“A Recovery Stymied By Redistribution” contains excerpts from a recent speech by Casey Mulligan of the University of Chicago. It’s about the destructive power of bad incentives, and it reeks of common sense. It’s long been recognized that efforts to soften economic blows can have damaging incentive effects. Today, those well-intentioned efforts have been expanded beyond the point at which they become counterproductive, and the negative effects are being compounded by new programs that can act as taxes on work effort.
I’ve witnessed some of the phenomena Mulligan describes first-hand. There is no question that some people can be tempted to accept benefits in exchange for a less than vigorous job-search effort, sometimes for no search effort at all, and sometimes fraudulently when they already have gainful employment. Mulligan quotes a job recruiter who, during the recession, “ran into a hurdle he hadn’t seen before. People would apply for jobs not with the intention of accepting it, but to demonstrate to the unemployment office that they were looking for work.” Mulligan also describes ways in which employers have seen reductions in their incentives to retain marginal workers.
Some programs are better than others at minimizing disincentives created by assistance. But here is what Ben Franklin thought:
I am for doing good to the poor, but I differ in opinion of the means. I think the best way of doing good to the poor, is not making them easy in poverty, but leading or driving them out of it. In my youth I traveled much, and I observed in different countries, that the more public provisions were made for the poor, the less they provided for themselves, and of course became poorer. And, on the contrary, the less was done for them, the more they did for themselves, and became richer.
— On the Price of Corn and Management of the Poor, November 1766
Damaging disincentives are also created by efforts to ease economic blows to businesses. Corporate bailouts, for example, create perverse, one-sided “win-can’t lose” sets of outcomes, leading to taxpayer subsidies and excessive risk-taking.