628. Sludge, Part 2: Is Government the Problem, or the Solution?

Summary

Freakonomics Radio - Episode 628: Sludge, Part 2: Is Government the Problem, or the Solution?

Release Date: April 4, 2025

In the second installment of the two-part series on sludge, Freakonomics Radio delves deeper into the pervasive issue of bureaucratic inefficiency and the barriers it creates for consumers. Building on the foundational concepts introduced by Nobel laureate Richard Thaler, host Stephen Dubner explores how government functions as both a source of sludge and a potential solution to mitigate it. This episode features insightful conversations with economists Neil Mahoney and Ben Handel, as well as an in-depth interview with Jennifer Palka, a pioneer in digital transformation within government agencies. The episode culminates with Thaler’s reflections on sludge reduction strategies.

1. Understanding Sludge in Modern Systems

The episode opens by revisiting Richard Thaler’s definition of sludge—the unnecessary barriers and complications that make processes harder than they need to be. Dubner recaps the first part of the series, highlighting how sludge manifests in various sectors, including health insurance and subscription services.

Richard Thaler [01:25]: "If you make things harder. I call that sludge. Kind of a fun word for stuff that's the opposite of fun."

2. Subscription Services: A Case Study in Sludge

Economist Neil Mahoney, who has experience in both the Biden and Obama administrations, shares his research on subscription cancellations. Mahoney's team investigated the cancellation processes of the 50 highest-circulation newspapers in the U.S., revealing significant hurdles for consumers attempting to terminate subscriptions.

Neil Mahoney [05:08]: "At some point, we should talk about my work on subscriptions, because it fits into all of this."

Drawing comparisons between Massachusetts, with minimal consumer protection laws, and California, known for its consumer-friendly regulations, Mahoney found that less than half of the newspapers allowed online cancellations. Even where online options existed, the processes were deliberately convoluted—characteristic of sludge.

Neil Mahoney [07:06]: "The most infuriating thing we discovered is there were newspapers, they wouldn't comply with the law, but sort of gesture to comply with the law by allowing you to cancel by chatbot."

3. FTC’s “Click to Cancel” Initiative

Mahoney’s research influenced the Federal Trade Commission (FTC) to enact the “Click to Cancel” rule, designed to simplify the subscription cancellation process. FTC Chair Lina Khan emphasized that the rule aims to protect consumers from deceptive subscription practices.

Neil Mahoney [07:29]: "Click to cancel is part of a bigger agenda on what are called junk fees that Mahoney worked on in the White House."

These regulations compel businesses to make cancellations as straightforward as sign-ups, threatening hefty fines for non-compliance. Mahoney underscores the bipartisan support for these measures, noting that even traditionally skeptical economists acknowledge the necessity of such regulations to ensure fair market competition.

Neil Mahoney [09:31]: "When policymakers and the healthcare system... can go out and test it first, you will end up finding ways to make that same regulation less burdensome."

4. Healthcare Sludge and Potential AI Solutions

The conversation shifts to the U.S. healthcare system, where economist Ben Handel discusses the intentional sludge created by insurance companies to maximize profits. Handel highlights the complexities consumers face in understanding coverage terms and accessing care providers.

Ben Handel [11:27]: "You could try to allow private firms to develop AI tools to help basically mine the insurance contract and then allow that to interact with consumer data in order to create this almost super decision maker."

Handel proposes leveraging artificial intelligence to streamline insurance contracts and improve transparency. However, he acknowledges significant barriers, particularly concerning data privacy and regulatory compliance under HIPAA.

Ben Handel [12:32]: "Medical privacy law, HIPAA... is based on a crude foundation."

5. Government Sludge: Interview with Jennifer Palka

Jennifer Palka, co-founder of the US Digital Service (USDS) and author of Recoding: Why Government is Failing in the Digital Age and How We Can Do Better, provides a comprehensive analysis of government-induced sludge. Palka explains how bureaucratic red tape, excessive regulations, and a lack of digital infrastructure contribute to inefficiency.

Jennifer Palka [21:00]: "I work with governments, state, federal, and local to increase their capacity to achieve their policy goals."

Palka recounts the infamous healthcare.gov rollout, attributing its failure to the absence of effective product management and the attempt to meet excessive requirements simultaneously.

Jennifer Palka [24:35]: "Healthcare.gov just tried to do all the things. It didn't have... somebody who was empowered to say, I don't think we can launch a system this complex that handles this many edge cases and have it work for everyone on day one."

6. Elon Musk’s Department of Government Efficiency (Doge)

The episode touches on Elon Musk’s creation of the Department of Government Efficiency (Doge), which took over the USDS. Palka expresses cautious optimism, suggesting that while Doge's mission aligns with sludge reduction, drastic measures like mass layoffs could have adverse effects.

Jennifer Palka [42:21]: "I think we could in some way place run the government on fewer people, but I also am a big advocate for more internal competencies of certain sorts."

7. Richard Thaler’s Perspective on Sludge Reduction

Returning to Richard Thaler, Dubner explores Thaler’s views on the feasibility of reducing sludge. Thaler emphasizes the historical successes in minimizing sludge through standardization and the introduction of systems like currency and standardized time.

Richard Thaler [49:09]: "It tells us that the system is way too complicated. That's what it tells us."

Thaler advocates for educational initiatives to raise awareness about sludge among government employees and the public. He envisions a future where repeated educational efforts empower individuals to systematically reduce sludge within their spheres of influence.

Richard Thaler [46:37]: "I would say every government employee, including legislators and executives, should take a one-day course on sludge and then take a pledge to leave their job with less sludge than when they found it."

