or struggling because of choice architecture that's not helpful to them, then we can replace it. But it would take a very strong showing of benefits justifying costs to overcome the presumption of liberty where there are no third-party effects.

MR. BOLLYKY: I think in your book, you mention tobacco taxation as one example.

MR. SUNSTEIN: Tobacco is a really interesting one, and there are a couple of reasons why it's interesting. One is that there are adverse effects on third parties – we do have a dispute about the magnitude of those effects – but not really a dispute about the existence of those effects. So there is an assortment of third-party effects from smoking. And the other is that smoking is addictive, and the number of smokers who begin at a very young age is really high. There's some data suggesting that cigarette taxes actually make smokers themselves happier, maybe because they're quitting or smoking less. So smoking is a distinctive case where you may have something like an intrapersonal collective action problem in which an early chooser, at a very young age, makes a decision which has proliferating, cascading adverse effects over the course of a life. It may be that something more than a nudge intervention can help solve the intrapersonal collective action problem in that not unique but pretty unusual setting.

MR. BOLLYKY: Would your reasoning on tobacco extend to obesity and to other behaviors that start very young and involve habits that may be addictive? How should we think about the tobacco analogy and whether or not similar solutions should be applied in other cases?

MR. SUNSTEIN: There's a very good report that comes out of the White House on the obesity epidemic. It's not a short report, and it has a panoply of tools. I think the administration has been wise to focus on the childhood obesity issue, for the reason you give. And I think it's also been wise to emphasize things that aren't coercive. With respect to food, well, food itself doesn't have quite the characteristics of tobacco, though there are some analogies, as you say.

But for obesity, one idea is to work with the private sector, which has been in many areas, very willing to engage in ways to make the food supply a little healthier for kids. So Wal-Mart has been a real leader there, and there are a bunch of companies that have pledged to eliminate calories. I think those kind of public-private partnerships are pretty good. The food plate is one example of a non-coercive approach. And there's been efforts to work with doctors, teachers, and families to figure out what can be done to catch a serious health problem as it's starting.

So one little idea on which there's some preliminary data is if people weigh themselves a fair bit, then they're going to pay attention to whether they're gaining or losing weight.

MR. BOLLYKY: As I mentioned at the outset in the introduction, a lot of people are looking to nudges and behavioral economics as a potential solution to these health challenges internationally. In the book, you talk a lot about the U.S. context, where nudges and behavioral economics are very consonant with the U.S. tradition of libertarianism. A lot of the downside risks of nudges that people have brought up, for example by Glenn Beck during your confirmation process, is that they're manipulative or somehow nontransparent, are mitigated, as you rightly point out, by the fact that we have public notice and comment procedures before adopting new regulations and a government that is responsive to public feedback. How does that reasoning extend internationally, where the traditions of libertarianism may be less strong, where governments may not have the same transparent regulatory processes?

MR. SUNSTEIN: My wife, Samantha Power, has been recently nominated to be U.N. ambassador, so I want to tread carefully on any area that is, within the family, hers. I guess I'd say that as a presumption, freedom of choice is a human good and not a uniquely American good. So the idea that people should be able to go their own way as a strong presumption when the issue involves only themselves, then that's not the worst idea for any country to have.

I'm recently back from Denmark and Germany, where I was struck by the extent to which the interest in freedom-preserving approaches that involve choice architecture is very much in the air in both of those countries. And I think the reason is that both of those countries have a number of aspirations for public health, safety, and the environment, and they know two things. One is that costly interventions are risky, and second is that there's a great deal of commitment to maintaining freedom. So there are countries that have weaker libertarian foundations than we do, but democracies generally are choice-friendly.

In the United Kingdom, the libertarian paternalist approach has been met with great enthusiasm, especially on the conservative side, where there's a Behavioural Insights Team, sometimes called the Nudge Unit, which has been experimenting with approaches that can save money or improve health that don't involve coercion.

So I think it's a great question. I guess I think that so long as we're talking about democracies which have market economies, approaches of this sort will expand and have a place in the toolbox of both private and public institutions. And it's kind of good time for that because of the economic situation that countries face.

