In one of his recent New York Times columns (“Too Much Choice Is Hurting America,” March 1, 2021), Nobel economist Paul Krugman worries about the United States having become
a country in which many of us are actually offered too many choices, in ways that can do a lot of harm.
It’s true that both Economics 101 and conservative ideology say that more choice is always a good thing. …
In the real world, too much choice can be a big problem. …
Too much choice creates space for predators who exploit our all-too-human limitations.
… people have limited “bandwidth” for processing complex issues.
This is not an original opinion. It is typical of the authoritarian left and of the authoritarian right. Even Trump might agree, he who did not mind preventing people from buying dolls made in China. Krugman should know why, for nearly three centuries, mainstream economics, and not only at the 101 level, has taken an opposite stance.
As a positive science, economics shows that individuals make their choices on the basis of their preferences and their constraints. Individuals generally prefer more choices because that increases the possibilities of satisfying their preferences. One is more limited if he can choose between only a rotary telephone and a push-button one. If we use economics normatively on the basis of classical-liberal values (from which Krugman has far drifted), every individuals should have the right to choose what he wants—except for committing crimes such as murder because a social system allowing such crimes is presumably in nobody’s interest.
When Prof. Krugman states that “many of us are actually offered too many choices,” he doesn’t include himself, but only the poor or those who he thinks don’t have his intellect. What would he say if some intellectual told him that he has too many book choices? What if we told him that he is manipulated by “predators who exploit our all-too-human limitations”?
Of course, it is true that some individuals make choices that turn out to be bad for their own future. Errare humanum est. But what is the alternative?
Mr. Krugman only dislikes individual choices. He loves the alternative: collective choices imposed on everybody, choices where individuals are much more impotent and blind. Impotent because the typical individual—as opposed to a Nobel Prize winner with a column in the New York Times—has only one vote that will not change the result of any election; and moreover because, “in the real world,” politicians and bureaucrats make most of the collective decisions anyway. Blind because, for the reasons we have just seen, the ordinary voter remains “rationally ignorant” (as public-choice economists say) of politics and spends less time getting information on politics than when, as a consumer, he buys a new car. Even if you think that you are buying something when you vote, it is nearly infinitely more difficult to figure out what you buy than when you purchase for yourself a car, a computer, a health insurance policy, or a mortgage.
Given his predilection for collective choices, we can suspect that Krugman wants his elitism to be imposed by laws and regulations, mandates and bans. His columns are not meant to be about aesthetics and literary criticism. Isn’t he worried that, in collective choices, political predators, with the same cognitive limitations as “many of us,” will “exploit our all-too-human limitations”? Who is more dangerous, a political demagogue or the VP Marketing at Ford?
Krugman cites the case of the Great Recession as an example of individuals being incompetent to make choices:
One cause of the 2008 financial crisis was the proliferation of novel financial arrangements, like interest-only loans, that looked like good deals but exposed borrowers to huge risks.
To be fair, he does speak of one cause but why does he not mention the major role played by the federal government, which was already guaranteeing nearly half of residential mortgages and was controlling the whole market? The main “novel financial arrangement,” the mortgage-based security, was created in 1970 by Ginnie Mae, a federal government agency that long boasted about it on its website. Krugman knows something about this because he wrote in a 2009 book that securitization was “pioneered by Fannie Mae,” a government-sponsored enterprise created by Congress. Moreover, the federal government had spent decades encouraging poor people to buy mortgages and coercing banks into not discriminating against people likely to be incapable of reimbursing them. In 2003, congressman Barney Frank declared (all citations in my 2011 book Somebody in Charge):
I believe that we, as the Federal Government, have probably done too little rather than too much to push them to meet their goals of affordable housing and to set reasonable goals. … I would like to get Fannie [Mae] and Freddie [Mac] more deeply into helping low-income housing and possibly moving into something that is more explicitly a subsidy. … I want to roll the dice a little bit more in this situation towards subsidizing housing.
All that is a bit troubling. How can somebody like Krugman, who is, after all, an economist and obviously an intelligent man, defend such simplistic ideas? Should we just suppose that his New York Times columns are so heavily edited that they don’t really represent his own opinions? (The New York Times is apparently known as an “editors’ paper” as opposed to a “writers’ paper.”) But if so, why would he accept to play that game?
READER COMMENTS
MarkW
Mar 8 2021 at 7:23am
Even Trump might agree, he who did not mind preventing people from buying dolls made in China.
Oh, c’mon. Trump’s trade policy was complete crap of course, but we’re not talking about the same kind of thing at all. Isn’t it yet possible for libertarian writers to plainly criticize the left without throwing in a random swipe at Trump to protect themselves from…what exactly?
One cause of the 2008 financial crisis was the proliferation of novel financial arrangements, like interest-only loans, that looked like good deals but exposed borrowers to huge risks.