8. Final Thoughts: The Path Forward

In closing, Dubner reflects on the challenges and opportunities in combating sludge. With advancements in technology, particularly AI, and increasing public frustration with inefficiency, there is a window of opportunity to implement meaningful reforms. The episode underscores the necessity of thoughtful policy design, cross-sector collaboration, and a commitment to continuous improvement to dismantle the entrenched barriers that sludge creates.

Jennifer Palka [36:36]: "Now we have a particular moment where the models are so broken and people are so frustrated that we have an opportunity."

Richard Thaler [49:45]: "We reduced sludge before and we can do it again. We, meaning humankind, we have been fighting and winning sludge battles for a long time."

Key Takeaways:

• Sludge refers to unnecessary obstacles that complicate processes for consumers, prevalent across various sectors including government, healthcare, and subscription services.

• Neil Mahoney's research highlights the deliberate complicating of subscription cancellations, influencing the FTC’s “Click to Cancel” rule aimed at simplifying these processes.

• Ben Handel suggests that AI could play a pivotal role in reducing sludge within the healthcare system, though data privacy remains a significant hurdle.

• Jennifer Palka offers a critical view of government-induced sludge, advocating for digital transformation, reduced procedural bloat, and the integration of feedback loops between policy and implementation.

• Richard Thaler believes that historical precedents demonstrate humanity’s ability to overcome sludge through standardization and technological advancements, emphasizing education as a tool for ongoing improvement.

This episode of Freakonomics Radio serves as a comprehensive exploration of sludge, particularly within government structures, and offers a nuanced discussion on potential strategies for reduction, leveraging both policy and technology.

Transcript

[Stephen Dubner]

Freeconomics Radio is sponsored by Discover. It's smart to always have a few financial goals and a really smart one. You can set earning cash back on what you buy every day. And with Discover, you can get this Discover automatically matches all the cash back you've earned at the end of your first year. Seriously, all of it. And we trust you to make smart decisions. After all, you listen to this show see [e-mail] Credit Card Freakonomics Radio is sponsored by Mint Mobile. Do you say data or data however you say it? It's time to stop overpaying for your monthly data plan with Mint Mobile and their premium wireless plans that start at just 15 bucks a month. No matter how you say it, don't overpay for it. Shop data [e-mail] freak that's mintmobile.com freak Upfront payment of $45 for 3 month 5 gigabyte plan required equivalent to doll. New customer offer for first 3 months only. Then full price plan options available, taxes and fees extra. See Mint Mobile for details. Last week in the first episode of this two part series, the Nobel Prize winning economist Richard Thaler described one of the most common afflictions of our time.

[Richard Thaler]

If you make things harder. I call that sludge. Kind of a fun word for stuff that's the opposite of fun.

[Stephen Dubner]

We heard how insurance companies use sludge to ration health care, how subscription services use sludge to avoid cancellations, and how governments are full of sludge because. Well, because sludge is an almost inevitable byproduct of bureaucracy today. In part two, we look at ways to fight sludge through better legislation, through the use of artificial intelligence, and maybe by hiring a personal sludge coach.

[Richard Thaler]

I'm not available.

[Stephen Dubner]

That's okay. We are available. Starting now.

[Jennifer Palka]

This is Freakonomics Radio, the podcast that explores the hidden side of everything with your host Stephen Dubner.

[Stephen Dubner]

It is a natural temptation to think that your problems are worse than other people's problems. Also to think that the problems of our generation are worse than previous generations. But as it was written way back in Ecclesiastes, there is nothing new under the sun. And so it is with sludge. For many years it went by another name, a prettier name, Red Tape. Do you know the story of how red tape got its name here? It's a cute story, I'll tell you. It apparently dates back to 16th century Spain and King Charles V, who had his most important legal documents bound in red ribbon. Eye catching and expensive ribbon befitting a king versus the plain ribbon Used for less documents. This tradition spread through Europe into America. And as governments and legal institutions expanded, there was ever more need to go back into the archives to find these important foundational documents. This meant that lawyers and clerks had to constantly untie and retie those red ribbons, later called red tape. Okay, that concludes our history for today. Back to the sludgy present. In last week's episode, we met the Stanford economist Neil Mahoney, who spent time in both the Biden and Obama administrations. He is particularly interested in consumer finance, which often means protecting consumers from financial exploitation.

[Neil Mahoney]

At some point, we should talk about my work on subscriptions, because it fits in to all of this.

[Stephen Dubner]

Okay, let's talk about that.

[Neil Mahoney]

The starting point for this project is I had a general impression that nobody can keep track of their subscriptions, meaning.

[Stephen Dubner]

It'S easy to sign up for something and forget about it and keep paying for it. For example, a digital subscription to a newspaper.

[Neil Mahoney]

So me and my team, we took a list of the 50 highest circulation newspapers in the US and we signed up for subscriptions and we canceled them. And we did it in Massachusetts, where there are no special consumer protection laws on the books.

[Stephen Dubner]

You're saying these are 50 newspapers spread out across the country, but you're doing the signing up and canceling in Massachusetts?

[Neil Mahoney]

Exactly.

[Stephen Dubner]

And why is it relevant where you're doing it from?

[Neil Mahoney]

Because the laws apply to where your.

[Stephen Dubner]

IP address is, not where the firm.

[Neil Mahoney]

Is, not where the firm is. So we did it from Massachusetts and then we did it from California, which is where we're based and where there were consumer protection laws on the books, which say it should be just as useful, easy to cancel as it is to sign up. You should be able to cancel online. You should be able to cancel without unnecessary impediments.