If you're dealing with a country which isn't as respectful of freedom as the United States and others are, it's probably worth considering in those nations whether freedom might be desirable for economic or other reasons and whether it might not be the wave of the future. There's some reason to think so. And if that is true, then the choice-preserving approaches are a good idea.

I think you're right to emphasize the importance of transparency of nudges. So it has been said, I think more often by talk show people than by others, that there's a risk of manipulation. But it's not a baseless concern, in the sense that whatever's done should be subject to scrutiny and should be disclosed to people. So there's nothing insidious, about giving people simple, clear information about risks they face. That's not a manipulation. It might be manipulative to give them a sea of complexity which will either baffle or mislead them.

It's not a manipulation to have automatic enrollment in something, given that when you get a credit card or a mortgage or when you start work or school, you're going to be defaulted into a lot of stuff automatically anyway. It's just going to happen. And you should know what those things are. And if you're not defaulted into something that involves, let's say, savings or an athletic program if you're in school – you don't get to use the gym unless you do something – that is a default. The default is you're not in the gym unless you do something. So it's not as if the default is being dispensed with; it's that it takes a certain form. So you should know what the defaults are, whether they're enrollment or non-enrollment, and that should be something that you can change if you prefer something else.

MR. BOLLYKY: Great. One very little known legacy of Cass's tenure as the administrator of OIRA is the use of international regulatory cooperation to address situations where countries have high standard regulations but they might be different. And what's important in those circumstances isn't so much the stringency of regulation, it's their heterogeneity, which affects international trade and job creation.

As someone who used to work at the Office of the U.S. Trade Representative on trade and regulation, I know from painful personal history how difficult it can be to get trade officials and regulatory officials aligned on a topic. Trade officials like harmonization and cooperation for its economic benefits, but it can be really difficult for regulators to adopt a strategy or an approach that's consonant with their counterparts, but may involve great bureaucratic costs – changing forms, shifting the way that they do things.

During your time at OIRA, what lessons did you learn in terms of trying to bring those two different constituencies together? What incentives can be brought to bear to try to improve the interaction between trade and regulation?

MR. SUNSTEIN: This was a top priority of mine, and it was something the president and Secretary Clinton were and are committed to. And the big lesson I learned was if you have a commitment at the top, then things will happen. So we had an agreement between President Obama and Prime Minister Harper that the United States and Canada were going to eliminate, to the extent feasible, red tape that made no sense, so that you could go across the border and do business in Canada and the U.S., and that this would help consumers, it would help companies, it would eliminate something which really was simply an artifact of a failure to coordinate and not a result of any different judgments of facts or values.

And this might seem a little kind of technical. The blood doesn't get racing about international regulatory cooperation.

MR. BOLLYKY: Speak for yourself. (Laughter.)

MR. SUNSTEIN: But if you think about, a little company in Minnesota that wants to sell its product to people in Toronto and it has to have a nightmare before it can do that – think of your worst nightmare. It might be a little like that. And this is an effort to take the nightmare away. And that can help economic growth. It can help people in Toronto.

And so we had very high-level leadership. I was in a meeting in the Oval Office with the prime minister and the president, and the president put me in charge of this. And the Canadians were fantastic. And we had an action plan that wasn't just words. It wasn't a to-do list. It includes in large part a "done" list of things where they're actually coordinated. So with fuel economy standards, a big deal for car manufacturers on both sides of the border, there aren't huge differences. In many ways they're the same. And I could give you a bunch like that that actually were done as of a few months ago. So that had top-down leadership.

We had something similar with Mexico, which was also pretty impressive. And maybe the most dramatic moment in our efforts with Mexico were when the Mexican government announced what it called "equivalence," which meant American companies could sell certain products in Mexico without meeting separate certification requirements in Mexico. Now, that's something that some companies in Mexico weren't so excited about, because the American companies could just come in and sell to their consumers. As I recall, this meant that tens of millions of American products would just go into Mexico and be sold. So it was a big deal for American companies. And there are actually human beings who will have jobs as a result of this unilateral decision by the government of Mexico.

And I asked my Mexican counterpart, "You know, this is great. Why did you do this?" And the answer was, "Mexican consumers, they can get the products cheaper." And we did a lot with Mexico.