Doesn’t he have this completely backward? Those low-income borrowers who made no down-payment and never had equity in their homes were the ones able to walk away with the least financial impact (they invested nothing and lost nothing). Those who made no down-payment, took out home equity loans on the their house’s appreciated value before 2008 and then ultimately defaulted did even better.
How can somebody like Krugman, who is, after all, an economist and obviously an intelligent man, defend such simplistic ideas?
I know a lot of intelligent people whose thinking on politically-polarized issues is completely tribal. The more intelligent ones have more sophisticated ways of justifying their positions. But these positions remain completely tribal — if the tribe changes its mind, they surely will too, and turn their intelligence toward justifying the new values. And this applies to the ‘Reds’ I know as well as the ‘Blues’ (a few of my extended conservative Republican relations were staunch supporters of free trade and balanced budgets until Trump).
The amazing thing is that all of these folks remain convinced that they are free, independent thinkers. But I guess the old adage is correct — the best way to fool others is to begin by fooling yourself.
JFA
Mar 8 2021 at 9:44am
“Those low-income borrowers who made no down-payment and never had equity in their homes were the ones able to walk away with the least financial impact (they invested nothing and lost nothing). ”
This doesn’t seem quite right to me. They were still on the hook for the mortgage payments on the house they no longer lived in or owned (or at least the value of the mortgage after they or the bank could sell the house in a down market for). Yes, they can declare bankruptcy, but 1) I think few people who have gone through that process would say it was a great experience and 2) while the bankruptcy process might reduce overall debt payments, it doesn’t just set your debts to 0 and unless something drastically changes about your situation, you’re not going to get much access to credit any time soon after your bankruptcy.
Christophe Biocca
Mar 8 2021 at 10:38am
That depends on the state: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1432437
~1/4 of states are non-recourse, but they have disproportionately more defaults than the rest: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1432437 and also have bigger price swings.
Securitizers and GSEs didn’t account for this effect either in their risk models, so they were willing to treat mortgages the same regardless of whether the homeowner could just mail the keys to the bank or actually have to declare bankruptcy.
It wasn’t the only thing in play in 2008, but it made things worse.
robc
Mar 8 2021 at 10:47am
Even in states with recourse, most banks let the lenders off the hook. Blood/turnip/etc.
JFA
Mar 8 2021 at 11:38am
Thanks for the links. Whether a loan is subject to recourse or not doesn’t determine whether the person is still on the hook for the payments, it just determines what the lender can do when the loan is in default. Regardless, the bank gets to keep the house (and whatever else was used as collateral for the loan), and one will certainly have a hard time buying another one (along with many other difficulties) with an unpaid mortgage on their balance sheet.
I don’t think those defaulting on their loans were getting off as scot-free as MarkW was suggesting.
Jon Murphy
Mar 8 2021 at 11:31am
One of the big problems in economics these days is too much focus on the “allocation” role of the price system and not enough on the “discovery” role. Prices do allow us to allocate our resources to wherever they are most valued (at least in equilibrium; outside of equilibrium, the message prices send is very murky). But prices also allow for discovery of new opportunities.
By focusing too much on the allocation role, Krugman (and the overwhelming majority of economists) see search and choice purely as cost. There is no benefit attached (indeed, in a world of equilibrium, search cannot have benefits by assumption). Thus, searchers only feel pain from choices.
But, if we remember the discovery role of prices, things take on a new light. Competition (that is, the increase of choice) becomes a means to help us discover who can serve us best (see Hayek’s 1946 essay “The Meaning of Competition“). Thus, choice does not simply have pain (cost) associated with it, but also benefit. Prices signal not only where things are more valued, but how we can serve each other better. These discoveries, by their nature, cannot be known beforehand. It’s not simply searching within a known population. It’s changing the very population.* So, what Krugman (and most standard neoclassical economists from Pigou onward) do not understand is when they explicitly focus on allocation, they are shutting down the vey mechanism that fosters growth. That is the Coasian complaint on Pigou. That is the Austrian complaint on Lange-Lerner. That is the UCLA complaint on old Institutionalism. That is what neoclassical economists do not understand
*This is why Austrian economics doesn;t play well with standard econometrics
Phil H
Mar 8 2021 at 7:27pm
“Prices signal not only where things are more valued, but how we can serve each other better. These discoveries, by their nature, cannot be known beforehand. It’s not simply searching within a known population. It’s changing the very population.*”
This sounds interesting, but I’m not sure I understand it yet. When you say population, do you mean the population of goods available to buy? How can search change the population?
Jon Murphy
Mar 8 2021 at 7:57pm
Statistical population. I’m making a statistical point there
Phil H
Mar 10 2021 at 11:11pm
Thanks, but population of what?
