Richard Thaler, the co-author of Nudge, has won the Nobel Prize for his contributions to behavioral economics. While he decides how best to spend his $1.1 million in prize money, less prosperous families are paying the price for government policies advancing economic paternalism.
Thaler suggested in a 2012 New York Times op-ed that the United States follow Europe’s lead in raising the price of gasoline in order to preserve the environment. Hiking the gas tax would be a more efficient way to reduce emissions than raising raise CAFE standards, he wrote:
A better approach would be to gradually raise the gasoline tax to levels similar to those in Western Europe, where fuel-efficient cars are the norm. N. Gregory Mankiw — the Harvard economist who advises Mr. Romney and is a fellow contributor to the Economic View column — has long advocated such a policy. I agree with him, as do most other economists.
“Higher gas prices have an upside: they give car owners the right incentives,” he wrote.
The UK government, which Thaler has sometimes served as an adviser, self-consciously crafted tax policy to change consumer behavior on the use of gasoline (or “petrol,” as the Brits say). Over the past two decades, the government has embarked on a convoluted history of economic incentives and disincentives designed to lower greenhouse gas emissions. That resulted in British drivers paying the highest fuel tax in Europe, despite a freeze – currently $2.19 a gallon (or 57p a litre) on gasoline and diesel.
Nudging UK consumers away from gasoline to diesel came at a significant human cost. It separated family members from one another. As one British writer recounted:
I remember going to a McDonalds by the M11 roundabout near Harlow and asking why there was a two-hour parking limit, with payment required after the allotted time had been reached.
I was told that commuters were using the car park to sleep in overnight, because they could not afford the fuel costs to drive back home to their families. The Sun newspaper had also published a report of a local police officer doing the same, sleeping overnight in the McDonalds car park because it was too expensive to drive back to Cambridgeshire every night.
High taxes forced lower-income Brits to choose between providing for their family members and spending time with them.
Economic nudges reduced the economic fortunes of those already “just about making it” in other ways. The same taxes that kept some workers from returning home kept job-seekers from leaving it. Poorer residents found they could not afford the new price of commuting to jobs in larger cities – no small harm in a nation as geographically divided by disposable income and employment opportunities as the UK. They were locked out of the world of work, running out of gas on the road to prosperity. “All this made it clear that keeping fuel costs down was not just about cutting taxes, but about social justice, too,” the aforementioned author wrote.
The underlying policy objective had unforeseen consequences for the planet, as well. As it turns out, diesel cars emit less carbon dioxide than unleaded gas but release higher levels of more than a score of other particulates into the atmosphere. EU politicians are now calling to suppress diesel usage via another round of economic incentives and disincentives – or outright bans.
Thaler’s insights are not restricted to government policy. However, the saga – and costs – of UK diesel policy illustrate the most important aspect of economic “nudges”: They are only as effective as the government’s most recent expertise. Seemingly omniscient technocrats fine-tune policies based on premises that turn out to be uncertain or disproven tomorrow. The lumbering behemoth of government bureaucracy is less nimble in correcting course than simply leaving decisions to an un-nudged citizenry.
The saga should remind everyone about an insight of economic behavior: tweaking the rules of human action produces human consequences. Those most likely to pay the price for such expert-driven regulations are struggling families in New Brighton or Oldham, not those devising or implementing them in Washington or Westminster.
(Photo credit: Colin J. This photo has been cropped. CC BY-SA 2.0.)