Transparency and Paternalism

A penchant for transparency, some are calling it a "radical transparency" is becoming a theme of this administration. The effect of the Chicago School is making itself known this way. Transparency in this context means that the solution to many problems posed by the legislative process or the market is more information. So rather than forbid certain mortgage practices, the goal is to require more up-front disclosure of true risks. Rather than forbid earmarks, require that their authors be disclosed up front (query whether credit for earmarks is always bad). Rather than forbid abusive credit card practices, require up-front disclosure in "plain language." (Similarly, the approach to torture at first glance was to disclose information, not punish). The idea is that the marketplace - whether the marketplace of ideas or the market for any good or service - will move away from bad practices if there is more information. Consumers and voters can, in other words, be trusted. The position that one should ban - rather than just order disclosure of - exploitative or abusive economic practices is often called paternalism.

There's an interesting divergence between political and economic transparency. Those who favor term limits are justly accused of being paternalistic. Their message is: stop me before I vote for an incumbent again. Voters, in their view, must be forced to discard incumbents. Transparency (publicizing that they are incumbents) does not prevent their re-election. Yet those same (conservative) people often resist economic paternalism. Liberals, like me, often favor protective economic legislation but resist cramping political choices. (The justification for my position is that the power dynamics in economic relationships are largely absent in the voting booth).

Does transparency work? In one almost definitional sense, we know it does not. By placing the onus on the consumer to navigate the shoals, you guarantee that some will fail. Some will miss the disclosures, fail to understand their import, or undervalue the risks. For reasons of poverty and liquidity, some will make choices they otherwise would not. Advocates of transparency say this is the price of freedom. Maybe so. The other serious concern is that the power relationships in the economic sphere may render disclosure moot. What does disclosure matter about credit cards if the few remaining banks issue credit cards with the same terms? What if the terms you want are simply not offered? What if - as is normally the case - everything is presented on a take-it-or-leave-it basis. Ever tried to negotiate with AT&T or your health insurer? Can't be done. Take it or leave it. Transparency is not working if all it does is tell you exactly how you are being screwed.

I think the Obama administration should be less afraid of the charge of "paternalism" and a bit more skeptical about the ability of the market to drive out bad practices through better information. Their hearts are in the right place, believing correctly that if transparency can work, it is a better choice than paternalism. But we should be realistic, too.

Think of this example as typical. When you drive into a car parking lot, you get handed a ticket that spells out the terms of liability (basically, they won't take any responsibility for your car not being stolen in their unprotected lot). Negotiating with the teenager or immigrant manning the booth - if there is even a person at all - is not possible. You either park there or not. All the lots will have the same pre-printed tickets. There is no option except to park on the street. Where street parking is limited, as in big cities, you basically find yourself with little or no choice but to accept those terms offered. This (sometimes called a "contract of adhesion") is a failure of transparency. Even if the parking lot were ordered to place its theft statistics in big numbers on a banner on the front, that might deter some, and might encourage some improvement, but not much overall would change. You still could not negotiate and still have too little choice. This is where government needs to step in to make a decision, possibly, to require that parking lots acccept liability for theft (or not).