Perverse Incentives and a Government Doomed to Collapse(January 14, 2010)We form and fund governments to solve problems. So what do we do when government devolves to a tangle of perverse incentives?As I worked through the Survival+ critique of the status quo, it struck me that the built-in incentives in any system are far more powerful predictors than the ideology used to justify the system.Foir example, the sickcare system (a.k.a. "healthcare") in the U.S. is doomed for a very simple reason: the incentives are all perverse. Care providers make more money by billing for needless or even harmful tests, procedures and medications, patients have no incentive to maintain their health or choose lower-cost care options (nobody even knows how much care costs before "buying" it), and the government systems (Medicare and Medicaid) are fundamentally open-ended--if you qualify, then we pay all your bills, no questions asked (hey, we only glance at 3% of the bills presented, 97% we pay automatically).Construct a system with these perverse incentives and it is doomed to implode as everyone piles in to exploit the windfall. It's really not that hard to understand.Another causal factor I cover in Survival+ is the concept of marginal returns. Let's start with the idea that government of any size, shape or form is formed to solve problems inherent to the human condition: the tribe in the next valley is starting to come over and steal our food, if we let this continue we will starve to death, etc.In areas without government, or with government which does not view this as a problem it is tasked with solving, disabled people who can't work are either beggars on the street or they are cared for at home by their families.In the U.S. and other wealthy post-industrial economies, government has come to accept disabled citizens as its responsibility.So government establishes a program to aid disabled citizens who can no longer work (or no longer work in standard settings, for whatever reason: physical or mental disabilities or perhaps a mix of both). Let's say 40 pages of regulations and guidelines are written to define who qualifies and how the stipend/aid is distributed.Since humans seek to exploit any and all windfalls, then "free money" programs are big targets for exploitation via fraud. So another 400 pages of guidelines are written to set up auditing, tighten the qualification process, enable appeals from those turned down, and so forth.Since we live in a legalist society, then various legal claims and lawsuits are filed regarding the guidelines, and soon it takes 4,000 pages to cover all the exemptions, exceptions and refinements needed to clarify exclusions and various types of aid for different populations of disabled citizens.Over time, new administrators seek to make their mark by improving service, and more legal challenges result in more refinements. Eventually the full body of documentation guiding the program reaches 40,000 pages, and the costs of operating the program exceeds the benefit of having such a massive body of rules and regulations.At some point, the program is so rigid and costly than any budget cuts are not just "unfair" but "impossible." Or the cost of litigating the cuts exceeds the savings, and so on. This is the threshold of marginal returns. Put another way: it now costs $10 to "save" $1.Without conscious design, the system becomes riddled with and then ruled by perverse incentives as various "fixes" incentivize ways to get around the barriers to windfall exploitation. Since the program is open-ended (an "entitlement"), then there is no feedback loop to limit expansion and complexity.The system is now doomed to inevitable implosion/collapse.In private enterprise, the company either goes bankrupt or enters a brutal downsizing/ reorganization which essentially throws over the entire status quo.With government, that is impossible because the status quo is heavily defended by politically potent protected fiefdoms with asymmetric stakes in the game of preserving their share of the tax revenues (and the funds borrowed by government).
Saturday, January 30, 2010
Its the Math, Stupid
Remember that slogan from Bill Clinto's first campaign? "Its the economy, stupid". That was James Carville at his most brilliant.
In real life, not the silly drone of political campaigns, "Its the Math, stupid".
Everything, and I mean EVERYTHING, can lend itself to mathematical analysis to great effect. Everything from the melody of a symphony to the beauty of a woman's face can be expressed, and understood, mathematically. So too can we predict outcomes of government policy.
Got it? IMHO, that is the most succinct explanation for the surety of the disastrous outcomes destined to come from our "political progressives" and their insane social policies.
No matter what "feel good" status you might get, the outcome is ineluctable, and these programs will inevitably cause far more damage than they might temporarily alleviate, not that you can tell this to a "true believer" to any great effect...
The again, these were the folks that studied humanities in order to avoid Math... with predictable results. Government is run by lawyers (wordsmiths), also with predictable results.
Posted by The Short Story Man at 6:50 AM