A Lesson In Incentives

I found an interesting story from Bloomberg. I think there are several lessons that can be learned from this story beyond the obvious. It goes to show you that with any government program, the devil is in the details! It's not enough just to say you're going to create a program to help feed the poor. HOW to do that is very very important.

Poor in India Starve as Politicians Steal $14.5 Billion of Food Ram Kishen, 52, half-blind and half- starved, holds in his gnarled hands the reason for his hunger: a tattered card entitling him to subsidized rations that now serves as a symbol of India’s biggest food heist. Kishen has had nothing from the village shop for 15 months. Yet 20 minutes’ drive from Satnapur, past bone-dry fields and tiny hamlets where children with distended bellies play, a government storage facility five football fields long bulges with wheat and rice. By law, those 57,000 tons of food are meant for Kishen and the 105 other households in Satnapur with ration books. They’re meant for some of the 350 million families living below India’s poverty line of 50 cents a day. Instead, as much as $14.5 billion in food was looted by corrupt politicians and their criminal syndicates over the past decade in Kishen’s home state of Uttar Pradesh alone, according to data compiled by Bloomberg. The theft blunted the country’s only weapon against widespread starvation -- a five-decade-old public distribution system that has failed to deliver record harvests to the plates of India’s hungriest. “This is the most mean-spirited, ruthlessly executed corruption because it hits the poorest and most vulnerable in society,” said Naresh Saxena, who, as a commissioner to the nation’s Supreme Court, monitors hunger-based programs across the country. “What I find even more shocking is the lack of willingness in trying to stop it.”

Let's go into the details to see how this program works.

From the government warehouses, millions of tons are dispatched monthly to states including Uttar Pradesh, which are supposed to distribute them at subsidized prices to the poor. About 10 percent of India’s food rots or is lost before it can be distributed, while some 3 million tons of wheat in buffer stocks is more than two years old, according to the government. The CBI’s indictment of Gupta provides a glimpse of how the operation was run. Food purchased by the central government is trucked to districts like Sitapur, where Kishen’s home of Satnapur is located, and stored until marketing managers in the food distribution system sign off on its dispatch to the Fair Price Shops. The owners of those shops, called kothedars in Hindi, bring cashier’s checks for the subsidized price of the supplies. A kilogram of rice, for instance, costs as little as 2 rupees, or about 3.6 cents, in most states. The market price for similar quality rice is about 10 times higher. The shop owners are supposed to sell the food to villagers without making a profit.

People respond to incentives, they will try to better themselves, the way incentives are set up make the difference. If there is incentive to better themselves through profits then they will do that, but if the incentive is towards stealing or some scam, they will consider if they can get caught and steal if the rewards outweigh the risks. Programs should be made in a way to minimize "bad" incentives while maximizing "good" incentives. Look at how the Indian system works vs. the US food stamp program. The Indian program gives subsidies to the sellers of food and expects them to pass along the savings to poor people. If shop owners are supposed to sell the food without making a profit, where is the incentive for them to get the food, make sure it arrives on time and unspoiled, and service the poor? Now look at the US program which gives subsidies directly to the poor through food stamps. The poor then go and buy food at full price from their choice of merchants. The merchants make profits so they have every incentive to make sure they have food in stock to sell and to make sure food arrives at markets without spoilage since people won't buy spoiled food. Yes the poor can sell their food stamps for money, just goes to show you that not all "bad" incentives can be eliminated, the goal is to eliminate as many as possible. The US system uses the market system more than the Indian system. The poor are forced to buy food at market prices and supermarkets get to make profit off of this government program. At first glance, this sounds worse than the Indian system in which there are no profits to markets so that every penny of the money the government spends goes towards helping the poor. Yet in practice, the Indian system is much much more corrupt and much much more wasteful.

From the government warehouses, millions of tons are dispatched monthly to states including Uttar Pradesh, which are supposed to distribute them at subsidized prices to the poor. About 10 percent of India’s food rots or is lost before it can be distributed, while some 3 million tons of wheat in buffer stocks is more than two years old, according to the government. Even after accounting for the wastage, only 41 percent of the food set aside for feeding the poor reached households nationwide in 2005, according to a World Bank study commissioned by the government and released last year.

So 10% is lost to rot and only 41% of the 90% left over ever reaches the poor! What that really means is that nearly 70% of the food purchased by the government for the poor never reaches the recipient! There is absolutely no incentive for efficient distribution or to make sure the poor get the food. Under the US system, the poor are responsible for figuring out how to get their food and where to go for the best prices (not hard, go to the supermarket and look at the weekly ads they send out). The lesson is that people respond to incentives and if there isn't any, they will be lax over their responsibilities. Profits give people an incentive to act. In a different world, we wouldn't need incentives and profits to supermarkets could be eliminated so that the poor get 100% of the subsidies, but in the world we live in, the real world, that's just not possible. Conservatives understand the limitations and work within the boundaries of the real world. Liberals do not understand the limitations and so craft programs that have the best intentions, but fail spectacularly in the real world.

The Evils of Austerity?