With Europe, it can be more challenging. And I think that's the answer to your lesson question. With the bilateral with Mexico and Canada, we had high-level leadership at the very top. We had face-to-face meetings. Each of our nations was in a position actually to do something. The people in the room could work with their counterparts to do stuff. With Europe, it's just a much more complicated structure, and you need some solution to that complexity to get agreement.

Now, the president has spoken about that fairly recently, and the next few years will be really interesting on that count. When I think about regulatory achievements over the last years, the fact that there are some rules that are saving up to thousands of lives annually – people who aren't getting killed on the highways, aren't getting sick from food, who aren't unhealthy or dead because of air pollution – those things I feel very gratified to have been able to play a part in.

If you think about the president's regulatory look-back, which is really simplification, at its best it took away a lot of legal requirements that didn't make sense and that are saving billions of dollars, including taking costs away from hospitals, doctors, and nurses so they can attend to patients rather than fill out forms. That's great. The international regulatory cooperation seems a little more abstract than that, but the actual human impact, if we can make some progress with Europe over the next years will be huge for consumers and for the business community.

MR. BOLLYKY: Great. I'm now going to turn it over to the audience. When you ask a question, just state your name and your affiliation, and I'll call you in the order that I see you. Betsy.

Q: I'm Betsy Wertheim with the Naval Postgraduate School. I have a challenge for you. We're trying to get the leadership at the Navy to basically change the way they think, feel, and behave about energy. How do we do this? I got into the energy game in '05, and what I wanted was for everybody in the country to feel about energy the way I felt about winning World War II. How do we do that?

One other thing I want to add is the book Escape from Freedom. And I find when I go in and have so many choices, I can't make any. And I think your point on complexity is absolutely right. If you could create a tax system that we could understand the questions and didn't have so many, we'd all be happier.

MR. SUNSTEIN: Great. My dad was in the Navy, so I have fondness for the Navy.

In terms of the Navy and energy, I don't have any particular suggestion for you. I think the only suggestion I guess I could make is plate, not pyramid. If you tell people, eat healthy, you don't get much of an impact. If you tell them to take 2 percent milk instead of whole milk, then they start losing weight. So I think to engage with the Navy on what particular ideas you think would be in the taxpayers' interest and in the interest of military preparedness, with a concrete suggestion, those are the things that I found in government to be the most useful.

I'll tell you something that maybe will be a little more useful than what I just said. There's a website called www.regulations.gov, which we tried to make as transparent, usable, and simple as possible. So if you want to propose regulations and get comments on those regulations, you can. And it's a work in progress. It will get better and better over time. But in the last few years, it's gotten much better.

And so I've spent a lot of time reading people's comments on rules that involved energy, immigration, or education. And the ones that were abstract, such as, "Do more," or "Do better," or "This is a terrible idea," or "This is a great idea," were much less helpful than the ones that said, "What you concretely ought to do to make this rule improve is this, and here's why." So if we got a comment that said, "This provision of this rule is going to impose very high costs on small business, and it's not really going to achieve the public safety goal," and that could be explained, then that was a very useful comment.

MR. BOLLYKY: Great. Rob?

Q: Thanks. Rob Quartel with NTELX. So I wonder if you've thought about the application of your ideas to pre-K-to-12 public education. So you have a range of choices and applications, from management, things like training the principals better, to things that relate to teachers, to then this whole other side of charter schools, choice, and vouchers. Then in the middle we've got these new national standards, which some people on my side of the aisle have a very pejorative term for, something like Soviet standards. So how do you apply that to something, and what do you see succeeding?

MR. SUNSTEIN: You know, it's a great question, and I don't really have an answer. I haven't studied education.

I'll tell you one little piece of data that I think is relevant, though how this can be used to scale or enlisted generally is a good question. As a University of Chicago faculty member for a long time, I would have thought that if teachers aren't doing well by students, to offer them a reward for better performance by the kids would be helpful. Now, there are questions about budgetary constraints and such, but that would be good.

The evidence is mixed on whether an economic reward gets the kids learning better. But if you give the teachers money up front and say they have to give it back at the end of the year if the students don't do better, then math scores skyrocket. And what's cool about that finding is that there's a behavioral phenomenon called loss aversion. People hate losses from the status quo. They like gains, but they hate losses a lot more than they like corresponding gains.