[Stephen Dubner]

And that's just because California's always been pretty consumer progressive in that way, correct?

[Neil Mahoney]

That's right.

[Stephen Dubner]

Okay, so you've got a team. Some are in California, some are in Massachusetts. And you're doing the same thing from those two places, is that right?

[Neil Mahoney]

We're doing the same thing from those two places in Massachusetts, 100% of newspapers you can sign up online. I don't think that's surprising. Less than half of them, only 45% of them, can you cancel online. The rest you have to call during business hours. You get passed from operator to operator. They ask you for reasons. Sometimes the call drops.

[Stephen Dubner]

They try to upsell you. They try and upsell you while you're trying to cancel.

[Neil Mahoney]

Exactly. And even when you can cancel online, it's not click to cancel. It's, you know, what is your reason for canceling? Would you like this other offer? What's your favorite color and type of dog, and then you can cancel.

[Stephen Dubner]

So what did Mahoney and his team learn from this research? Remember, in Massachusetts, fewer than half of the biggest newspapers in the country let you cancel online in the first place. Of those that did allow online cancellation, the vast majority slowed down the process with the kind of sludge that Mahoney was just describing. And how about in California, consumer friendly California, which already has laws that are supposed to make it as easy to cancel as it is to sign up. Even there, only 64% of the newspapers actually allowed online cancellation. And of Those that did, 83% made the process sludgy.

[Neil Mahoney]

The most infuriating thing we discovered is there were newspapers, they wouldn't comply with the law, but sort of gesture to comply with the law by allowing you to cancel by chatbot. These are chatbots that would sometimes take 10 minutes to respond. My guess is they're sort of throttling the response of the chatbot because people get busy and they run outside and they forget to cancel.

[Stephen Dubner]

In other words, firms purposely sludge up the cancellation process in order to discourage customers from canceling. But soon this should be a thing of the past. Thanks in part to Mahoney's research and his work in the Biden White House. The the FTC recently enacted a rule known as Click to cancel. Here's how then, FTC chair Lina Khan put it when the rule was proposed. Some businesses too often trick customers into paying for subscriptions they no longer want or didn't sign up for in the first place. The proposal would save consumers time and money, and businesses that continued to use subscription tricks and traps would be subject to stiff penalties. The penalty phase, with potentially large fines, begins in May of this year. Click to cancel is part of a bigger agenda on what are called junk fees that Mahoney worked on in the White House.

[Neil Mahoney]

Yes, I think we called it the junk fees agenda and there's lots of.

[Stephen Dubner]

Documentation, including in the 2023 State of the Union, I believe.

[Neil Mahoney]

Yes, that was the apex of the launch.

[Stephen Dubner]

The junk fees agenda was meant to address problems like the one that Mahoney described in last week's episode.

[Neil Mahoney]

There's this phenomenon where you think your concert ticket is going to be 70 bucks. You go to check out and there's a $35 service fee, shipping fee, etc.

[Stephen Dubner]

The FTC recently issued another rule that forbids this type of fee.

[Neil Mahoney]

Those are going away. The North Star in the space is all in upfront pricing. There shouldn't be any mandatory charges on the back end or in the fine print. The FTC finalize a rule that will make this the law of the land for every player.

[Stephen Dubner]

Presidential administrations, of course, change and there's no guarantee that a regulatory agenda like this one will continue as planned. But for now, both click to cancel and all in upfront pricing are set to become the norm. Mahoney says there is broad support for this kind of thing.

[Neil Mahoney]

The policies were championed by progressives that wanted to take a strong stand against what they saw as bad behavior behavior by businesses. But these policies also had this grounding in decades of behavioral economic research, in research of market competition. These policies were about getting markets to work, getting rid of the sludge so that consumers could actively choose the good or service that was best for them. We'll see what the Trump administration does, but there's really broad support for these policies. I talk to economists who I would think, based on their politics, would criticize this agenda, and they don't criticize it.

[Stephen Dubner]

As government going too far. Government getting in the business of business.

[Neil Mahoney]

Exactly. They tend to be skeptical of regulation, but here's a place where they understand that we need regulation to make sure that firms are competing the way we want them to compete.

[Stephen Dubner]

For anyone who is anti sludge, these junk fee rules are real victories. But if we're being honest, they are relatively tiny victories considering how much sludge there is in the world. Consider the US healthcare system. We got into this a bit last week with Ben Handel, a healthcare economist at UC Berkeley. He told us that a lot of healthcare sludge is intentional, a way for insurance companies to ration care in order to profit maximize. He also described how sludgy it can be to simply figure out what is covered in the healthcare contract you're signing up for. And then once you're signed up, there's more sludge in trying to find a healthcare provider who actually has some availability to see you. So I went back to handle and asked if he had any fixes in mind, any solutions.

[Ben Handel]

You could try to allow private firms to develop AI tools to help basically mine the insurance contract and then allow that to interact with consumer data in order to create this almost super decision maker. You could go even further and require some listing of availability of these doctors because a lot of times there's what's called ghost networks where the provider is listed but they have no availability and they're listed.

[Stephen Dubner]

Why just to make it seem like there's better or more choice.

[Ben Handel]

Exactly. That is especially prevalent in the mental health space. This is almost like a crisis level at this point where therapists have essentially no availability. Your insurer might list 55 of them and maybe two of them will actually have room. There's a second thing which is I just kind of made this statement, oh, we're going to integrate consumers data. This is something I've been talking about for like 10 years. This is really, for some reason, really hard.

[Stephen Dubner]

Is this because of privacy concerns? Is that the main barrier?

