Monday, May 15, 2017

Incentives: Wrapping it Up

Both economic progressives and conservatives fail to follow the first lesson of economics. Many progressive are like Karl Marx in that they judge a government program based on its intended outcome without appreciating the fact that it creates incentives that reward laziness. But conservatives fail to properly apply the first lesson too. They just look at the effect of government programs on laziness, but it’s not enough to just look at one effect, you have to look at all of them. And it’s not enough to list the effects. You have to get your hands dirty by gathering evidence so that you can find out the strength of the effects.  

Let’s keep things simple by focusing on job mismatch and laziness. Perhaps we’d see a huge increase in laziness and only a small decrease in job mismatch. In that case unemployment insurance would be a bad program that rewards laziness. But maybe we’d find the opposite – a big decrease in job mismatch and only a small increase in laziness. In that case, unemployment insurance would be a good program. So conservatives who point to government programs that reward laziness without showing the strength of all the effects are also wrong.

Let’s revisit the research by Summers and Clark. They found that unemployment only increases by about half a percent, such as from 5% to 5.5%. So it seems pretty clear that both the laziness effect and the “job mismatch” effect are pretty small. Even in the worst possible scenario – that all of the increase in unemployment is because of people abusing the system – you are still left with ten people getting a lot of help for every one person who is shirking. That seems like an excellent tradeoff to make. Unemployment insurance is a program that helps people who are down on their luck and doesn’t do much harm.

Human society is extremely complex and even small changes will produce a multitude of large and small effects. You can’t sit down in an armchair and carefully reason your way to a prediction about the consequences of a new law or government regulation. You have to spend time thinking about all the possible effects, both good and bad, and then spend more time getting your hands dirty by gathering evidence about the strengths of all these effects – or by going to Google Scholar and reading the papers of economists who have. Only then can you form a rational conclusion about whether or not unemployment insurance, or welfare, or Social Security is a good or bad program. Liberals and conservatives each have different ways of ignoring the first lesson of economics. It’s not clear which is worse.

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