Via David Henderson over at Econlog, keithhennessey.com points out some precarious and perverse incentives facing DC legislators at the moment. In particular:
The Democratic party is unified in wanting a major legislative accomplishment. I know of no Democrat who is saying he or she wants the bill to fail, even if some of them will vote against it. This sounds trivial but is important. Congressional Democrats appear to believe that enactment of a comprehensive law is critical to their re-election. Most seem to believe that a White House signing ceremony is more important than the contents of the bill that becomes law. This helps the Leaders and the President rally votes and creates legislative bargaining flexibility.
Relying on government benevolence is like leaving the front door of your home unlocked 24/7 because you believe everyone around you is good. It's a wonderful thought, but you are going to get robbed.
Showing posts with label Incentives. Show all posts
Showing posts with label Incentives. Show all posts
Stimulus Discussion, Continued
Some thoughts on Rob's responses to questions I raise on stimulus theory. Questions in bold, Rob's answers in regular type, mine in italics.
Price Distortion (Mises): What effects (negative/positive/neither) do you think taking $787 billion out of the private sector and putting into specifically determined areas of the public sector will have on levels of consumption, investment and saving?
1. My best guess is, it depends. Neither Government nor the markets are infallible. The private sector won't necessarily make the best decision about collective action problems. The answer here isn't about Government vs markets so much as it is about the details of Government policy. Some will be likely implemented better than markets could and some will not. Only time will tell if this is a good idea. I think historical evidence from a number of public works projects during the great depression TVA, WPA, etc. can help make the case that Government can help allocate resources to solve a collective action problems and if investment is tanking along with consumption the spender of last resort is the Government. More about this in answer to question 4.
I think I'm with you on this one. First off, you're right, who knows? Only time and brilliant, objective analysis will reveal the truth. The Great Depression and public works is an interesting example because most people praise it as the most positive government intervention in history or deride it as pure government takeover with no benefits. From what I've heard/read, it fall somewhere inbetween. Is this situation the same? I don't think so, and I'm still in the recalculation camp; there is a glut of resources in some areas (capital markets, housing markets, etc...) and shortages in others (now if I knew where I would be a millionaire) and resources should be shifting. Obviously the key word is should. I have no idea if they are. Thus, maybe they do need some government spur. But for the reasons listed below, I'm wary.
2. Knowledge Deficiency (Hayek): Can we reasonably believe that Washington bureaucrats will effectively and efficiently spend this money?
No, but can we reasonably believe that market will either? With markets we have the tools of self incentives that work the vast majority of the time and fail catastrophically on occasion. Government can't fix all our problems, but we do have the tools of democratically elected officials with limited terms to evaluate their policies.
Maybe I'm hopelessly optimistic, but I think we can expect markets will do a better job of this than government officials. I believe this for numerous reasons, but for this question I will just approach one: knowledge. Hayek called planning (which is what stimulus spending is) "the fatal conceit"; the idea that a few "experts" believe they possessed the knowledge to make the infinite number of decisions private market participants make in an unhindered economy.
Of course the flaw in the market theory is the rational actors presumption. I assume Rob think's this is much more of an issue than I. Anticipating Rob's retort I would propose an examination of degree of irrationality and what sparked the change in degree. I would say more often than not it would be due to regulation (but that is only speculation).
3. Public Choice (Buchanan): Can we reasonably expect Washington bureaucrats not to succumb to perverse spending incentives?
A better question might be can we reasonably expect [people] not to succumb to perverse spending. I don't think markets have eliminated greed and replaced it with responsibility to stock holders and neither has Government replaced corruption with duty to constituents.Sometimes Government can do a better job and sometimes not.
Markets will never eliminate greed. Markets don't want to eliminate greed. Like risk-taking, greed was and always will be essential to capitalism. The nuance required here is "how much greed" or "what kind of greed". But self-interest, for the most part is an excellent check on private decision-makers. For public officials, not so much. What makes markets work so well is rational self-interest (a term I imagine Rob loathes) because that is the model. The model for legislating needs to be "purely benevolent". This goes against human nature is completely impractical. As a wise man or woman (Walter Williams?) once said "the road to hell is paved with good intentions."
4. Private Incentives (unknown): How will private actors react when they realize significant amounts of their income will be seized by the government to be spent as said government sees fit because said government does not believe said private actors are capable/responsible/smart enough to spend said money themselves?
It's not so much about arrogance of the Government believing it can plan the economy as it is about Government stepping in to solve a tragedy of the commons. It is in every firm's self interest to hoard capital right now. However, the best outcome for everybody is all acting in unison to ramp up investment and spur the economy. It's a classic prisoner's dilemma that Government can fix by borrowing now and boosting investment. Weighing the costs is difficult, but crowding out is not really a concern when the trepidation firms harbor is creating a positive feedback loop inspiring more fear and less investment.
