Obama's iPod Government

Initially, hearing the term "iPod Government" you might think it's just another of Obama's catch-phrase ploys, another cheesy attempt to lock-in young voters. In reality, however, it's an intriguing approach to the political challenge of balancing government-knows-best mandates with leave-it-up-to-the-consumer free choice.

Under Obama's iPod Government system, consumers would make their own choices, but the government would clearly lay those choices out. Rather than simply give us options, Obama would give us options we can understand. This approach would change the presentation of several essential consumer decisions, from Medicare prescription drug plans to mortgage terms.

While the feasibility of this plan is questionable--can such complex decisions really be pared down to a version palatable to the every-day decision-maker without bias or oversimplification?--the benefit is pretty clear. Economic theory would argue that making options clearer will necessarily benefit the consumer, as they will be more educated and face less certainty as a result.

Other aspects of Obama's proposal are more controversial, however. Take for instance his plan to shift the default for many programs from opting in to opting out. The most significant manifestation of this plan, should it come to pass, would be the automatic enrollment of all workers in employer-based savings plans. While today workers must actively enroll in such programs, under Obama's plan they would have to (but easily could) actively drop out. Even if the savings plans themselves were no different than today's, the impact would still be remarkable.

In proposing this over-arching approach to decision-making, Obama has relied heavily on his economic advisors. Abandoning one of the most frustrating assumptions of undergraduate economics--that people are rational actors--Obama's team instead pays significant attention to the field of behavioral economics. In this case, their position is based on the empirically-supported "status quo bias" which suggests that people are likely to stick with the default option, whatever that may be. In other words, if people are automatically enrolled in a savings program, they are significantly more likely to stay in it than if they are automatically not. Regardless of the specifics of the options, the consumer's choice is heavily biased towards the default one.

Deemed "libertarian paternalism", this policy simultaneously allows for consumer choice and pushes that choice in the direction Obama prefers. In my opinion, it's a sound policy. Any way you look at it, some option has to take the default place. And, as discussed in class, the option of non-participation is no less neutral than the automatic enrollment one. So, why shouldn't the default option be the one that experts like Obama and his economic advisers recommend? Sure, in some ways this means the government will be making the decision for some consumers (i.e., those who just stick with the default, regardless of what it may be). But economic theory would likely fall apart with them anyways--if they aren't rational, informed consumers, they are unlikely to independently make the optimal choice regardless.

So maybe this is the best of both worlds: let the people who care make their own well-informed decisions and help those that don't by guiding them in the direction you (and your team of economists and experts) think best.