[Ben Handel]

That is one of the key barriers. However, it's a surmountable barrier, I believe, but it takes some minimal degree of cleverness that somehow is a little too high for policymakers and the healthcare system.

[Stephen Dubner]

Come on, say what you really mean. What do you mean by that? Exactly? What needs to be done that requires too much cleverness.

[Ben Handel]

I am sympathetic to this a little bit. It's not trivial. You basically have to find a way to anonymize the data in a way that really works right now. Medical privacy law, hipaa, which is the Health Insurance Portability and Accountability act, that is a good law that's designed to essentially say you can't have this kind of information in data that you're passing around. The problem is that the regulation, it's based on a crude foundation. The foundation is like, well, we're setting this up so that the likelihood that someone's identified is very low. The problem is that if you just follow HIPAA and you have a huge healthcare claims dataset, there are versions of that where, yeah, you could still identify a decent number of people. And that would be politically bad. It would be probably bad for people personally. So the challenge is that you have to set up a system where the data have to be securely transmitted in a way that allows individuals to be identified in the data. Because the whole value in integrating the data is the individual specificity.

[Stephen Dubner]

So if you don't have that, it won't work. But if you have that, then you're risking violating hipaa.

[Ben Handel]

Exactly. It's kind of a regulatory problem. You basically want to have a firm or intermediary that hosts this privatized data, anonymized so that an individual can go there and opt in and say, hey, I want you to use my privatized data. I want you to use that and tell me which plan is the best one financially, which one covers my doctors, if I have a need in this space, Mental health, for example, and I check this box. Are there two doctors available or 50 doctors available. You see many industries where lots of consumer data is being used. Basically every online sector, including very private data, that's being used to make recommendations. This is possible to do. That's the way to say it. Somehow in the places where there is vast money to be made, in social media and online retail, no problem. In the health space, there's not really money to be made.

[Stephen Dubner]

What Ben Handel just said there, that there's not really money to be made in health care. That's not quite right. There is money being made in healthcare. It's just that the business model is different. With most products, the more you sell, the more money you make. But when you sell someone a health insurance policy, you get paid a fixed amount. And the way you make money is by making sure that you pay the health care providers that you contract with less than that fixed amount. This is part of the reason why insurers make it hard for you to consume the health care you may want. So this is a case where commercial entities use sludge to boost their profits. Coming up after the break, how about government sludge?

[Jennifer Palka]

We've now tried to design processes in which you cannot criticize the judgment of anybody in them because literally no judgment was used.

[Stephen Dubner]

I'm Stephen Dubner. This is Freakonomics Radio. We'll be right back. Foreignomics Radio is sponsored by Rocket Money. You sign up for something, forget about it after the trial period ends, then you're charged month after month after month. That's where Rocket Money comes in. Rocket Money is a personal finance app that helps find and cancel your unwanted subscriptions, monitors your spending, and helps lower your bills so you can grow your savings. Rocket Money's dashboard gives you a clear view of expenses across all accounts. You can create a personalized budget with custom categories to track spending and view monthly trends to see exactly where your money goes. Rocket Money has over 5 million users and has saved a total of $500 million in canceled subscriptions, saving members up to $740 a year when using all of the app's premium features. Cancel your unwanted subscriptions and reach your financial goals faster with Rocket Money. Go to RocketMoney.com Freakonomics today. That's RocketMoney.com Freakonomics RocketMoney.com Freakonomics.

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[Jennifer Palka]

A.

[Stephen Dubner]

Little while back we asked you, our listeners, to send in your personal sludge stories. Here's one from Paul Gabriel hey there.

[Paul Gabriel]

I'm a longtime federal employee and applying for jobs is notoriously sludgy. I was applying for a position that required at least two semesters of physics, college level physics to qualify. I had it. One of them was called Physics 101 and the other was called Statics. It was an engineering course studying static loads on structures. I was deemed ineligible for this position because I did not have two years of physics. I emailed back and forth to the HR person for a long time and they were pretty unmoved. I sent them the description of the course. I sent them a letter from the professor saying that this is indeed a physics course. Nothing, nothing, nothing. Finally, I got an email from the head of HR saying we cannot count a statistics course as a physics course. This decision is final. You are ineligible. At that point, I just picked up the phone, gave her a call and said, listen, it's not statistics, statics, and what do you know? 20 minutes later I was offered an interview and deemed eligible. You can usually make it work if you're willing to stand up and fight for yourself, but there's a lot of sludge to wade through.

[Stephen Dubner]

It's probably not surprising that many of the personal sludge stories we received had to do with government sludge. And when you think about government sludge at this moment in time, you may well think of Elon Musk, the world's wealthiest man and one of its most unusual. He has been deputized by Donald Trump to drain the D.C. swamp to take a chainsaw to bureaucracy. Pick your metaphor. There are plenty to go around. Musk runs a new entity called doge, the Department of Government Efficiency, which took over and renamed an existing entity called the usds, or US Digital Service. So we thought it'd be good to speak with one of the people who founded the USDS a little over 10 years ago under President Obama.

[Jennifer Palka]

I'm Jennifer Palka. I wrote a book called Recoding why Government is Failing in the Digital Age and How We Can Do Better.

[Stephen Dubner]

Palka no longer works in government, but she is usually adjacent.

[Jennifer Palka]

I work with governments, state, federal and local to increase their capacity to achieve their policy goals. I founded a nonprofit that helps state and local governments do all that stuff.

[Stephen Dubner]

That nonprofit is called Code for America. Palka does some other things as well.