Robert Schadler
Mar 8 2021 at 4:48pm
Presumably there is an abstract “optimum” number of choices that balances the presumed “transaction cost” of sorting through all the choices. A hundred choices on a menu might discourage customers from wanting to patronize the place.
What might be an ideal for Krugman, is just one choice — the best choice — for that person at that particular moment. Of course, no one can know what that choice might be, except by a certain amount of comparison shopping. Krugman may think he’s much smarter than dumb, poor people, but not in this kind of case. The poor person may have to “discover” his best choice at that moment. Everyone else is just guessing or imposing their own imagined choice for that person.
Recall Patrick Boarman once saying that one of the satisfaction of a menu, was, not just the choice made, but the sense of rejecting all the other items. That too, might be a factor in an optimum number of choices.
Pierre Lemieux
Mar 9 2021 at 10:02am
Robert: Good points. And if I may repeat what I said to Mark Z below, note the multiple ways that people choose to restrict, at least for a time, their feasible set (of choices): many choose a religion, get married, decide to live in certain places instead of others, buy a mortgage, etc. In choosing daily consumption goods, they are even helped by their suppliers: Amazon and now, it seems, most online department stores allow you to filter by brand and price so that you don’t have to consider a zillion of choices.
robc
Mar 9 2021 at 10:24am
I sort of agree, but I think empirical evidence goes against us. The kind of places that have the pages and pages of menu items tend to be ones that are super popular and have hundreds of locations.
The single page menus are usually local places with more selective clientele.
I think quality declines with size of menu, but not popularity.
AMT
Mar 8 2021 at 5:28pm
Though I generally disagree with most of what Krugman says, I think he is correct here about the electricity prices, but not the mortgage issue. I think it is very easy to see the argument for paternalism in many situations. Ordinary consumers are surprisingly “irrationally ignorant.” You correctly point out political demagogues are a concern as well, but I’m more concerned with ones that propose well intentioned, yet harmful policy, like the minimum wage, than self-interested crony capitalism which is less likely to be passed through due to public criticism of the conflicts of interest.
Do you disagree with Nudge? Also, there is another book called The Paradox of Choice by Barry Schwartz that I found pretty persuasive more generally regarding consumer choices.
Pierre Lemieux
Mar 9 2021 at 9:49am
AMT: Nudging is certainly preferably to coercively limiting one’s domain of choice. But who will choose the nudger among the zillions candidates? And how to nudge the nudger so that he nudges you according to your preferences and not his?
Mark Z
Mar 8 2021 at 7:10pm
People are perfectly capable of limiting their choices to a manageable set without state paternalism. They can and do shop for preferred ‘choice architectures’ to use Sunstein and Thaler’s terminology. It doesn’t seem like Krugman’s issue (or most paternalists) is that people have too many choices, but simply that people make the wrong choices (which only requires two choices) and should only have one. It’s worth noting, of course, that the literature on irrationality rarely actually demonstrates that a specific paternalist intervention is beneficial, even where it proves people are irrational (e.g., have inconsistent preferences). E.g., the Sunstein-Thaler example that, when asked to pick a snack for tomorrow, people pick a healthier snack when they’re less hungry today. That may be irrational, but it doesn’t at all justify making them pick the healthier one, as Sunstein and Thaler imagine; it could just as easily justify making them pick the less healthy one. An inconsistency in one’s preferences doesn’t tell us anything about which preference is more in accord with one’s higher order preference.
Pierre Lemieux
Mar 9 2021 at 9:57am
Mark: Interesting comments. Note the multiple ways that people choose to restrict, at least for a time, their feasible set (of choices): they chose a religion, get married, live in certain places instead of others, buy a mortgage, etc. In choosing daily consumption goods, they are even helped by their suppliers: Amazon and now, it seems, most online shops allow you to filter by brand and price so that you don’t have to consider a zillion of choices.
drobviousso
Mar 10 2021 at 1:49pm
Oh, are we not doing this any more? Ok.
“Welfare in both countries will increase, both because of higher w/p and because of increased choice” (Krugman 1979″
Pierre Lemieux
Mar 10 2021 at 2:00pm
Drobviousso: I don’t know where you found this quote, but it is representative of Krugman’s defense (even current defense!) of free trade. The argument for trade, foreign and domestic alike, rests on the respect of individual preferences and choices. Krugman’s incoherence is troubling.
drobviousso
Mar 11 2021 at 11:42am
It is from Kurgman’s 1979 paper Increasing returns, monopolistic competition, and international trade available at https://pr.princeton.edu/pictures/g-k/krugman/krugman-increasing_returns_1978.pdf (I don’t know the link says 1978 the paper says 1979)
I was lamenting how Kurgman the pundit and Kurgman the economist seem to have so little in common.
Pierre Lemieux
Mar 11 2021 at 6:12pm
That’s what I understood. Thanks for the citation.
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