So the teacher study is kind of in the same family as the study of golfers that suggests that professional golfers do a lot better putting for par than putting for birdie, even for equivalent putts. And the reason is, if you lose a stroke to par, that's terrible, and if you get a stroke from birdie, that's great. And a terrible loss from the status quo, which is bogey, is much worse than a victory in the form of birdie is good. So you get that disparity.

There's some very interesting work – as I say, I'm an amateur on this – by Raj Chetty who just won the Clark Medal. It's like the baby Nobel. And one of the things he won it for was education and teachers for little kids. And I think the evidence is that – and this is a very important paper – good teachers in classes – in exactly the area you're discussing – are adding a tremendous amount economically over the course of a lifetime. So if you get good teachers in the fourth, fifth, sixth grade, then that has proliferating effects over a lifetime. So as an amateur, I would focus on teacher quality and teacher incentives.

MR. BOLLYKY: Right here in the middle, third row back.

Q: Thank you. Alan Raul, Sidley Austin. One of the recurring themes of your comments seems to be a predilection for the concrete over the abstract. President Obama inserted the concept of dignity, human dignity, in the executive order on regulatory review, which seems not unreasonable. But how do you apply that in your rigorous cost-benefit analysis? And a case in point would be privacy data protection regulations, very much in the news recently with regard to the national security aspects of privacy, but also it has commercial ramifications.

How do you conduct a cost-benefit analysis that takes into account the really intangible, non-pecuniary, but nonetheless real benefits of privacy and weigh them against the costs on innovation in addition to basic compliance costs?

MR. SUNSTEIN: That's a great question. So while President Obama placed a big emphasis on analysis of costs and benefits and real continuity with the Reagan administration's path-breaking Executive Order 12291, which put cost-benefit analysis on the table, he also emphasized that there are some values that are hard or impossible to quantify. Human dignity was called out.

I'll give you some examples, and I'll try to answer more concretely. Suppose you have a rule that allows wheelchair-bound people, including veterans, to be able to use bathrooms in public buildings. And let's say for that rule there are some provisions where the monetized benefits are a bit lower than the monetized costs. And the response is you have people coming back from war. They want to be able to do their job without having their colleagues have to lift them into the toilet seat. You're not going to treat that dignitary value as zero. Or suppose you have a rule that makes it so that people who are suffering some terrible physical or mental problem get to keep working without losing their jobs. Congress, bipartisan, enacted amendments – I think Bush signed it – to the Americans with Disabilities Act. That was implemented. There had to be a cost-benefit analysis. Generally the benefits are justifying the costs, but there's a recognition that there's something going on there for people who have real distress in their lives that the monetary value doesn't capture. So that's what the human dignity aspect is about, and you're completely right that privacy is a natural candidate for that.

Some people are concerned that dignity, privacy, and other values could be trump cards that would allow the agencies to escape the analytic discipline of cost-benefit analysis. And that is a worry that needs to be answered.

Here's what agencies have been doing. What they do when they have a non-monetizable value like dignity is not just say, "Hurray, we'll go forward with an expensive regulation," but instead say, "OK, you've got this thing; we can't give it a monetary value. How much would it have to be worth in order for the regulation to be justified?" So hypothetically say you have a rule that allows a 100,000 people who are in wheelchairs to get access to buildings. Let's say that rule costs $1 million dollars. Suppose that million dollars doesn't have monetizable benefits; it's just pure cost. We would say, "OK, you have a 100,000 people; is it worth $10 annually to let them have the dignity of going to the bathroom that year without someone helping them?" It doesn't have the discipline of arithmetic, unfortunately, but that's a pretty good deal if it's a 100,000 people and $1 million. Now, if, by contrast, we're talking about 50 people and it's a $1 billion rule, then you can do the arithmetic. Is it worth that many hundreds of millions to give people bathroom access? That's a little more questionable.

So what the agencies have done, which has sometimes been extremely impressive technical stuff, is to say, "What's the size of the affected population? What's the cost of the thing? What is the thing? How much would that thing have to be worth for the non-monetizable value to be justified?" Monetization might work pretty well in the environmental area, where if we have things that involve public health, then we're probably in business. But what if it's some environmental benefit without public health consequences, but instead involves aesthetics or something? You wouldn't want to say, I don't think the fact that the river's prettier or cleaner is a trump card in the face of hundreds of millions of dollars of costs that farmers and developers have to face. But if it's a lot of water bodies, and they're getting much cleaner, then it may be the per water body cost is manageable.

