Incentive effects

Despite having a pretty reasonable record on economic management, it looks as if members of Australia’s current Labor government may have an inadequate grasp of economic theory – specifically, the role of incentive effects.

Not that they’d be alone in that; it’s a widespread disorder in public policy. Throughout the long years of the drought we were plagued by politicians and pundits who failed to understand the simple point that if water was too cheap, people were going to use too much of it.

Ditto for petrol, for carbon pollution, and for any number of other issues. And tonight we saw the same failure in the ALP. If you increase the rewards for political bastardry, then as sure as night follows day, you will encourage the supply of it.

But perhaps I do them an injustice. Perhaps this was one of those occasions where the incentive effects just had to be borne, for want of an alternative.

That does happen. Those on the right, for example, are often attacked for pointing out the simple truth that if you increase unemployment benefits, you will get more unemployment. Their opponents, instead of trying to deny it, would be better to acknowledge the existence of the incentive effect but argue (correctly, in my view) that that’s a price we should be willing to pay as part of being a civilised society.

Perhaps caucus members felt that increasing the future incidence of bastardry was a price worth paying in the effort to put the nightmare behind them. If so, I’m not convinced they were right.


11 thoughts on “Incentive effects

  1. So Alister, do you think people generally don’t respond to incentives? Or is it just that one case where for some reason they don’t? Sorry I’m on holidays so I don’t have time to compile the statistical evidence to show that water runs downhill, but if you like I’ll do it when I get back.

    What I didn’t mention (because it wasn’t the main point of the post) is that of course much of the actual argument is about the size of the effect. A lot of people on the right have the idea that with things like unemployment the incentive effects are very large, whereas it seems to me they’re probably quite small. In any case my view is that the supporters of humane treatment for welfare recipients do themselves a disservice if they deny what seems so obvious.

    But the post was supposed to be about Kevin Rudd.


  2. Unemployment benefits are not nearly enough for those genuinely seeking to work, but, nonetheless, serious bludgers manage to scrape by on it. A great conundrum to help the wealthy, whilst not incentivising the lazy to not work.


  3. Charles, don’t flame your commenters. Alister has a reasonable question about whether increasing welfare makes it more attractive. You can’t just make an argument and then refuse to back it up with facts. You certainly can’t then insult one of your readers for asking you to back up your claim. We are, after all, seekers of truth.

    In my experience, being on welfare is a humiliating experience. The amount of money you’re given doesn’t provide you with enough to do anything other than live in a shithole and eat Mi Goreng at every meal. Even if they *did* increase it by a small amount, it still means living below the poverty line and all the social stigma and self-esteem problems that go with it.

    Money is not the only factor in welfare. Suggesting that it is is ludicrous. I’m with Alister on this: prove it.

    Show us some stats.


  4. Actually, I thought the post was about incentives. With regard to Kevin Rudd’s return as PM, the issue is more that he saw an opportunity and took it, which makes him little different to Julia Gillard three years ago. I don’t think this has increased incentives for political bastardry. They’re already pretty high as it is.

    With regard to unemployment, firstly I don’t think patronising comments about gravity are helpful, and secondly there’s the fact that whether unemployment rises or falls with a rise in unemployment benefits really depends on what’s going on around the unemployed. See this and this from Krugman starters. You’d also need to explain why until recently US unemployment rates were higher than Europe’s (see this and this from Quiggin.

    I mean no disrespect when I say this, but sometimes it’s easy to let what are effectively theoretical models override empirical evidence. This can lead to analogies that don’t actually hold.


  5. @ cvsanders

    Charles wasn’t insulting just because he made it clear that the answer was obvious when you make sure that you are not asserting a large effect. Can you possibly deny the direction of the effect? No,of course not, so the magnitude of the effect needn’t be raised as an issue on this thread.

    Would you deny, btw, that increasing the humiliation entailed by being unemployed will decrease unemployment, other things being equal (that is you don’t chop off people’s legs or blindfold them as part of the humiliation)? That’s incentive effects at work, always at the margin of course.


  6. I thought it was patronising. Seeing as Charles gave me a pony for my birthday, I’m gonna let it slide. This one time.


  7. I certainly didn’t intend my last comment to be insulting, and I apologise if it was. But if you read what I said I think it’s clear I also didn’t say that “money is the only factor in welfare”; I agree entirely about the humiliating effect of our current system of unemployment benefits, and I support giving the unemployed a better deal. I just think it’s better all round to acknowledge that there’s a cost in that. Alister, thank you for the links – I shall follow them up when I’m back at my desk.


  8. I don’t think that providing money to people for being unemployed is an incentive; rather it removes a barrier for people who really don’t ‘fit in’ in the employment market for no reason other than that they are unwilling to work. Those people would be unemployed whether there was welfare or not – welfare just means they have to do less ‘black market’ activity to stay afloat. If anything, welfare acts as a counter to the need for criminal activity.

    That’s my theory, and I have zero research to back it up other than personal experience both as an unemployed person and as someone who has … preferred some sorts of work to others.

    Long in the past, of course. We don’t stay teenagers forever.


  9. Thanks cvs. Sure, there are lots of people for whom the incentive is irrelevant – they’d be unemployed (or employed) regardless. But that’s true of any incentive; its effect happens only at the margins. There are other people who, for example, are dissatisfied with their jobs and for whom the existence of adequate unemployment benefits would make the difference between (a) quitting now and being unemployed for a bit while they look for another job and (b) sticking it out until another job comes up that they can move straight to without a period of unemployment.


  10. I therefore posit that, for most politicians, staying in or getting into power is the main incentive, and that political bastardry is something which has influence only on the extreme margins.


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