Whenever someone says "commons" or "American people" or something along those lines, it immediately raises a red flag for me. Is it really in every single firm's self-interest to hoard capital right now? Are there really no good lending opportunities out there, anywhere, at the moment? Maybe you're right and it really is that bad, but I feel like something else is going on. This is obviously a question of data and I don't want to apply too much conjecture. But if your premise is correct, then that is a real serious problem. I just have trouble accepting it really is that awful out there. We should both definetely try and dig up some data on this when we get a chance.
5. Morality/Constitutional (unknown): Under the Rule of Law, is stimulus spending immoral? Under the Constitution, is such a practice unconstitutional?
This may the most interesting point Will raises. I am (sadly) not very knowledgeable about our constitution, but I definitely don't believe stimulus spending is immoral on any grounds. One might make the case that we are taxing the future to spend now, but a more reasonable conclusion is if we do nothing we will end up with a lost decade ala Japan which will hurt future tax payers even more. Stimulus spending, while bad for future generations is not as bad as doing nothing.
I think this is the most interesting question as well and I think I will devote a seperate post to it later in the day.
Good discussion.
Price Distortion (Mises): What effects (negative/positive/neither) do you think taking $787 billion out of the private sector and putting into specifically determined areas of the public sector will have on levels of consumption, investment and saving?
1. My best guess is, it depends. Neither Government nor the markets are infallible. The private sector won't necessarily make the best decision about collective action problems. The answer here isn't about Government vs markets so much as it is about the details of Government policy. Some will be likely implemented better than markets could and some will not. Only time will tell if this is a good idea. I think historical evidence from a number of public works projects during the great depression TVA, WPA, etc. can help make the case that Government can help allocate resources to solve a collective action problems and if investment is tanking along with consumption the spender of last resort is the Government. More about this in answer to question 4.
I think I'm with you on this one. First off, you're right, who knows? Only time and brilliant, objective analysis will reveal the truth. The Great Depression and public works is an interesting example because most people praise it as the most positive government intervention in history or deride it as pure government takeover with no benefits. From what I've heard/read, it fall somewhere inbetween. Is this situation the same? I don't think so, and I'm still in the recalculation camp; there is a glut of resources in some areas (capital markets, housing markets, etc...) and shortages in others (now if I knew where I would be a millionaire) and resources should be shifting. Obviously the key word is should. I have no idea if they are. Thus, maybe they do need some government spur. But for the reasons listed below, I'm wary.
2. Knowledge Deficiency (Hayek): Can we reasonably believe that Washington bureaucrats will effectively and efficiently spend this money?
No, but can we reasonably believe that market will either? With markets we have the tools of self incentives that work the vast majority of the time and fail catastrophically on occasion. Government can't fix all our problems, but we do have the tools of democratically elected officials with limited terms to evaluate their policies.
Maybe I'm hopelessly optimistic, but I think we can expect markets will do a better job of this than government officials. I believe this for numerous reasons, but for this question I will just approach one: knowledge. Hayek called planning (which is what stimulus spending is) "the fatal conceit"; the idea that a few "experts" believe they possessed the knowledge to make the infinite number of decisions private market participants make in an unhindered economy.
Of course the flaw in the market theory is the rational actors presumption. I assume Rob think's this is much more of an issue than I. Anticipating Rob's retort I would propose an examination of degree of irrationality and what sparked the change in degree. I would say more often than not it would be due to regulation (but that is only speculation).
3. Public Choice (Buchanan): Can we reasonably expect Washington bureaucrats not to succumb to perverse spending incentives?
A better question might be can we reasonably expect [people] not to succumb to perverse spending. I don't think markets have eliminated greed and replaced it with responsibility to stock holders and neither has Government replaced corruption with duty to constituents.Sometimes Government can do a better job and sometimes not.
Markets will never eliminate greed. Markets don't want to eliminate greed. Like risk-taking, greed was and always will be essential to capitalism. The nuance required here is "how much greed" or "what kind of greed". But self-interest, for the most part is an excellent check on private decision-makers. For public officials, not so much. What makes markets work so well is rational self-interest (a term I imagine Rob loathes) because that is the model. The model for legislating needs to be "purely benevolent". This goes against human nature is completely impractical. As a wise man or woman (Walter Williams?) once said "the road to hell is paved with good intentions."
4. Private Incentives (unknown): How will private actors react when they realize significant amounts of their income will be seized by the government to be spent as said government sees fit because said government does not believe said private actors are capable/responsible/smart enough to spend said money themselves?
It's not so much about arrogance of the Government believing it can plan the economy as it is about Government stepping in to solve a tragedy of the commons. It is in every firm's self interest to hoard capital right now. However, the best outcome for everybody is all acting in unison to ramp up investment and spur the economy. It's a classic prisoner's dilemma that Government can fix by borrowing now and boosting investment. Weighing the costs is difficult, but crowding out is not really a concern when the trepidation firms harbor is creating a positive feedback loop inspiring more fear and less investment.