So I actually have a new paper on this, which I'm not satisfied with, but this is what I think the best agencies are doing. We need a lot more thinking about it.

MR. BOLLYKY: Great. I'm going to work my way to the side of the room. In the back.

Q: Hi, Claire Casey, Garten Rothkopf. You mentioned fuel economy standards. It brought to mind two questions for me. One, are there any places where the principles you laid out are actually applicable to corporate actors? Because I have trouble seeing a place where there aren't third-party effects. And the second would be related to that in terms of fuel economy. Is there any interest in the Obama administration or the agencies in looking to regulations that might nudge consumers into more fuel-efficient vehicles?

MR. SUNSTEIN: OK, great. On the second, one thing the Obama administration did – and this is something that had enthusiasm from people on all sides of the political spectrum – was to replace the fuel economy label, which used to have miles per gallon-city, miles per gallon-highway, and then non-highway in huge letters. And then in tiny print the label had annual fuel cost and miles per gallon. What does that mean? It's part of our language now, but if you ask me, and I work on this stuff, "What's the difference between a 25 mile-per-gallon car and a 35 mile-per-gallon car in terms of money over a year?" I don't know the specifics. Or if you ask me, "What are the environmental effects?" I have no idea, at least not about the specifics. And so to give that label to consumers, it's not quite as bad as the food pyramid, but it's not helpful.

So what the U.S. Department of Transportation and the U.S. Environmental Protection Agency (EPA) did was to change the fuel economy label so you now can see in big, bold letters annual fuel cost, and then you can see that this car is maybe not that expensive, but it's going to cost me a lot to operate. And it also says how much you're going to save or spend over five years compared to the average vehicle. So it gives you an automatic comparison.

And we learned from studies that most car purchasers aren't really focused on environmental effects; they're focused on money. And so we tracked people's actual interest, which is having the money in big print. But Congress also said we had to have something about the environmental effects, so there's a little bit on the environmental effects so that people who care about that can learn something. So that's the answer to the second question.

So on corporate behavior, fuel economy, and third-party effects: you could have companies that are interacting with their employees, and they're not sure whether automatic enrollment is a good idea or whether it's something the government is making complicated or simple. So you could imagine a company wanting at least freedom to enroll people automatically without having IRS complexity. And actually, the Obama administration, which is something the Bush administration started, is making automatic enrollment easier, even though there aren't really third-party effects. And there is a lot to be done for simplification in interacting with companies, large and small, where you're not really focused on third-party effects; rather, you're trying to make it so that dealing with the tax system is easier or that qualifying for things that people are entitled to get is easier, like a loan for small business.

Since OIRA overseas the Paperwork Reduction Act, companies said to me frequently, "Look, we're facing duplicate, even redundant requirements; it's completely crazy." A lot of people said, "To get the home office deduction is an ordeal." In a free society how can getting the home office deduction be an ordeal? That's supposed to be helpful to people. And the IRS did do a great deal to take away its complexity so the home office deduction is much simpler now. There's forms EZ and you can do electronic filing. There is much more to be done, and I think this could be a very productive time in Congress on that count in terms of the complexity where there's not really a third-party effect.

On fuel economy, particularly, it's actually a really interesting tale because when I think people think about fuel economy, they think about two things: energy security and the environment. And it is true that if you ratchet up the fuel economy rules, as the Obama administration did, you'll decrease dependence on foreign oil, which is good, and you will decrease air pollution, which is also good. And you can do it in a way that isn't draconian in terms of its economic impact. You may remember that President Obama told the EPA he didn't support the agency's finalizing their ozone rule. That was one thing; the fuel economy rule was something where he was strongly supportive.

