An Introduction to Incentivism- Part 3

Incentivism is a type of economic system whose philosophy emphasizes the use of financial reward rather than punishment to alter an individual’s personal self-interest to make it consistent with that of society.

An Introduction to Incentivism – Part 3: Government Intervention

An ongoing bi-monthly series                 February 5, 2018

If you wish to either catch up or review the “Education and Information without Fabrication” contained in our first 2 issues, the links are:

An Introduction to Incentivism Part 1

An Introduction to Incentivism Part 2

Or, for a quick recap of the last issue….

“More than fifty years later, this War’s (The War on Poverty’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?”


Government Intervention

“We the people of the United States, in order to form a more Perfect Union, establish justice, insure domestic tranquility, provide for the common defense, Promote the General Welfare, and secure the Blessings of Liberty to ourselves and our posterity, do ordain and establish this Constitution for the United States of America.”

With those words, the Preamble to the Constitution set forth the reason for the existence of this now infant Government and what was required of it.  The Constitution became the Law of the Land when New Hampshire became the 9th state to ratify, making it effective on June 21st, 1788.

Governments are formed because they are far preferable to anarchy and chaos.   Providing for a common defense or promoting the general welfare REQUIRES some sort of intervention or management by Government.   Could you imagine any scenario in which defense was NOT a collective effort?   The execution of the military plan for World War II, for example, demonstrated the finest in what the Government COULD do.

It was also Incentivism at work.  How so?  The self-interest of society and that of individuals was already quite consistent and aligned.  Society wanted to survive as a FREE one, as did individuals.  Survival, if in question, will absolutely be the dominant factor determining one’s own self-interest.

The interpretation of Government’s requirement to intervene, however is very, very subjective.  Typically, politicians call for intervention when an outcome is contrary to THEIR own self-interest, which is ….  Re- election.  If they lose?  Not fair!  By definition!

It’s not just losing an election that sets off the tears, but anything that MIGHT cost them votes is just not fair to their constituency.

Furthermore, what’s fair today is not necessarily what will be fair tomorrow.  Post-election, the two-party system typically anoints one as the Majority that has some control in setting the agenda, while the other becomes their primary opposition or Minority.   Typically, the Minority Party almost always opposes everything the Majority Party intends to enact, whether or not their opposition is contrary to where they stood when they were in power.

On certain issues, there does exist broad agreement.  One example is the reliance on free market dynamics to most efficiently allocate scarce resources and match buyers and sellers.  But, that’s where the DIS-agreement begins.   The recent hike in Federal minimum wage (discussed in part 2) is a perfect example.  Since the labor market was not providing the outcome that some believed was “Fair”, the solution was to enact a fix to create a more desirable outcome.

Minimum wage laws are nothing more than “price controls” applied to the free market for low skilled or inexperienced labor.   So, if you and I enter into an agreement which we both believe to be mutually beneficial and without any transfer of costs to innocent third parties, the violating employer is subject to civil penalties and fines which can reach $100,000 if the violation is deemed intentional.  In the UK, minimum wage offenders can be prosecuted criminally.   So, how can it possibly benefit society or any individual to place such heavy restrictions on agreements between mutually accepting parties?  It can only benefit those that actually get a raise, and aren’t replaced by a robot, or about a couple percent of the entire labor market.   It only needs to benefit the re-election campaigns of its sponsors to be enacted.  What’s fair to you isn’t necessarily fair to them.

Despite having the ability to create an outcome more politically palatable, Government intervention schemes rarely achieve the desired result.    Artificially benefitting some requires harming others through the transfer of wealth.  You can’t give someone something for nothing unless you give someone else nothing for something.

Enforcement requires a punishment mechanism.   Once deterrence is provided for by some form of penalty, government intervention becomes coercive and punitive.

The rationale for superimposing a subjective value system on an otherwise Free Market is based on the belief that they are flawed by a characteristic called “Externalities” (a term for the financial damage to innocent third parties or society, such as pollution).  Typically, externalities occur because of the inherent conflict of interest between doing what’s good for you rather than the right thing for society.

Physicians take what’s known as the Hippocratic oath of “First do no harm (to the patient)”.  Politicians, if they took a similar oath: “First, do no harm (to your re-election chances)”.    Whether the intervention harms society or not, is completely irrelevant.

 

Regulations

Employing regulations as a mechanism for solving the flaws of free market dynamics imposes the possibility of a significant cost on what may be innocent third parties.  The cost of complying with them is often substantial and creates a powerful incentive to evade them.   Recently, auto maker Volkswagen was caught red handed fabricating its compliance with average fleet mileage and emissions regulations: https://www.freep.com/story/money/cars/mark-phelan/2017/10/06/gas-mileage-fuel-economy-window-stickers/730153001/

In fact, regulations may be so costly to comply with, that an entire industry, could be rendered non-competitive.   Coal, for example, has been beset by miner safety and environmental regulations which rendered it uneconomic.

That does NOT suggest that all regulations are either unnecessary or detrimental.  Not one bit.  In fact, any regulations should be scrutinized from a cost/benefit standpoint.  Environmental regulations are a perfect example:  On the one hand, they do impose costs on innocent third parties such by restricting economic activity and hindering employment.   But on the other hand, the benefit of cleaner air and water is material for everyone in society.

All that one needs to do to prove this, is to look at China.  Many have argued that a variety of regulations have led to the outsourcing of jobs to China, which is less regulated and the labor cheaper.   While it is most certainly true that there has been a detrimental effect on jobs and the economy, this policy, perhaps UN-intentionally, has led to the exportation of Pollution as well.  Whether the costs are outweighed by the benefits is a personal calculation.  Incentivism accepts the notion that different people may have entirely different preferences and takes no position as to whether costs or benefits are greater.   