Wait a minute, the facts are that federal government spending has increased dramatically since the beginning of the crisis in 2008. According to the White House, total federal outlays were the following (in millions). http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/hist.pdf 2008 2,982,544 2009 3,517,677 2010 3,456,213 2011 3,603,061 2012est 3,795,547 Now lets include outlays at the beginning of the decade for further comparison. 2001 1,862,846 2002 2,010,894 Where is the austerity? I think you have perception confused with actuality. There are those in Congress who have made speeches about austerity and the need to spend less, but none of the talk has translated directly into reduced spending yet. So far Congress has done exactly what Krugman and those in his camp recommended. Now if you want even more spending, then that's a separate argument, but I think it is mistaken to say that austerity has been imposed in any form. The increase in spending from 2007 to 2012 is approximately 27%! Federal outlays have doubled since 2001! Where is the austerity?

Compassion And Health Care As A Right

Compassion can't be given by requiring someone else to pay for the act. There is no compassion in mandating that other people pay for health care. Otherwise, just give me your wallet and I'd be the most compassionate being ever alive. I'd ask everyone what they want and give them double...no triple what they answer. Of course you'd probably have to get another job, but what do I care about how much you work when I'm so compassionate? In fact, my compassion demands you work 20 hours a day, no less. There is just so much good I want to do, so many people to help. I hope you get my point. True compassion comes from you giving your own money or volunteering your own time and labor to help people in need. It can't come from forcing others to. Compassion has nothing to do with national health care or any other social program. Unfortunately, what people want, need, or deserve is constrained by reality. There can be no right that depends on someone else's labor, money, or work to provide it. Therefore food, clothing, shelter, water and health care can't be rights. Why? What if everyone demands these "rights", who is going to work to provide them? If someone can go up to a farmer and demand his crops because he is hungry and has a right to food, what happens when the farmer decides to stop working the farm, since all of his produce is being taken away, and demand HIS right to food? Who will provide that food? Reality has veto power over any proposed right. If you want to reduce health care costs, health care must be limited and rationed. Right now, the value equation is missing from health care decisions. What do I mean by value? Is it worth $100,000 to give a treatment that, on average, extends life by 6 months? If you are that person, AND someone else is going to pay for it, then the answer is going to be yes. So we have to ask this difficult question in a more neutral way. Today, this question isn't asked. Doctors do not deny care based on "value". Doctors are trained only to diagnose and treat, regardless of cost. To limit costs, someone has to decide if the costs of the treatment are worth the benefits and deny care if they aren't. I won't pretend I know the answer to the "value" question, but this is the root of our problems with the health care system.

UC Tuition Increases: The True Cost of Providing Education

An important question that must be asked is what is the COST of providing an UC education? And why is the cost rising so much faster than inflation? I've found a blog post that deals with costs and is very detailed using the UCOP budget office's own report on the cost of providing education. I will only repost a summary, the blog post is worth reading in detail. http://changinguniversities.blogspot.com/2011/05/how-uc-calculates-instructional-cost.html

I have not edited any of these figures, and so we learn that the UC’s estimation of the direct instructional cost is actually lower than my calculation of $9,000. The question then is why is their total cost estimate so much higher, and the answer is that they assume that the indirect instructional costs make up over 60% of the total cost; in fact, they argue that the university pays almost the same amount for faculty salaries as it does for departmental support.

From my perspective, this report shows that students and the state are paying for the enormous increase in administrative costs on the campuses, and thus the economic solution is not to reduce enrollments or raise tuition; rather, the solution has to be to decrease the cost of non-instructional services. Faculty, citizens, students, and workers concerned about instruction and research should question these budgetary policies.

A UC Berkeley professor tried to come up with his own estimate of what the costs are to educated per student at Berkeley in 2005. He found that actual costs should be only $7000. Again, readers should check out his post for the details. http://socrates.berkeley.edu/~schwrtz/Cost_II.html

The top budget officer of my school, the University of California, says that the current annual Cost of Instruction is about $16,000 per student. I have done a detailed calculation, using official accounting reports and an official faculty time-use study, to conclude that, averaging over all UC programs, undergraduate education costs this institution just under $7,000 per student per year. (See the details of this calculation at http://socrates.berkeley.edu/~schwrtz/UndergradCost.html ) Thus, current levels of undergraduate student fees now cover the full actual cost of their education at UC! That is shocking. Various experts have said that my result must be wrong; and a few have manufactured rather hilarious reasons to discredit it. (See http://socrates.berkeley.edu/~schwrtz/ExpertsRespond.html ) None have given any objective basis for faulting my analysis, although I continue to seek that sort of academic dialogue. I have a list of many small details in the calculation where better data, discussion or analysis could lead to a more precise answer.

My tentative conclusion is that a huge amount of money is being spent on programs and stuff that does not have anything to do with educating students. Administrative costs are a prime example, though not the only one. I have a good friend who is a Cal-State university professor. He says that the reason administrative costs are not cut is because administrators are the ones who make the decision where to cut. They aren't going to cut their own jobs! Nor do will they want to layoff their staff or reduce their own budgets. Yes this is only a small segment of the larger picture, but one that deserves attention.

