An Introduction to Incentivism- Part 2

Incentivism is a type of economic system whose philosophy employs the use of financial reward as a way to substantially augment and/or replace punishment to more closely align an individual’s self-interest with that of society.   

 

(You can access the debut issue “An Introduction to Incentivism” here)

From Issue 1….

“What if Politicians’ reward system was adjusted in a way that incentivized them to enact policies that were in society’s interest?   What if they were rewarded for policies that succeeded and penalized for enacted policies that turned out to be detrimental?

The policy outcomes that are overwhelmingly supported are never achieved in practice despite the lip service and campaign promises.  The reason that Politicians fail to meet these objectives is that there is neither much of a financial benefit for success nor any penalty for failure.

Thus, applying the appropriate incentives to elected Politicians could and would eliminate their own conflict between re-election efforts and promoting legislation which benefits the entire country.  The dysfunction of government policy would be merely a bad memory, rather than our daily nightmare from which we NEVER wake up”

 

Political Calculations

Politicians are primarily motivated by their own re-election efforts.  Their power, influence and prestige are a function of their time in office and the various committees to which they will be assigned or even chair. 

As they add multiple terms to list their accomplishments, they can begin to monetize their power and influence through a variety of activities such personal appearances or writing books.  

Salaries of members of Congress are extraordinarily modest.   Freshmen earn as “little” as $174,000 per year while the President of the United States (POTUS), the most powerful person on the planet, earns a scant $400,000.  Salaries for publicly elected officials are much lower than most comparable occupation in the private sector.  Is it possible that we simply get what we pay for?

A position comparable to POTUS would be the CEO of an extremely large multinational enterprise such as Exxon, General Electric or IBM.  Those positions have highly targeted incentive packages to align the CEO with the objectives of the stockholders, which is higher profits and therefore, higher stock prices and profits.    With stock options, bonuses and usually a 7 or 8 figure salary. the total compensation of a successfully performing company’s CEO, may be in excess of $100 Million.

Before being able to monetize their influence, a Congressman must be re-elected to at least several terms (Terms are 2 years for the House) while a Senator, whose terms are longer (6 years for the Senate), needs to serve at least 2 terms.  So, despite bashing giant multinational corporations and evil rich, Politicians MUST cozy up to those very same large corporations or people in order to fund their campaigns unless they’re rich themselves.  

The Law of Unintended Consequences

Actions have consequences.  If your work performance is poor, you’ll get fired.  If you drink and drive, you’ll get a big fine and possibly jail.

Politicians, however, enact legislation that may have many consequences. Some are intended. Some are not.

The recent hike in Federal Minimum Wage, for example, was intended to provide for a “Living Wage” of $15/hour, presumably to increase the income of low-skilled, minimum wage earners, thereby, reducing the need for government assistance.  How this exact rate was determined is baffling.  Why not $20 or $100 for that matter?

Prior hikes of minimum wage, whether here or abroad, have demonstrated the same outcome, time after time.  Price of labor goes up, demand for labor goes down.

 

The UNintended consequences of the hike, read like a “Who’s Who” of how to achieve the opposite of one’s intentions.  For one, there is a broad consensus that this law has already cost at LEAST a million jobs for the very people it was intended to help. https://www.washingtonpost.com/news/business/wp/2018/01/11/walmart-to-raise-starting-hourly-wage-to-11-offer-paid-parental-leave/?utm_term=.e0f80db98eb7

If a business is “low skilled” labor intensive, any hike in minimum wage will rapidly usher in technological labor-saving innovation or be felt at the bottom line.   The Food industry, which employs the bulk of minimum wage earners, has poured its resources into rapidly decreasing the amount of labor hours required with “Do it yourself” kiosks and IPADs at the tables for their customers from which they can both order and pay.

https://www.zerohedge.com/news/2017-06-23/mcdonalds-replacing-2500-human-cashiers-digital-kiosks-here-its-math  

http://www.businessinsider.com/minimum-wage-leads-to-job-losses-2017-3  

https://www.zerohedge.com/news/2014-01-30/minimum-wage-mendacity  

The estimates of total job losses vary from about 1 million to as high as 7 million!

Presumably an employer would retain any employee whose work efforts “produced” more than $15 per hour to the profitability of the Company.  That means that the workers getting the axe would be the LOWEST skilled workers they employ.   If they weren’t worth $15 to their current employer, to whom are they worth paying that rate?  Probably no one.   The law allegedly enacted to help the poorest of the working poor renders them not only unemployed, but UNEMPLOYABLE.   

Incentivism applied to the labor market offers a very powerful approach to rectify this issue.  Applications of Incentivism will be discussed in future issues.  For now, let’s just say that Politicians’ incentive to remain in office supersedes their ethics.  Pretending not to know that paying more for a service (labor) comes at the expense of its use, amounts to nothing more than pure fabrication, for the purpose of “buying votes”.

Even more littered with unintended consequences has been the so-called “War on Poverty”, now into its SIXTH decade.  According to some estimates this “War” has cost upwards of $20 Trillion since it was enacted in the 60’s.  That figure is not a typo.  It exceeds the annual US Gross National Product and is equal to our entire National Debt.

More than fifty years later, this War’s intended consequences have been “Absent Without Leave”.   The rate of poverty had been declining well before the legislation making up The War on Poverty was enacted.   Yet, despite a continuing and parabolic escalation in expenditures, the poverty rate has remained stable.

The Unintended Consequences, however, are everywhere to be seen; the most obvious being, the resulting dis-incentive on work effort.  Another is the financial burden the nation has been put under to finance the War on Poverty.  A third is the creation of the “entitlement nation”.  The massive spending increases are now believed to be the unalienable RIGHTS of the recipients, as opposed to the “temporary assistance” its proponents envisioned.  The creation of the “Welfare Class”, which divides “haves” from “have nots”, is the fourth.

While the notion that society should assist its citizens when times are tough is a compassionate one, the perversity with which it’s enacted is not.    

Isn’t it ironic that Congresses are often labeled as “Do Nothing”, when society would be so much better off if they did exactly that: NOTHING?

 

Marko Budgyk

Marina del Rey, California

January 24, 2018

www.Markonomics101.com

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Alectronics Research Center International is a tax-exempt 501 (c) (3) non-profit public benefit corporation.  We’re focused on assisting the less fortunate with Social Impact Development Projects that span student, veterans and the environment.  As an important extension of our reach to the community, we will be offering a complete financial literacy program.  Marko will be authoring a revolutionary concept in socio-political economics beginning 2018.  More information about us is through our website  www.1arc.org.  Because we’re lean staff of volunteers, any sized donation to: http://1arc.org/donate/   is greatly appreciated. Please feel to contact me for any additional information via email:  al@1arc.org.   

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About the Author

Marko Budgyk is a former hedge fund manager and entrepreneur who now writes about politics, economic events, finance and other miscellaneous matters.  He has an MBA in finance from the University of Chicago and has a BA in economics from Pomona College. He has been a guest expert on financial channels and quoted extensively in major business papers and magazines. He has returned to his first love which is writing.   He can be reached at Markonomics101@gmail.com.  Markonomics101 has a Facebook page https://www.facebook.com/Markonomics101/.

 

 

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