[Jennifer Palka]

I served on the Defense Innovation Board trying to help the Defense Department be better. I do stuff like that. I write a lot. I write a substack called Eating policy.

[Stephen Dubner]

It was in 2014 that Palka Co founded the US Digital Service. It was imagined as a kind of anti sludge strike force, going from agency to agency to help them update their digital infrastructure. And how did Jennifer Palka become this kind of a fixer? I asked her specifically. I asked what sort of superpower this requires.

[Jennifer Palka]

My superpower is translating between different languages, but not actual languages.

[Stephen Dubner]

Intra English translation you're saying yes.

[Jennifer Palka]

Intra English translation the theme of my life is sitting at the boundary between things and being able to tell people on each side of the boundary what the other is talking about and helping them see it from the other person's perspective or community's perspective.

[Stephen Dubner]

So in the case of a government function, who would be the two parties that you're translating for?

[Jennifer Palka]

When I started Code for America, we had people who came in primarily from the tech industry. 2011 was our first year, so it was very much like the startup world. And then you had people in city government and they have very different assumptions about what work looks like, how you serve the public. The tech industry folks started to understand why government works the way it does. And the government people getting, oh, these folks are bringing a different approach.

[Stephen Dubner]

So is government sludgier in a different way than other institutions or firms? Or is sludge pretty much the same everywhere?

[Jennifer Palka]

There's a whole bunch of reasons that it can get more sludgy and more complicated in government. We have Congress and the executive branch. We have federalism. So any sludge problem can implicate state, local, federal, tribal and a private sector. I completely agree with all the people who come up and tell me, but my big company I work for is just as bad as government. Well, it is frustrating and it is slow, but it is different because you don't have Congress as your boss. But I think actually what matters more is not are big corporations or government more Sludgy, but that government is a monopoly. And so it just matters more.

[Stephen Dubner]

Like you or I can't decide to give unemployment benefits. I mean, we could, but we don't.

[Jennifer Palka]

Yes. And when government systems fail, they're the only system. When a company can't get its product on the shelves, there's a different company there to fill in. Child welfare, unemployment insurance, Medicare, the tax system, it's the only one.

[Stephen Dubner]

I'd like you to talk for a minute about the very not good rollout of healthcare.gov. way back when, that was the website where you could buy insurance under the new Affordable Care Act.

[Jennifer Palka]

So I was there trying to stand up the USDS when healthcare.gov had its failures and my boss got pulled into helping get the site back up and running.

[Stephen Dubner]

So what happened? What were the problems that led to that failure? And what kind of lessons can you draw from the failure?

[Jennifer Palka]

The HHS Inspector general wrote this report that details so many things that were wrong that you're like, that's just everything. And I don't think that the IG was wrong in any of the things that they listed, but the thing they didn't list that I think needs to be said is that we have this concept in consumer tech called a product manager. And it is always confused in government because it sounds like project manager. There are thousands of project managers in every department, agency, whatever. And until recently in government, there were zero product managers. So what's the difference? Project management is the art of getting things done. And there's so much to do in government that we have amazing project managers and lots of them. But product management is the art of deciding what to do. Healthcare.gov just tried to do all the things. It didn't have. Somebody who was empowered to say, I don't think we can launch a system this complex that handles this many edge cases and have it work for everyone on day one in Silicon Valley, you would never do that. It doesn't have to be Silicon Valley anywhere in the country that's launching technology that needs to work for people, that needs to be usable, scalable and reliable. You just don't do that. You start with a small set of users who sort of help you work out the bugs, and then you add more, and then you add more. The people who did propose that at the time were told that it was illegal, that for equity concerns you have to serve everyone equally. Well, we served no one for a while. And I think we need to have that idea of what is it that we're actually deciding to do. And Then empower someone to make those choices instead of say, here are literally thousands of requirements and have them all work the first day that the site launches. I mean, it's in retrospect insane and I wish that the IG had that language. But instead they look at the different ways that the project management went wrong instead of questioning the whole assumption in the first place.

[Stephen Dubner]

In 2020, early in the COVID pandemic, Jennifer Palka was brought in by the state of California to help with a similar problem. A state run website that was overwhelmed by applications for unemployment benefits.

[Jennifer Palka]

You had 10 x 15 x spikes in the volume of applications for unemployment insurance. Every state developed a pretty big backlog, which is a real crisis because if you are four months into having no job and your unemployment check isn't there, you are running out of money to eat. It looks like just a problem of a computer system, but unemployment insurance dates back to the 1935 Social Security Act. What happens is that we add requirements and process and procedure and law and regulation every year to that program. It comes from the federal government, it comes from the state, it comes from the executive branch, the judicial branch and the legislative branch. It's all additive and it's never subtractive. One commissioner of labor in New Jersey, Commissioner Asaro Angelo, when he was called up in front of the legislature to explain why they had a backlog, he brought the 7,119 pages of regulation that he's supposed to comply with, put them on the table and said, it's a little hard.

[Stephen Dubner]

How do you address that without starting over?

[Jennifer Palka]

It's very hard because the incentives for legislators in particular is to add, we think we want elected leaders who are going to write bills. We think that's their job. I think their job is actually different. I think their job is to create the conditions under which government agencies can succeed. Changing incentives is very difficult and involves the public having a different view of what they want out of their electeds. But we now have large language models that can help us sort through those 7,119 pages. Five years ago, if you said to a legislative assistant, your success is going to be doing something with that pile here. They literally couldn't. It's too complex to actually understand and then to rationalize and simplify.

