Friday, December 2, 2011

Oliver Marc Hartwich: Incentives are life and death

If there was one word to sum up the whole body of economic theory, it would have to be ‘incentives.’ People act on incentives. As William Stanley Jevons (1835–82), one of the founding fathers of neoclassical economics, put it, the whole economy is ‘a calculus of pleasure and pain.’

Greece is playing out a most macabre application of incentives. Greece may be the madhouse of the world economy, but there is method in its madness. According to a report in The Lancet, the number of HIV infections in Greece has skyrocketed. The increase was partly due to the termination of drug rehabilitation and street-work programs as a result of government austerity measures. But there was a more chilling explanation.

Drug addicts – acting on incentives – are injecting themselves with the deadly virus to qualify for ‘benefits of €700 per month and faster admission onto drug substitution programmes.’ The incentive to get higher welfare benefits plus access to medical treatment obviously is a strong one – particularly for people who have little left to lose.

It is not the first time economic research has revealed the strange consequences of people acting on incentives. One of the classic economic papers, ‘Dying to save taxes,’ was about how some people in the United States were successfully prolonging their lives by a few days to reduce the estate-tax liability of their heirs.

Australian economists Joshua Gans and Andrew Leigh came to a similar conclusion after studying the effects of the abolition of federal inheritance taxes in 1979: ‘in the very short run the death rate is highly elastic with respect to the inheritance tax rate.’ In other words, people managed to live a bit longer to beat the tax office.

Tax incentives certainly are a matter of life and death, as was confirmed by Germany’s introduction of parental benefits from 1 January 2007. Research by the University of Bolzano showed how German mothers delayed giving birth by a few days to qualify for the benefits.

Incentives matter. If policymakers kept this basic insight in mind, they would design better policies. It might also save the Greek government money it would otherwise spend on AIDS treatment.

Dr Oliver Marc Hartwich is a Research Fellow at The Centre for Independent Studies.

1 comment:

Ken R Taylor said...

I could not agree more and so why do we not employ the incentive system across the board?
We wring our hands lamenting how children are leaving school with no qualifications and end up as long term beneficiaries, then somehow blame them and their "negligent" parents for their failure, when the blame clearly lies with the system - or lack of.
The government has the ultimate tools for the job, but not the intestinal fortitude to to 'grasp the nettle" and legislate accordingly.

Why not withhold driving licences until the applicant has a minimum qualification of level two NZCEA or has attained the age 21?
This would give the incentive for our kids to achieve a qualification as well as keep idiots off our roads until they have at least developed their frontal lobes.
The hard pressed A&E hospital staff would welcome it I am sure, as would the health budget.
This is but one example of how incentives can benefit in so many ways, but first we have to have "Thinkers" in parliament instead of a bunch of impotent pretenders.
Similarly, the government bemoans the woeful history of savings, but give massive incentives to property owners, but no incentives for those trying to save their first few thousand dollars for a deposit.
Again we should be offering incentives instead of whacking depositors 17.5% on every dollar earned after the first measly $200.00.
This niggardly amount should be expanded to at least $5.000.00 as a real incentive to actually save cash.
But alas, it is too late as we have once more returned those pretenders to the throne! God help us all!