Wednesday, April 21, 2010

The Most Important Lesson of Economics

INCENTIVES MATTER. Why after so many studies and so much evidence this critical factor continues to be ignored is something I can't explain.

There is no perfectly evil or perfectly good person who behaves in a wicked or saintly way regardless of the incentives and disincentives placed in front of them. "Good" people can be lured into doing "bad" acts through incentives. Outcomes can be altered due to mistaken incentives and the old nemesis of unintended consequences can make a well intentioned program into a very very harmful and bad one.

The intent really doesn't matter, what matters is that anytime an activity or outcome is subsidized, you incentivize it and anytime you tax an activity or outcome, you discourage it. At some point, there is danger that, in helping the poor or unemployed, the incentives become so large that behavior is changed and negative factors arise.

Now that's not saying we should end all unemployment or social payments. I just want everyone to take into consideration that INCENTIVES MATTER. I find that the Left's refusal to acknowledge this crucial factor is perhaps the largest reason why conservatives and liberals disagree on the proposed solution to age old problems. Thus the tax cut versus more social payments/subsides, etc.

Notice I'm not saying that giving a penny to the poor will make everyone in the US rush to spend their assets and become poor. The only thing I am saying is that the effects of incentives and disincentives should be considered by everyone. They are simply too important to be ignored, yet they often are as evidenced by the posts above, simply excused away instead of factored into calculations and conclusions.

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