[Stephen Dubner]

So if you set an LLM to work on those 7,000 plus pages of just New Jersey Unemployment Compensation regulations, I'm guessing it could do perfectly well at giving you a three page version. But I'm also guessing it would point out what are inherent contradictions that are unresolvable.

[Jennifer Palka]

Yes, yes. In a best case scenario, magic wand thought experiment, it would actually give you not only what the regulation should look like, but it would write the legislation that repeals the stuff that needs to be repealed.

[Stephen Dubner]

And just let's keep with this thought experiment. What if you, Jen Palka, had the ability and the permission, what do you think would be the result if you said, let's actually try this, let's reduce the 10,000 pages of X regulations around whatever it is, voting registration or unemployment, or clearing someone's felony conviction after marijuana is decriminalized, et cetera, et cetera. And we can take those thousands of pages and turn it into a one pager. Then we just need to take a step back, get rid of the stuff that's not working and that we can't agree on and move forward in a streamlined way with the stuff that is working and or that we can agree on. Would that work?

[Jennifer Palka]

You need not just political will, but you need to counter the interests of the status quo. There will always be someone who says, wait, if you simplify it, this person might be out of a job, or this vendor might be out of a job. Or we think that one of the things you're proposing to take out is a safeguard that's important for this constituency or this consideration. And I'm not saying that those interests, particularly for safeguards, are wrong. We do need safeguards. The problem is that oftentimes we have so many safeguards that government just can't move forward.

[Stephen Dubner]

Give me some specifics of safeguards. Let's stick with the realm of unemployment insurance. I'm guessing that most of the safeguards are to prevent fraud of different sorts. Is that correct?

[Jennifer Palka]

There are safeguards meant to prevent fraud. When I started working on it in 2020, none of those safeguards prevented fraud at all. In fact, they were enabling fraud. There's a lot of safeguards around things like technology development where you have to do things in a very prescriptive way. You are supposed to have your plan set entirely in huge detail up front before you ever start coding anything. There are requirements for security. Security is a good thing. We need security. But the way we prescribe security is over detailed and keeps security professionals from using any judgment. It's a whole set of compliance regimes around these interlocking issues like technology, like labor, like how you communicate with the public that all come together to create gridlock.

[Stephen Dubner]

You just mentioned judgment. I once heard someone really smart, she used to run universities and she would talk about how she hires People generally, she said, I don't want to hire people who are good at following rules. I want to hire people who have good judgment. And that really stuck with me because I've come to see that a lot of the trouble in the world, or at least a lot of the sludge, is caused by people who are pretty sure that they're doing the right thing by following the rules. And it's very simple to follow rules. It's kind of paint by numbers. Do you agree or disagree with that?

[Jennifer Palka]

I think that in many government processes, they have gone so far towards just following rules and for reasons that we should talk about, right. There's real incentives for that that the public helps create. But we've now tried to design processes in which you cannot criticize the judgment of anybody in them because literally no judgment was used. And the outcomes of those systems are almost across the board poor.

[Stephen Dubner]

One thing that made me want to do this episode was trying to do something very simple with my bank that turned into a comedy of errors. I wanted to buy a cd. The rates were good. I had a little money. I bought the CD online in about five seconds. It was really easy because I'm logged into my bank. They know me, I know them. I bought the cd, da, da. And then when the CD was getting ready to expire, it was not so simple. I thought I would have the option to either re, enroll, roll it over, or just move the money back into checking or whatnot. And it turns out that, no, I couldn't do that. I had to get on the phone with my banker. He said it would take about 20 minutes. I said, what are you talking about? Why? My first instinct was, well, this is the way companies like to work. They make it easy to buy and hard to sell, easy to subscribe, hard to unsubscribe. It turns out that he needed a lot of identity verification, which struck me as absurd because I was already identified. But he attributed it to government compliance laws, know your customer laws, and things like that. I do wonder how much government sludge tips over into and infects private firms. And all the rest of us companies.

[Jennifer Palka]

Are going to complain about that, probably a little disproportionately to how much it really is government's fault. But it's certainly true that that happens, that sometimes government imposes regulations that it doesn't quite understand the implications of. And one thing I kind of want to insert in the dialogue is that it's really in how you design the implementation of those regulations that matters from.

[Stephen Dubner]

The government side or from the firm side?

[Jennifer Palka]

Well, both. Right. There's a thing in consumer technology of just testing with users and we don't do that. This is the thing I wish policymakers would do more of. And I've seen them do it recently. People are starting to pick this up where they say, okay, this is what we think the regulation needs to say. Now let's go show it to people and see what they heard first of all, because very often they'll be like, well, we didn't write that. And then what is it gonna look like when it's actually hitting the user, so to speak, when it gets out in the real world? And then they can go, oh, oh, oh, oh, I see. Because we said this, you have to do that. Oh, we can do that in a different. That's part of what I mean by closing this policy implementation loop is that if you can get out there and test it first, you will end up finding ways to make that same regulation less burdensome. The dialogue right now assumes this sort of one to one relationship, like this amount of regulation will be this amount of burden, when in fact designing things thoughtfully and testing them thoroughly in the real world can mean a lot less burden on both the companies and the end user for the same kind of benefit of guardrail.

[Stephen Dubner]

So I hate to be impatient and what you just described about policy implementation is plainly part of the solution, but I want more solution. We could talk about the formation of the problem forever, but it doesn't sound that surprising. It's a little bit like, you know, if we were geologists, we'd talk about this sedimentary accumulation that's happened over a billion of years. Like we get it, there were fires, earthquakes, da da, da. It all added up, but now it's a big rock and we need to move the rock. So how do you move the rock?