Whenever someone says "commons" or "American people" or something along those lines, it immediately raises a red flag for me. Is it really in every single firm's self-interest to hoard capital right now? Are there really no good lending opportunities out there, anywhere, at the moment? Maybe you're right and it really is that bad, but I feel like something else is going on. This is obviously a question of data and I don't want to apply too much conjecture. But if your premise is correct, then that is a real serious problem. I just have trouble accepting it really is that awful out there. We should both definetely try and dig up some data on this when we get a chance.
5. Morality/Constitutional (unknown): Under the Rule of Law, is stimulus spending immoral? Under the Constitution, is such a practice unconstitutional?
This may the most interesting point Will raises. I am (sadly) not very knowledgeable about our constitution, but I definitely don't believe stimulus spending is immoral on any grounds. One might make the case that we are taxing the future to spend now, but a more reasonable conclusion is if we do nothing we will end up with a lost decade ala Japan which will hurt future tax payers even more. Stimulus spending, while bad for future generations is not as bad as doing nothing.
I think this is the most interesting question as well and I think I will devote a seperate post to it later in the day.
Good discussion.
Obama's Healthcare Speech - Language
As is often the case on this blog, I enjoy examining the use of language and how people/groups distort it to further a certain agenda. Barack Obama did this tonight (numerous times) in his Congressional Address. There is one specific example I want to focus on though: "no denial of insurance for preexisting conditions".
The President decreed that in his plan no persons suffering from a pre-existing condition (two other words that need to be thoroughly examined) would never be denied coverage. This sounds like a wonderful idea at first glance (I know I thought it did). But it begs the question: why would an individual ever purchase insurance in the first place until they became afflicated with said condition? Of course they have zero incentive to do so. Consequently, insurance companies are going to have to make up for these unintended coerced costs in another way. One method may be to raise premiums. But what if they can't do this either? Well, like with any price control that puts a ceiling on prices (and this is what the pre-existing argument essentially is), you will have market participants drop out and a shortage will occur and this will further the path of a government takeover.
Look at the incentives in another way. What if tomorrow the federal government mandated that car insurance companies could not deny any applicants with car accidents or points on their licenses on their records.
(I don't have any data, on this, but I am fairly sure such applicants generate enormous revenues for car insurance companies. What the companies do though is counter the added risk with increased premiums and deductibles).
What signal would this send consumers? First, it would tell them there is zero chance they could be denied coverage, so they would never purchase the insurance until they were involved in an accident or were assigned points by a court. Secondly, it takes away negotiating power from the companies. If they have to sign such applicants by law, what is to prevent prices from plummeting to artificially low levels (the cost problem)? Finally, such a policy would create a significant moral hazard. If I know that government will force insurance companies to provide me "insurance" at the lowest cost due to the cost problem, or totally subsidize me through taxpayer dollars if I cannot afford said prices, what is to stop me from taking adverse risks while driving?
I digress though. My basic point is if the federal government implements this rule insurance will no longer be insurance. It will be a subsidy. The guise of calling it "insurance" is incredibly dangerous.
The President decreed that in his plan no persons suffering from a pre-existing condition (two other words that need to be thoroughly examined) would never be denied coverage. This sounds like a wonderful idea at first glance (I know I thought it did). But it begs the question: why would an individual ever purchase insurance in the first place until they became afflicated with said condition? Of course they have zero incentive to do so. Consequently, insurance companies are going to have to make up for these unintended coerced costs in another way. One method may be to raise premiums. But what if they can't do this either? Well, like with any price control that puts a ceiling on prices (and this is what the pre-existing argument essentially is), you will have market participants drop out and a shortage will occur and this will further the path of a government takeover.
Look at the incentives in another way. What if tomorrow the federal government mandated that car insurance companies could not deny any applicants with car accidents or points on their licenses on their records.
(I don't have any data, on this, but I am fairly sure such applicants generate enormous revenues for car insurance companies. What the companies do though is counter the added risk with increased premiums and deductibles).
What signal would this send consumers? First, it would tell them there is zero chance they could be denied coverage, so they would never purchase the insurance until they were involved in an accident or were assigned points by a court. Secondly, it takes away negotiating power from the companies. If they have to sign such applicants by law, what is to prevent prices from plummeting to artificially low levels (the cost problem)? Finally, such a policy would create a significant moral hazard. If I know that government will force insurance companies to provide me "insurance" at the lowest cost due to the cost problem, or totally subsidize me through taxpayer dollars if I cannot afford said prices, what is to stop me from taking adverse risks while driving?
I digress though. My basic point is if the federal government implements this rule insurance will no longer be insurance. It will be a subsidy. The guise of calling it "insurance" is incredibly dangerous.
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