Sometimes there is economics even in mundane humor. In the Jan. 21 cartoon “The Buckets,” Grandpa emerges fuming from the doctor’s office. The doc had upped the old man’s blood pressure meds but noted that this would not be necessary if Grandpa modified his diet and exercised more. Grandpa is angry the doctor is so lazy that he suggested this to avoid the work of writing a new prescription.
This is an issue that arises all the time in our lives. Does requiring seat belts motivate careless driving? Do improved blood pressure meds reduce incentives to exercise more, lose weight and reduce salt and caffeine in one’s diet? Do mandatory energy efficient light bulbs let people ignore lights “that are just burning a hole in the sky” to use my mother’s exasperated expression?
Or, for a good Minnesota example, did the invention of four-wheel-drive for pickups just motivate some drivers to get themselves into worse trouble?
That last certainly is true to some extent. We all have seen shiny new pickups rolled on their tops or hopelessly mired while mere mortals chug on past in mundane sedans.
And, based on sundry empirical research, such a “yes, to a degree” answer is true for all of the above situations.
I’ve had hypertension for years. I should avoid virtually all ethnic restaurants with salty sauces. But, when my meds keep my readings in an acceptable range, why not meet a friend at our favorite Asian buffet? Just the other day I walked out of our condo and realized I had left lights on. But the bulbs were only 13 watts and the elevator was ready, so I didn’t go back. My conscience and wallet both would have spoken louder back in the days when they would have been 75 watts.
Some will respond that there is nothing wrong in using such innovations in this imperfect way. Was it a mistake when the builders of the Golden Gate Bridge innovated the use of safety nets just because it led some workers to be a little less careful? The number of workers who “took a flop” into the nets was well above the number who, statistically, would have had fatal falls without the net. But the total number of deaths was, by the standards of the day, remarkably low. Similarly, is it bad that drugs extend the lives of millions of people even if they don’t take all the healthy non-pharmaceutical steps they might? No.
However, we do need to take these perverse responses into effect in planning. If you ban incandescent bulbs, as Minnesota partially has, the reduction in use of electricity for lighting won’t fall by the exact relative wattage of old and new bulbs.
Moreover, there are bigger fish. If you protect depositors by insurance against loss from banks failing, banks do become less careful in their lending. If it becomes known that we will never liquidate the largest 40-odd “too-big-to-fail” banks and cover all their depositors, even those with balances hundreds of times the nominal deposit coverage, you create problems. These banks will get deposits more easily than smaller banks that may be more prudently managed.
This causes economic inefficiency. We get less satisfaction of needs and wants than could be possible. And it is unfair.
If we think farmers are not getting high enough prices to earn decent livings, and intervene to raise those prices, as we long did, the farmers themselves bid up the price of land. At the new higher land prices, farmers cannot earn enough to make a decent living after paying their mortgages.
If we want to protect them from the vagaries of weather and volatile markets by providing government subsidized insurance, as we currently do, then they forsake diversification, the price and weather risk management tool that farmers used for millennia. We end up with bi-culture on most Upper Midwest farms, corn and soybeans. This is bad for the environment, but entirely rational from operators’ points of view.
There are similar perverse incentives in income-transfer programs. Give SNAP benefits — aka Food Stamps — to poor people and their food consumption will go up somewhat, but less than the amount of the ostensible “food benefit” they get. Economists knew this would happen and argue that simply switching to cash payments would be better for society. But the general public don’t trust the poor to spend wisely and in some cases, they may be right.
If people have problems getting funds to attend college and you set up federal student aid based on “need,” then books and seminars telling parents just how to order their financial affairs so that their children will have the greatest calculated “need” soon are available and popular. And, as more students have gotten aid, monopolistic competition among colleges has led to their costs, and hence tuition, rising much faster than general inflation.
Reducing risk also may reduce incentives in other areas. Many Republicans opposed the Social Security Act of 1935 because a mandatory government retirement plan would reduce incentives to work hard and save. Social Security would replace private saving for retirement, not complement it, they said. To a certain extent that may have turned out to be true. But the overall benefits to society of the program far outweigh such efficiency losses.
Perverse incentives are not limited to government actions. I could write another column to examples of businesses sabotaging themselves by creating unintended incentives. Nor should we stop all government action, just because some unintended consequences are greater than we expected. But the possibility should make us more cautious in how we design programs. There really isn’t any need for income transfers to farmers anymore and federal student aid cries out for restructuring. But many other programs, such as Social Security, do much good despite some incentives glitches.