[Jennifer Palka]

Let me pull apart two parts of that. One is there hasn't felt like there's many solutions. This has been a sort of intractable problem. But I think we're in a particular moment where the models are so broken and people are so frustrated that we have an opportunity. Plus we have new tools at our disposal. Plus there's significant changes in government like the Supreme Court's decision in Loper Bright, which is going to force change. Now that change could be awful, but it is going to force a change, for instance, in how the executive and legislative branches work together. And nobody knows what that looks like. And so we have an opportunity to shape it towards a better model. And governments everywhere are going to have fiscal crises. Now there's just all of these things coming together that I think hopefully are going to kick us out of that malaise of just adding policy and procedure and being frustrated with bad outcomes.

[Stephen Dubner]

The Loper Bright decision that Palka just mentioned is a 2024 ruling that overturned what is known as the Chevron Doctrine, which required courts to defer to federal agencies on how statutes are interpret interpreted. Loper Bright will require courts to independently assess certain statutes and sometimes overrule the agencies. As Palka says, nobody knows exactly what this is going to look like. Critics say Loper Bright will give the courts too much leverage on issues like health care, the environment, consumer safety. But Palka sees at least the potential for good reform. She and Andrew Greenway recently wrote a position paper about this.

[Jennifer Palka]

The way we frame the problem is the how of government. Everyone's focused on the what. The what is the bill you pass that says we're going to do industrial policy or we're going to give people incentives for solar panels, or we're going to do financial aid for students in this certain way, the how is all of the plumbing of it that's gotten jammed up with sludge. So if you want government that can actually achieve its policy goals, you have to have four things. You have to be able to hire the right people and fire the wrong ones. You have to reduce the procedural bloat or accretion that we talked about. You have to invest in digital and data infrastructure, and you have to close the loop between policy and implementation. For most people, once you pass the law, that's the end. For me, it's the start. So today we have this very linear waterfall process and you don't have these feedback loops that you have in systems that work well. And so moving from that linear waterfall model to something in which we're constantly looping back to wait, is this working as intended? What do we need to adjust that fundamentally more than anything else is going to be the solution to this, in my view. But it is a profound difference from what we have today.

[Stephen Dubner]

Coming up after the break, Jennifer Palka says that what government really needs is more go energy and less stop energy. And we circle back to Richard Thaler to borrow some of his go energy. I'm Stephen Dubner. This is Freakonomics Radio. We'll be right back.

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[Stephen Dubner]

If you've been having your McDonald's sausage McMuffin with an iced coffee from somewhere else, now is a great time to reconsider.

[McDonald's]

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[Stephen Dubner]

Jennifer Palka is a Democrat who has spent much of her career working on digital transformation and sludge reduction in government. So what does she think about the current Republican administration's approach under Elon Musk and Doge? We spoke with Palka several weeks ago as Doge was just getting started. And remember, Doge took over the federal agency that Palka co founded, the US Digital Service or usds.

[Jennifer Palka]

If they come in and put a whole bunch more muscle behind the kind of digital transformation that USDSers have been doing and empower them to this cleaning out of the cruft and working with agencies to deliver better and faster, I have to support that.

[Stephen Dubner]

And what if on the to do list is eliminate 30% of these government positions? What's your feeling about that as a first order directive?

[Jennifer Palka]

That's not how I would do it. But I'm not in charge. The folks I voted for didn't try to do it. So we're gonna get cuts that are deeper and probably more arbitrary than I would have liked. I do think we could in some way places run the government on fewer people, but I also am a big advocate for more internal competencies of certain sorts. We need people in house who actually understand how government works. We understand our own systems. I mean, we've been outsourcing these things to vendors to the extent that we don't actually even know how our own systems work sometimes. And that puts us in a really bad position. We have a really incorrect balance between what I call stop energy and go energy. There are lots and lots of people in government whose Jobs are to make sure something doesn't happen. And there are very few people whose job is what I call delivery.

[Stephen Dubner]

Give me an example.

[Jennifer Palka]

Direct file at the irs. Fantastic new product for low income people to be able to file, not having to use TurboTax or something like that. You'll have this really small group of people doing delivery and then a whole lot of people saying, here are all the things that have to be done for the contract, security for all these things. One government delivery person said to me once, we were six people trying to deliver the product, we have easily 60 people telling us what we couldn't do. Now those 60 people are well intentioned and often very thorough, very bright, very dedicated public servants. I mean them no disrespect. It's not their fault that there's 60 of them and six people trying to deliver the product. That's a problem of leadership to say that ratio is wrong, let's fix it. I'm more interested in switching those ratios of go energy to stop energy than I am interested in mass layoffs. But I do think we do need fewer people who are slowing things down and more people whose job it is to get the job done.

[Stephen Dubner]

For some final thoughts on sludge elimination, I wanted to go back to Richard Thaler. He is the University of Chicago economist who co wrote the book Nudge and who helped popularize the word sludge as we've been using it over these past couple episodes. I asked Thaler for his thoughts on whether Elon, Musk and Doge are fighting sludge or something else.

[Richard Thaler]

I haven't seen anything that would fall into the category of sludge reduction. I mean, how is getting rid of USAID reducing sludge? You can say, oh, we don't want to give money to poor people in foreign countries. I can understand somebody having that point of view, but it has nothing to do with efficiency.

[Stephen Dubner]

Right. Although when he sent some people into treasury to theoretically streamline the payments system, I mean, streamlining the payment system at a Treasury would theoretically be an exercise in diluting sludge, wouldn't it?

[Richard Thaler]

Absolutely. Look, when Elon bought Twitter, he fired 80% of their software engineers. And as far as I can tell, the site technically works better.

