Comments on Daniel Benjamin and David Laibson: “Good Policies For Bad Governments: Behavioral Political Economy”

2 The authors make two main arguments in this paper: that behavioral economics rationalizes a wide array of welfare-improving interventions; and that economists should refrain from recommending policies that go beyond benign paternalism because policymakers are subject to the same behavioral biases that afflict individuals or, worse, may be self-interested, not benevolent. I agree that behavioral economics rationalizes activist policy. I agree too that policies sometimes do more harm than good. But I see a stronger rationale for at least some policies that go beyond benign paternalism. I would like to react to some of the particular macroeconomic policies espoused by the authors. But first, I want to make explicit my view that behavioral economics provides a solid and much needed intellectual underpinning for Keynesian economics and the macroeconomic goal of stabilization policy. This point is implicit in the Benjamin/Laibson paper but it deserves emphasis. exhibit pronounced cyclical fluctuations in output and employment, has been under attack for decades from theorists who regard its microfoundations—particularly the assumption of sluggish wage and price adjustment—as both ad hoc and implausible. A major contribution of behavioral economics is to demonstrate that " money wage stickiness " is a sensible description of how labor markets actually work, reflecting deep aspects of the human psyche, not implausible adhocery. It is striking that the authors describe these ideas about wage determination as now the " consensus views in the profession. " I am uncertain whether the authors consider the active use of monetary and fiscal policy to stabilize the economy an example of benign paternalism or not. There is certainly a large literature, dating at least back to Milton Friedman, questioning both the competence and 3 motivation of policymakers to improve macroeconomic performance. This literature urges that