Even more thoughts on incentives

The topic of the War in Afghanistan came up at a recent seminar I attended. One participant claimed that President Obama pulled the troops out of Afghanistan because of political pressure. Everyone quickly nodded in agreement as he continued with the rest of his comments.

This reminded me of the argument that politicians increase spending in order to earn votes from their constituents. This is a good argument on the surface, but we can’t be sure of politicians motives for doing whatever it is they do.

In the same way, there is no telling whether Obama pulled the troops out because of political pressure. Maybe he honestly wanted to pull them out the way he did–advised by specialists, of course. No one but him can know.

This helps illuminate my growing suspicion of “incentive talk” even further. I realize my blog is filling up with posts like this, but it’s really getting to me. I hear it all the time. Economists predict with seeming certainty that if you lower the cost of X, people will do more of X. Or if you raise the cost of Y, people will substitute other things for Y.

This entire notion is based on the proposition that people are rational. They seek the lowest-cost means to their highest-valued ends. It then becomes fair game to say that policy Z will have such and such effect as people react this and that way to the new costs and benefits.

But we can’t know how people will react. I’ve said before that it is usually safe to say that subsidizing unemployment, for example, will lead to more unemployment as people on the margin choose to quit and live off unemployment benefits. But this prediction is based in our experience  of how people usually respond to things like that. We cannot logically deduce that conclusion–we can only draw on our past observations of how people respond to various incentives.

For instance, the following world is entirely conceivable to me: The federal government raises unemployment benefits by 50 percent (being unemployed pays 50 more than before). But instead of more people quitting their jobs to live off unemployment, people’s preferences are such that unemployment becomes less and less desirable as its payout rises. This could be due to, say, some prevailing religious belief that led people to consider unemployment benefits evil–that getting paid to not work is something that people should avoid at all costs. The relationship between unemployment benefits and the unemployment rate, then, becomes inverse: as benefits increase, the unemployment rate decreases.

This relates to my War in Afghanistan example above in the following way:

The guy in my seminar who said President Obama pulled troops out of Afghanistan because of political pressures assumes that President Obama wants to be politically popular–that he cares about how voters think of him. I’ve heard other people make this assumption more explicit by citing the fact that a political career depends on being re-elected, and that getting re-elected often requires politicians to do something other than what’s best for the long-term interest of their constituents. Instead, they focus on legislative action that has immediate, highly-visible results that benefit their constituents in obvious ways.

This is bunk. I’ll have to go back later and identify the exact place I read this argument, but suffice it to say that the fact that any politician who engaged in such behavior was ever defeated by an incumbent who promised to concern himself more with the long-term health of his constituency undermines this entire argument.

But even aside from that, why is it that political incentives should take precedence over other types of incentives. Religious incentives, for example, can be pretty strong. One might say that suicide bomber missions are irrational, but not from the perspective of the suicide bomber. In like manner, one might claim that to do the opposite of what the majority of voters wants is irrational for a politician, but that’s only true if the politicians goal is to win votes. What if the politician’s goal is something else, and the biggest incentives he or she responds to are unknown to anyone else?

I hope this makes sense. It’s a ramble, but unless I jot it all down quick I end up questioning myself. Talk about responses to various incentives is so pervasive that I feel somewhat vulnerable attacking it. Any thoughts?

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