[Stephen Dubner]

You're saying 80% of the civil service should be fired? That's your statement here, Professor Thaler, I.

[Richard Thaler]

Want to go on record as saying that I did not say that. But it's certainly the case that many parts of the government could be streamlined. Basically every administration has talked waste, fraud and abuse. I haven't heard of an administration that says we want more waste, fraud and abuse. No one's ever said that.

[Stephen Dubner]

What's your best advice for people looking to cut through sludge in their daily lives? Is it a cognitive approach, a strategic approach? Do you need to hire a sludge meister? Are you, for instance, available?

[Richard Thaler]

I'm not available. You know, I think all of the above. You do what you can to simplify and hire experts. If you have a complicated tax return, pay somebody to do it. But I think most of us have very few defense mechanisms. If I could waive my magic wand, I would say every government employee, including legislators and executives, should take a one day course on sludge and then take a pledge to leave their job with less sludge than when they found it.

[Stephen Dubner]

Would you be willing to teach that one day course?

[Richard Thaler]

Yeah, once.

[Stephen Dubner]

Huh. Okay.

[Richard Thaler]

But I'd be willing to teach 100 people who would teach a thousand people.

[Stephen Dubner]

So, Richard, I was hanging out not so long ago with you and Ben Handel and the conversation came around to choosing a healthcare plan.

[Richard Thaler]

Yeah.

[Stephen Dubner]

Which was not where I thought the conversation was going. Do you want to take the story from here? Because if I say it, it may not sound so believable.

[Richard Thaler]

So I am about to become a professor emeritus at the University of Chicago. Although I am well over 70, I've been plugging away since I've been an employee and will be until June 30th. I've been on the University of Chicago health insurance. I will no longer be eligible for that as a retired person. And so exactly what I was talking to Ben about was, all right, June 30th, I have to choose a Medicare option. Maybe you would have thought that two economists, one of whom is a health economist, he would say, just take option J. That's the winner. It wasn't as easy as that. In part, your choices are going to depend on where you're getting your healthcare, what kind of prescription drugs you're on, and what kinds of ills you have. It's a hard problem.

[Stephen Dubner]

What does it say about the state of, I don't know, commerce generally, that an economist, you, who happens to have a Nobel Prize, needs help picking his healthcare plan from another economist who happens to be a health care specialist?

[Richard Thaler]

It tells us that the system is way too complicated. That's what it tells us.

[Stephen Dubner]

Complicated systems, broken feedback loops, implementation problems, bright red ribbons everywhere you look. It may seem by now that the war against sludge is unwinnable. But Richard Thaler has one piece of good news for us. We, meaning humankind, we have been fighting and winning sludge battles for a long time in domains as foundational as money and time.

[Richard Thaler]

Imagine you go to one of these old markets that still exist in various places around the world where you have to negotiate for those luscious looking fruits. So that's complicated enough that the price is not clear. But imagine if the measuring, if it wasn't 12 ounces or 50 grams, but it was about this much and it cost about that much, that would just make life hard. I remember looking at the history of this and certainly the Romans were devising uniform ways of measuring various stuff. And then, you know, currency solved a big problem because before currency, we had to do barter. So societies have developed all kinds of sludge reduction methods. You know, we all are on the same clock and 99% of the world is on the same hour. You could imagine the perfect time zone for each place would vary every hundred miles by a couple minutes. But that would be horrific, horrible sludge. So we make some sacrifices, we do all kinds of stuff to make it easier to communicate and to make transactions.

[Stephen Dubner]

There is a moral to the sludge story that Thaler tells. We reduced sludge before and we can do it again. Will we? I'd love to hear what you think. Our email is radioeeconomics.com coming up, next time on the show, we ask a simple but extremely tricky question. In a time of so much entertainment, so much digital and even virtual entertainment, how is live theater still alive or not a real business? We have hits, but in between those hits, we have four flops in a row.

[Jennifer Palka]

You've got to really love something if you're gonna do it eight times a week.

[Stephen Dubner]

One wrong decision and you're dead and you don't know it. Are you trying to get me killed? That's next time on the show. Until then, take care of yourself and if you can, someone else too. Freakonomics Radio is produced by Stitches and Renbud Radio. You can find our entire archive on any podcast app. [e-mail] where we publish transcripts and show notes. This episode was produced by Augusta Chapman. The Freakonomics Radio network staff also includes Alina Coleman, Dalvin Abuaji, Eleanor Osborne, Ellen Frankman, Elsa Hernandez, Gabriel Roth, Greg Rippon, Jasmine Klinger, Jeremy Johnston, John Schnarz, Morgan Levy, Neil Carruth, Sarah Lilly, Teo Jacob and Zach Lipinski. Our theme song is Mr. Fortune by the Hitchhikers and our composer is Luis Guerra. As always, thanks for listening.

[Richard Thaler]

This studio was described as notoriously difficult to find.

[Stephen Dubner]

Did it live up to its reputation.

[Richard Thaler]

That was an understatement.

[Jennifer Palka]

The Freakonomics Radio Network the Hidden side of everything stitcher.

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[Stephen Dubner]

It out.

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[Stephen Dubner]

If you've been having your McDonald's sausage McMuffin with an iced coffee from somewhere else, now is a great time to reconsider.

[McDonald's]

In the Pacific Northwest, it's never too cold for an iced coffee in the morning. Grab yourself a medium caramel, French vanilla or classic iced coffee for just 2 to 29. Beverage may cause craving for McMuffin or hash browns. Prices and participation may vary. Cannot be combined with any other offer or combo meal.