Incentives

Whenever someone rolls out a new program, they always talk about the intentions, the goals, of the program.  This new program will make our streets safer.  That new program will reduce the cost of healthcare.  This other program will improve education.  Another will make college more affordable.  Reduce poverty.  Improve the economy.  And so on and so on and so on.

However, as the late economist Milton Friedman was wont to say, “One of the great mistakes is to judge policies and programs by their intentions rather than their results.”

Now, all too often, by the time we know what the results are, it’s far too late.  Thomas Sowell, however, gave us a key to helping predict what the actual results (as opposed to the intended results) a policy is likely to have.  That is, to look for the incentives that it creates.  What behaviors lead decision makers to benefit under a particular program vs. what behaviors lead to disadvantage.

I discussed a particular example of that before:  public education.  For a very long time now, the surest way for those involved in education to get more power, more funding, and more authority, was to produce excuses for failing to teach basic skills to our young people.  They were rewarded not for producing well educated, knowledgeable young adults.  They were rewarded for producing excuses for failure:  “We need more computers.” “We need bigger buildings with smaller classrooms.” We need to hire more teachers (and a lot more administrators).” “We need education to be a cabinet level post.” And on and on.  And we get what we pay for.  We get what we reward.  Given the incentives, the wonder, indeed, is that we produce children as well educated as we do.

It’s not rocket science.

In the private sector, this is something of a self-correcting situation.  In the ultimate extreme the incentive is to provide goods or services that people will part with some of their own resources (usually represented by money) in exchange.  If enough people are willing to part with enough of their own resources  for your product instead of for any of the other products they could purchase with those resources, your business prospers.  If they do not, you either have to find some way to make your product more appealing–either improving your product, offering it at lower cost, or some combination of the two–to more people or you’ll have to do something else.  If you attempt to press on without making those changes, bankruptcy awaits, forcing you to do something else.

Government, however, lacks such an automatic self-correction mechanism.  If a government program fails to accomplish its stated intentions, consider what usually happens.  How often has some government program failed and those in authority said “this isn’t working”, cancelled the program and tried something else?  You might find a few cases if you look hard enough but mostly, the response is “Oh, they just didn’t have enough money/resources/authority/power to do the job.” And, once again, we reward not success but excuses for failure.

Indeed, there is one perverse incentive that’s endemic to government programs of all types, and that is that by their very nature they reward those who seek power over others because that’s what government is–the license to forcibly exert power over others.  All government programs, by definition, involve force.  There’s no need to please the “consumer”.  Even elected officials don’t really need to please the consumer, to produce results in line with their stated intentions.  Entirely too many people are willing to vote based on the stated intentions and except endless excuses (there’s always someone at whom the politician can point the finger of blame).  Often times, the politician who implements a policy is long gone by the time the results roll around and it’s the new crop, who might even be trying to fix the problem, who then shoulder the blame. (City council imposes higher taxes on local industry in order to finance some “civic improvements.” A lot of businesses have rather immobile assets and can’t just pull up and leave but over time in the normal ebb and flow of business, fewer new businesses open to replace those that close.  Eventually, the drop in business starts pinching.  But by that time it’s a whole new city council who had nothing to do with the tax hike who are called on to “do something” about the struggling city.)

This kind of political “kick the can” is entirely rational for those engaging in it.  The immediate behavior is rewarded.  The longer term consequences are left for someone else.  It’s an inherent incentive of the political system and may well be insolvable.  There may well be no way to eliminate this kind of drain in any government structure.  Putting in new government programs to attempt to deal with it simply moves the perverse incentives to different locations.

Thus, we may have to accept that government, any government, is going to have perverse incentives that produce results far short of what we might wish.  Since it cannot be removed, the question is how to keep it as small as possible.  And, when stated that way, the answer also becomes clear.

The way to keep the perverse incentives endemic to government as small and innocuous as possible, is to keep government itself as small and endemic as possible.  National defense.  Minimal police and courts.  And, really, not that much else.  Only there do the benefits possibly counterbalance the very large millstone around ones neck that government has always proven, must always prove, to be.

2 thoughts on “Incentives”

  1. “In the private sector, this is something of a self-correcting situation.” — I was just mentioning to my wife how important the metric is, if we want to improve. Profit is a clear metric, and hugely important to the success of sustainable firms. Too many programs have too many other goals, often which are somewhat or even totally contradictory.

    Great conclusion: “any government, is going to have perverse incentives that produce results far short of what we might wish.”

    Nevertheless, as an alternative to the seductive allure of UBI (free cash for all), I’d support a gov’t Job Guarantee instead. The terrible commies did achieve a society where, essentially, everybody had a job. Lots of other problems, but this was a genuine good thing — in Slovakia it was illegal to be without a job. And everybody really really wanted to avoid prison. That level of force is too much, but having an offer of a job in National Service should not be.

    Later post on guns and knives was cool, too.

    typo, “accept” — vote based on the stated intentions and except endless excuses.

    Like

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