Incentives Rule!

By John Lumbard.

  In December the Boston Globe ran a front-page story on the “dangerous incentives” created by a program that offers cash to the parents of children taking psychotropic drugs for ADHD and other behavioral conditions.  The number of children on these drugs has predictably swelled, and a program that once focused on children with severe physical disabilities such as cerebral palsy and blindness “now largely serves children with relatively common mental, learning and behavioral disorders.”  You can’t get the cash unless your child takes the drugs. 

In happier news, we’ve been exporting gasoline to Saudi Arabia!  American companies receive a 45-cent-a-gallon subsidy for blending American ethanol with gasoline, and the Saudis (coals to Newcastle!) are pleased to buy it at bargain prices. 

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  “The feds just made available a $300,000 grant to the city of Hartselle, Ala.  That money is earmarked to help build a Cracker Barrel restaurant.  The money is supposed to create up to 200 jobs.  Not counted in this job creation number:  the jobs lost at other restaurants when Cracker Barrel takes away their customers.”

                                                             —  Economics professor Art Cardin, in Forbes

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 Federal subsidies for colleges and universities were meant to hold down tuition costs, but instead have helped to enable a massive increase in spending—fresh sushi in every dining hall!—that has driven tuitions above $50,000 a year.  And then there’s the nutty web of disincentives and incentives that are driving up costs in health care . . . .

Of all the faults of our congresspeople, the greatest is their inability to recognize the unintended consequences of new legislation, and understand that these incentives are often the most powerful aspect of any bill.  Brilliant minds and sophisticated arguments are most unhelpful in this regard, because they contribute to the illusion that it’s possible to piss into the wind without getting wet.

We have laws that reward borrowing, consumption, participation in housing bubbles, and exploitation of tax loopholes.  Federal and state governments penalize workers, savers, and investors, while rewarding early retirement, gasoline consumption, large families, single-income households, and unemployment.  

Yet we (The People) can also be faulted, for incentivizing our legislators to buy our votes with earmarks and entitlements.  It would be bad enough if they bought votes with money from their own pockets, but this cash is taken from the pockets of our children . . . . In recent decades many congressmen have asserted forcefully that “representing their districts” means bringing home the bacon.  Not so many years ago we saw a billboard in Boston proclaiming that the local congressman’s constituents “get their fair share . . . and then some”. 

Irresponsible spending has to be funded, so Congress found ways to lie about the true size of the annual budget deficit.  According to the Social Security Administration it was Lyndon Johnson who first proposed the “unified budget”, a scheme in which the size of the deficit is reduced by deducting that year’s contributions to the Social Security trust fund.  Congress happily went along, and 40 years later they’re still offering up that big ugly lie.

These same powerful incentives created a fib called “The Doc Fix”, and a practice of studiously ignoring any future promises made for retirement obligations and medical care—to 3 million federal employees and 300 million Americans.  All corporations are forced to account for these future liabilities, under rules known as Generally Accepted Accounting Principles (GAAP);  why not Congress?

Over time morality shifts to accommodate anything that’s put into law.  If the government were to offer $1,000 tax credits for killing domestic pets, they would soon begin to disappear from the streets—and killing pets would soon become socially acceptable. “Your retriever? Oh, sorry—I thought you knew. Muffy Wilson shot it last week. But you know, she was getting killed on her taxes. She really needed that deduction.”

The quiet dismissal of the National Commission on Fiscal Responsibility just proved, beyond a reasonable doubt, that we’re not going to be able to balance the budget until we force the Congress to do its job—via a Balanced Budget Amendment to the Constitution. Those budgets should be balanced under proper GAAP accounting, and we’d like to further minimize the potential for pork and earmarks with a line-item veto and a limit on federal spending as a % of GDP.

49 of the states already mandate balanced budgets, and Congress came within one vote of sending the amendment to the states in 1995.  Right now it offers a way to reassure our foreign creditors—who could push our annual interest tab to a trillion dollars a year if they become nervous—while pushing the pain of actually balancing the budget 3 or 4 years into the future.

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