Price Controls

Another mechanism for Government Intervention is the employment of either setting a minimum or maximum price that is “permissible”.  Examples include subsidies or price controls.   Sometimes, these controls are intended to “help” a certain industry such as agriculture.   Price subsidies for cheese, for example, have been an utter disaster.  The question to ask is whose re-election odds were aided by this policy?  https://www.vox.com/2016/10/13/13268980/cheese-glut-united-states.

The intention was to keep cheese prices artificially high to help the dairy farmers.   In order to identify the existence of any Unintended Consequences, all one needs to do is ask the following question:  What would YOU do, if you could sell all the cheese you produced at a higher price than the market would otherwise bear, and at a higher profit?  You’d produce as much as you could!  So much so, that in order to maintain an artificially high price, the government would be obligated to be your buyer.  And, so it goes, and so it goes.

Or, it could be deemed that gasoline prices are unacceptably high as was the case in the 1970’s.  The intention was to keep prices low from the predatory oil companies who might try to exploit consumers.    So, ask yourself the following question:  How would you react if the price of gasoline was kept artificially low?  You’d buy more of it than you actually needed and you might even hoard it while it’s “on sale”.  But, what if you ran an oil company that produces gasoline?   You’d do the opposite.  Oil, which is used to create gasoline, might be withheld from the market and stored in floating tankers if necessary.

One group wants to buy more and the other wants to sell as little as possible.   The consequence of this intervention is very easy to predict:  Shortages, rationing and long lines at gas stations to filler up.

Apparently, “time” spent waiting in line was not part of the “cost” or was deemed to have absolutely no detriment to value.  More likely:  Politicians decided that “no action” was going to hurt their re-election odds, so they imposed a “feel good” type of law that ignored the harm that it would impose.   After all, Politicians have a staff to do the waiting-in-line for them or they simply use a limo service at taxpayer expense.

The intention of rent controls is to keep housing affordable.  Now ask yourself how you’d react if rents were kept artificially low and how’d you react if you were a landlord.  Answer that and you could identify the Unintended Consequences and generate a pretty good forecast of the outcomes of the policy in advance.   Unintended consequences are not all that difficult to predict once you understand how all those affected will react.  Always ask which Politician, voting block or special interest group benefits from the intervention or policy itself.

Federal Government Ownership 

Speaking of long lines, and the enormous cost of time spent waiting, have you been to the Post Office lately?    Probably not, unless you had absolutely no other option.   Fans of the United States Postal Service (USPS) point out that delivery rates are, in many cases, LOWER than its direct competitors such as UPS or Federal Express (FDX) to justify its existence.

That logic is completely flawed. The USPS can lose virtually unlimited amounts of money without some higher up losing their job or without going bankrupt.   Its’  “costs” or operating losses are spread out over millions of taxpayers who only each bear a miniscule portion.   The beneficiaries, on the other hand, comprise a much smaller and concentrated group, who are more greatly impacted individually.   The American Postal Workers Union (APWU) and its membership, receive the benefits of overcompensation that transfer wealth from taxpayers to their members.

The USPS publicity arm points out how both UPS and FDX both subcontract a portion of their business to the USPS.  Wouldn’t you shift some business elsewhere if someone would take the money losing part of YOUR business off your hands?  In so doing, the taxpayer is SUBSIDIZING the profitability of UPS and FDX.

Does the Post Office provide a necessary function?  According to the USPS “fact” sheet, it certainly does.   https://about.usps.com/who-we-are/postal-facts/size-scope.htm.    The claim that the Post Office never uses taxpayers to fund its operations is outright Fabrication.   Since it perpetually loses money, the only conceivable reason they are not in debt is that the taxpayer picks up the tab.   In 2017 alone, the USPS reported a loss of $2.7 Billion.   https://about.usps.com/news/national-releases/2017/pr17_069.htm

Perhaps, the real value in having a Federal Government owned entity is the showcasing of just how inefficient public ownership can be.  For Incentivism, the USPS is practically a poster child of how important a properly crafted reward system is to maintain an efficient and profitable enterprise.

Public ownership is absolutely riddled with “Externalities” (imposing costs on innocent third parties or society) by requiring the taxpayer subsidization of operating losses.   Does having a poorly run, money losing enterprise in any way “promote the welfare” or benefit the citizenry?

The APWU appears to have the greatest vested interest in keeping its membership insulated from harm by a competitive economy.  They, too have a propagandized “fact” sheet.  http://www.apwu.org/pay-benefits.   The pay scale is nearly double the going rate in the private market, which, considering the annual red ink, seems hard to understand.

Or does it?    https://www.opensecrets.org/orgs/summary.php?id=D000000143.  Campaign “contributions” explain the unexplainable.  The APWU obviously understands that ensuring its membership’s existence will require the “purchase” of the goodwill of the career Politician class which is almost always for sale at some price.   Re-election campaigns require money, and thus a “More Perfect Union” is formed, just not the one sought by “We the People”.

In the next issue, we will apply Incentivism to an existing problem:  Student Loan Debt.  No better way to understand than to actually “solve” a problem that is HUGE!  Incentivism is “The Revolution in Solutions”

 

 

 

Marko Budgyk

Marina del Rey, California

February 5th, 2017

www.Markonomics101.com

https://www.facebook.com/Markonomics101/

Markonomics101@gmail.com  to join the mailing list or any questions.


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