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Philip Booth: Why I have reservations about the "Nudge" philosophy

Picture 10 Professor Philip Booth is Editorial and Programme Director at the Institute of Economic Affairs.

I have various reservations about the Nudge philosophy that has been embraced by David Cameron. It is clearly attractive to the Conservatives because it seems novel without appearing to smack of market fundamentalism - and the Conservatives seem unable or unwilling to make the case for liberating the market economy directly.

One reservation that I have about “Nudge” is not about the basic underlying idea, but about the likely flaws in implementation. The authors of "Nudge" clearly intend that their proposals should be an alternative to state regulation, but it is difficult to see them being implemented that way in practice. For example, in the pensions field, auto-enrolment into personal accounts is going to be used in addition to all the current government interference in the provision of pensions: we will still have a government-provided state pension, a “second state pension”, continued regulation and tax relief. In addition to all this, people will be auto-enrolled into saving through personal accounts.

A second problem is that of who decides the direction in which to nudge people. The political elite, for example, wish to nudge the young to take out pensions but this risks making pension mis-selling compulsory. Young people will be saving in a pension whilst paying off a mortgage or even paying off credit card bills: saving and borrowing with two different financial institutions at the same time is an expensive business. Of course, the people who will lose out most are those who are not sufficiently sophisticated to shoulder barge the nudger and do their own thing.

The best way is to allow paternalism to evolve naturally in society without the interference of government. That is genuine “libertarian-paternalism” to use the phrase that Nudge’s authors use. People generally know when they are not the best judges of their own interests and they often choose to devolve decisions to others.

Again, we can use an example from the area of pension provision. Until 1988, employers were allowed to require their employees to join their pension schemes as part of their terms and conditions of employment. It satisfied both parties. A Conservative government then tore up freely negotiated contracts of employment which contained “libertarian-paternalistic” clauses so the employees were free to leave the schemes. The consequence of this intervention was the £12billion pension mis-selling scandal. Now the Conservative Party is accepting (and will not reverse) government proposals to do exactly what it has prevented employers and employees freely agreeing to - auto-enrolment into pension schemes. Government will be doing what society used to do – that is not the way round that David Cameron is supposed to want things.

The most recent nudge David Cameron has come up with does not inspire confidence either. This is the idea of sending to households their next door neighbour's electricity and gas bills so that you are nudged (or shamed) into cutting down on energy use. Perhaps this policy was developed because somebody in Central Office had seen the reports of the latest research on this issue in the recent NBER Digest. It is worth looking at the results of that research:

  1. The average change in energy use was just over 1.5% - this is a very small saving.
  2. This translated into a $24 saving a year per household. A similar 1.5% saving seems to translate into roughly a £12 saving in the UK - or about £5 per person per year for the average household.
  3. Low energy users, on average, increased their energy usage in one study!
  4. The average saving includes a group who received monthly reports on their neighbour's consumption rather than just quarterly reports. This is significant because the biggest savings come close to the time when people received their neighbour's usage figures. Those receiving quarterly reports about their neighbour's usage, in one of the studies, made savings less than 50% of the savings made by those receiving monthly reports.

So, if monthly reports on neighbours’ energy use are to be required, this will be an awful lot of paper, postage and information collation for a very small saving in energy bills. If the Conservative Party really were both serious and honest about energy use issues and not just courting electoral popularity, they would stop messing about and just propose VAT on domestic fuel at the standard rate.

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