Krugman's Keynesian Stimulus Theory is Marred By Reality

The financial crisis ended the artificial boom in housing, when that happened, government revenue growth fell or stagnated, but government spending, which had risen in tandem with the bubble, did not. THIS is the cause of the Eurozone crisis, unsustainable government deficits and spending. Government spending, much like property prices, must return to more reasonable levels. Krugman's cyclical stimulus theory is deeply flawed due to real world problems. In theory, governments should fire workers and reduce its contribution to the economy in good times. The fired workers will easily find employment in the private sector and the reduction in spending will be more than countered by general economic prosperity. The opposite then should be done in recessions. Does this ever happen? Does government ever eliminate social programs and start laying off people in good times? No. What happens is that government grows and adds more permanent social programs and employees. When a deep recession occurs, the economy can no longer support such a bloated government. And with deficits and debt so high, there is simply no more room to expand government spending even more. The theory calls for temporary government spending that can be adjusted to counter cyclical economic trends. The reality is that the vast majority of government spending is permanent, in the form of social programs and promised benefits. With each economic cycle, government grows bigger and bigger until a crisis point is reached where it becomes evident that such spending cannot be supported or sustained. Europe has reached such a point and the United States is set to follow very soon. Krugman and his followers should have been rioting in the streets, calling for less government spending during the housing boom if they took his theories seriously. Instead, all I heard were calls for even more government and a greater growth in spending. This is why the theory is garbage. It seems that the only way to stop the growth of government is a reality check, which is exactly what is happening in Europe. This crisis is the equivalent of an intervention for a drug user. The drug user can throw a fit and "riot", but he has hit rock bottom and the drugs will be cut off no matter what.

Paul Krugman's Wrong When it Comes to Austerity

What doesn't Krugman understand? The crisis stems from governments spending much more than they take in. Those governments must reduce their spending to bring it in line with what they can afford. That means resources and employment MUST be shifted from the public sector to the private sector. Since this does not happen overnight, there MUST be unemployment and a reduction in living standards and GDP. THIS IS UNAVOIDABLE! The only cure would be prevention, stopping government from getting so out of control to the point where it is 40-50% of GDP as it was in Greece. That is exactly what certain wise Americans are advocating today. Once deficits are no longer supportable, there is no way to avoid the pain. Krugman's idea of more government spending would just prolong and deepen the crisis. It cannot be a solution because an overly large public sector is the problem! This is very similar to drug addiction. An addict can't be cured by giving him a larger dose of drugs. His withdrawal symptoms can be removed for a while, but he cannot be free of drugs without feeling pain and the larger the doze of stimulant, the worse the recovery will be. Giving an addict more drugs to get high is NOT a cure!

Income Inequality is Not the Same as Racial Discrimination

It's quite a jump to claim that poor people are discriminated against in the same way Blacks were before the Civil Rights Era. It's in fact, an incredible leap off a cliff, but it's exactly what some people claim. They attribute income inequality to some form of unfair discrimination. The poor are assumed to be discriminated against in the same way Blacks and other minorities were in the past. But just how do you identify a poor person? I'm sure many here have their assumptions, but no, you can't identify a poor person by the clothes they wear or the car they drive. As described in the book, The Millionaire Next Door, many of the rich drive older model cars like Camrys and Accords. I know one multi-millionaire that has never bought a new car in his life and he's in his late 60's now. Likewise, you can find a poor person driving a flashy car. The same applies with clothing. It seems to me that instead of attributing unequal outcomes to discrimination and some sort of unfairness, the most logical explanation is that unequal outcomes arise from unequal skills and attributes. If we examine any skill or base of knowledge, we would see a wide range of proficiencies amongst the general populace. If a fair system rewards those with greater skills and knowledge in areas of demand, then we would EXPECT to see income inequality. Only in an UNFAIR system would we see equality in income.

Government Has A Role

Yes government does have a role, but I think the bigger question is how we make government do what it is supposed to? How do we change an inefficient and incompetent government or a government that has been co-opted by corporations, unions, and special interests for their benefit? What is the mechanism to make government better?

Elections only replace the top level of government, it doesn't do anything to change the bureaucrats and lower level employees, what if they are incompetent and fail consistently to do their jobs? The SEC and their counterparts like the Commodities and Futures Commission (CFC) are good examples. We're told they were at MF Global overlooking the company weeks before they went bankrupt and stole over a billion in customer funds. How do we get these regulators to actually do their jobs? Unsurprisingly, no one has been fired from the regulators, how do we make them accountable? What is the incentive for these agencies to do better?

How do we determine if a government service is a good value? The TSA is a good example. How do we figure out if the benefits of their service outweigh the costs, both in dollar terms and time spent?

People are frustrated because we don't seem to be able to change government and make it better. With a private enterprise, we would just stop being customers and they would either have to shape up or go bankrupt solving the problem and another, better company would rise in its place. We have no such mechanism for government. Mark Thoma and others here make too many assumptions, especially about the efficiency of government and that government will operate as it's supposed to. What happens if it doesn't?