But if you look at the benefits numbers for the fuel economy rule, a lot of it is driven not by energy security or air pollution; it's by consumer savings, which is not a third-party effect. So consumers are spending more upfront for cars, but they're making the money back and then some – a lot – over the life of vehicle. And that's not a third-party effect. And we worked, not I personally because my job didn't entail this, but my colleagues worked closely with the automobile industry to make sure that this was something that wasn't going to be dumb in the sense of driving the costs of cars up so much that you'd cut off your nose to spite your face. And it ended up having a very good benefit-cost ratio. It wouldn't have if not for the consumer savings.

So I do think there is a lot when companies are dealing with their employers to think, "How can we be helpful with defaults that are in people's interests or not?" I would hope that they choose the first, and for the government to work mostly in a way that's respectful of the autonomy of the business community, but in some cases, as in the fuel economy rule, to think what would be a sensible response.

I'll just give you one other example, which is energy efficiency. I was very focused in our energy efficiency rules to make sure that the rules aren't issued to bring about products that are energy efficient but that don't work well. So you wouldn't want to have energy-efficient refrigerators that don't cool food. That would be really bad. And there have been reports of some energy-efficient products, maybe sometimes required by government, that just are not good products. And that's not ideal.

So the energy efficiency rules that we issued while I was there were predominantly ones that emerged from careful engagement with the private sector to see what sorts of goods would be salable so that they wouldn't be more costly than consumers would bear, and would work well so that consumers wouldn't get washing machines that don't wash clothes. And there are third-party effects because there are pollution effects and energy security benefits. But the big gain of the energy-efficient goods is that consumers win. And the companies, in the cases where we issued rules, said this is very reasonable.

MR. BOLLYKY: Great. We only have three minutes left, so I'm going to take these three questions over here. If you can just limit yourself to one question, keep it succinct, and I'll let Cass answer in his final remarks.

Q: Steve Charnovitz, George Washington University. I wonder what the implications of your insights are for foreign relations. A lot of international law is about second-party effects, third-party effects, and therefore, a mandate might be appropriate. But a lot of international law is about helping countries do the right thing for themselves. So I'm wondering to what extent nudges or simplifications or changing the choice architecture could help improve international law.

MR. BOLLYKY: Great. Daniella.

Q: Daniella Ballou-Aares, from the State Department. The opportunity to use the type of data-driven decision-making that you're talking about is applicable across many things we do in government beyond regulation. Any thoughts on how to increase the use of that and some nudges within our own institutions to make tradeoff analysis and more quantitative cost-benefit analysis embedded in any matter of decisions?

MR. BOLLYKY: And then last question up here in front.

Q: Jan Lodal, Atlantic Council. What about situations where it's not so much cost benefits, but big impacts on the economy, like our regulations that sort of determine the way we provide Internet service that go back to cable companies, telecoms, health care, and so forth that don't necessarily apply?

MR. BOLLYKY: Great. Cass?

MR. SUNSTEIN: So if the cost-benefit analysis is done right, it will capture the big impacts on the economy. So if you have a rule that requires companies to do something, if the cost-benefit analysis is sufficiently comprehensive, it will capture all of the cost. And there might be indirect or second order costs that are hard to measure, and that's just a technical challenge. The hope is that the indirect and second-order costs won't dwarf the first-order costs. If you have a fuel economy rule like the one we're discussing, that's going to have effects not just on the car companies but also on the parts providers. Are those going to be positive or negative? We may not know. I would think that in the context you're discussing, a free-market presumption is probably a good idea to avoid unintended bad effects. That's a platitude.

MR. BOLLYKY: Some quick words on international law?

MR. SUNSTEIN: Well, my quick reaction is if Michael Jordan's current wife were asked basketball questions, she should probably say, "You got to talk to my husband," – so there. (Laughter.)

MR. BOLLYKY: Data-driven approaches in government, final word on that?

MR. SUNSTEIN: Yes. Well, I think if you got some top-down clarity is great. So we got from President Obama a very ringing endorsement of data-driven cost-benefit approaches. And if you don't have that, then there are two things in government. There is authority, and there is argument. And if you have authority, the top person said, "So, there's that." If you don't have that, then there is argument and persuasion. You can say, "We don't know what we're doing here; we have got to get the data."

MR. BOLLYKY: Great. I hope you'll join me in thanking Cass for being here. Again, he has a new book out. It's well worth reading. I read it on my return flight from Myanmar, and it kept me up the whole time. It's a great book – Simpler: On the Future of Government.