Obama Pushes iPod Government

May 14, 2008 — -- To understand the intellectual underpinnings of Sen. Barack Obama's plan for reinventing government, it's useful to read "Nudge: Improving Decisions About Health, Wealth and Happiness."

The new book by two University of Chicago professors who serve as informal advisers to the Democratic Illinois senator explains how a "libertarian paternalist" government can preserve freedom of choice while moving its citizens in directions that will improve their lives.

Obama's iPod Government

"His campaign has referred to a beautiful phrase 'iPod Government,'" said law professor Cass Sunstein in an interview with ABC News. "We don't use that phrase in the book, but iPod government is very close to what we have in mind. Those who are concerned about choice architecture love the idea of iPod government because it's user-friendly, the default rules are sensible, you can adapt as you wish but if you don't adapt, things are going to be fine."

The premise of Sunstein's book, which he wrote with behavioral economist Richard Thaler, is that people are less than rational when they make economic decisions. In the lingo of the book, there is no such thing as "economic man." Humans are influenced by the power of inertia.

The authors believe that once it is accepted that some nudging is inevitable, the body politic can move on to consider how nudges can be used to improve people's lives.

"Obama is very alert to the idea of choice architecture, which has to do with the fact that there's a context against which people make decisions and the context can be confusing and harmful or straightforward and helpful," said Sunstein.

Economic Savings

The clearest example of how Obama plans to construct default rules to alter behavior is his automatic savings plan.

At present, millions of Americans are given the option of joining employer-based savings plans but do not exercise the option. Test studies have shown, however, that if employers automatically enroll their employees, enrollment rates shoot up dramatically.

In order to take advantage of what behavioral economists call "the status quo bias," Obama would require all employers to enroll their workers in a direct deposit retirement account that places a small percentage of each paycheck into the account. This is the paternalistic part. The libertarian part of his proposal is that employees would still have the choice of opting out.

"Before he ran for president, I had a discussion with Sen. Obama personally about automatic enrollment," said Sunstein. "He was completely on top of the topic and he understands the behavioral background."

Medicare and Rx Drugs

Austan Goolsbee, Obama's chief economic adviser, is a University of Chicago colleague of Sunstein and Thaler, and the concept of choice architecture can be seen in the Illinois Democrat's proposal for improving the Medicare prescription drug program.

Thaler and Sunstein believe the designers of the drug benefit failed to appreciate that simply offering seniors a multitude of choices is not productive if the options are not well understood.

To help seniors determine which plans could help lower their out-of-pocket costs, Obama would require prescription drug companies to send Medicare beneficiaries a full list of the drugs and fees they paid the previous year.

Obama also employs nudges in his proposals for making credit card and mortgage terms easier to understand and he has adopted a Goolsbee proposal to simplify tax filings by offering people with no outside income or itemized deductions a prepared tax return that they can simply sign and return.

Sunstein thinks Obama's "libertarian paternalist" instinct can also be seen in his reluctance to resort to mandates.

"Obama shows signs of being more of a libertarian paternalist than Hillary Clinton," said Sunstein. "What I would single out for Obama is two things: for health care, it's revealing that she has a mandate and he doesn't."

"In responding to the mortgage crisis," he continued, "Sen. Clinton has proposed a [five-year] freeze … on [subprime] interest rates. Obama has resisted that strongly in favor of a disclosure policy, which is very much in the spirit of libertarian paternalism."

ABC News' Talal Al-Khatib and Mike Elmore contributed to this report.