Wednesday, May 10, 2017

Liberals and Incentives

Liberals and conservatives can each fail to understand how people respond to incentives, but they do it in different ways. Liberals sometimes judge policies based on their intentions – on whether a proposed law means well. We’ve already seen that with communism. The concept of “from each according to their ability, to each according to their need” is a beautiful concept. That’s how my family works. I make more money than my wife does, but that doesn’t mean that I get to spend more money than she does. We share our money in common and use on whatever we think is the greatest need. This works well for our family but it didn’t work for the Chinese farmers. That raises another puzzle: how come Marx’s slogan works so well for families but so badly for villages? We’ll cover that in a later post, but you may want to start thinking about it now.

Progressives face the same challenge as communists. Many government programs are designed to help the poor and afflicted, so they are clearly well-meaning. Who is opposed to helping the poor and afflicted? The problem is that they also create some bad incentives. Take unemployment insurance, which is a government program that gives money to workers who have lost their jobs. It is clearly based on good intentions. Who doesn’t want to help people who are down on their luck? But let’s consider the incentives. It taxes (punishes) people who are working in order to give money to (reward) people who don’t have a job. Since people respond to incentives this means that unemployment insurance actually creates more unemployment. 

Does this mean we should get rid of unemployment insurance, much like how the Chinese farmers got rid of communism? Probably not, and we'll see why in the next post on conservatives and incentives.

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