Incentives matter

Here’s a nice paragraph from Arthur Laffer’s opinion piece in the Wall Street Journal today:

Government taxes cigarettes to stop people from smoking, not to get them to smoke. Government fines speeders so they won’t speed, not to encourage them to drive faster. And yet contrary to common sense, it seems perfectly natural to some people that government would tax people who work or companies that are successful only to give that money to people who don’t work and to bail out losing companies. The thought never crosses their minds that these policies are the very reason why our economy is in such bad shape.

Pay-for-performance in teaching

On occasion, I see or hear pay-for-performance in teaching discussed as a solution to help fix education.  I believe studies show that these pay systems show modest gains, but nothing to write home about.

I think the discussion usually misses the point, though.

First, I don’t trust standard measures of teacher performance.  Holding teachers accountable to test scores doesn’t make much sense.  Students should be held accountable to test scores.  Teachers should be held accountable to whether parents would recommend that teacher to kids of other parents.

Second, if pay-for-performance is not accompanied by a more open market for teachers, it won’t do much good.

In a pay-for-performance model, I believe there are two sources of possible advantage.

1) The “right” pay incentives may cause individuals to try harder and perform better than they would without those incentives.

2) The overall pay level attracts people with the best talent for doing the job.

I believe #1 is the benefit most people consider when discussing pay-for-performance.  However, #2 is the primary source of advantage and it won’t work if it doesn’t attract those with better talent.

Consider professional sports.  Many players receive bonuses if they achieve certain defined goals, like accumulating a certain number of touchdowns or making it to the post season.  I don’t believe those bonuses have much influence on outcomes.  Maybe some, but not a lot.  I have yet to hear teams claim they have found the magic formula pay structure that turns a mediocre football talent into a superstar.

Who performs the task does influence outcomes.  Put me in as a running back in the NFL and I would lose yardage and get a career-ending injury the first time I was tackled, no matter what bonuses were built into my contract.

The pay levels of the NFL encourages folks with much greater football talent than I into giving it a go.  Let’s say NFL salaries were capped to $100,000 per season.  Do you think the NFL would attract the same talent that it does today?  Doubtful.  Many of these guys would find something else to do.

In teaching, we typically look to see if pay-for-performance will encourage the existing teachers to perform better.  We should be looking to see if it attracts teachers with a different level of talent.

A couple of nice Mankiw links

The first link is to Greg Mankiw’s, Harvard economist, recent New York Times column, How to Make Business Want to Invest Again.

Key paragraphs:

Advocates of traditional fiscal stimulus often view low levels of investment as a symptom, rather than a cause, of the weak recovery. Businesses are reluctant to invest, they argue, because they lack customers eager to spend. If the government can goose demand by handing out dollars to households short on cash, or by buying goods and services directly, businesses will respond by expanding their own spending as well.

Yet fluctuations in investment spending, rather than being only a passive response, are also one of the driving forces of the booms and busts of the business cycle. The great economist John Maynard Keynes suggested that investment spending is in part determined by the “animal spirits” of investors, which he described as “a spontaneous urge to action rather than inaction.” Recessions occur when optimism turns to pessimism, and businesses are reluctant to place bets on a prosperous future. Recovery occurs when investor confidence returns.

WHAT can policy makers do to stoke animal spirits and encourage businesses to invest?

One obvious step would be a cut in the taxation of income from corporate capital. According to a 2008 study by the Organization for Economic Cooperation and Development, “Corporate taxes are found to be most harmful for growth.” Tax reform that reduced the burden on capital income and shifted it toward consumption would improve prospects for long-run growth and, in so doing, encourage greater investment today.

The second is from a 2007 New York Times column, but is just as timely: Fair Taxes? Depends What You Mean by ‘Fair’.  It’s a response to Buffett’s tax claims.  I wonder if Buffett ever reads his critics?

The best source for objective data on the distribution of the tax burden is the Congressional Budget Office. The C.B.O. goes beyond anecdotes and bald assertions to provide hard data on who pays taxes. One can argue about the details of its methods, but there is no doubt that it is nonpartisan and that its tax analysts are some of the best in the business.

The C.B.O.’s most recent calculations of federal tax rates show a highly progressive system. (The numbers are based on 2004 data, but the tax code has not changed much since then.) The poorest fifth of the population, with average annual income of $15,400, pays only 4.5 percent of its income in federal taxes. The middle fifth, with income of $56,200, pays 13.9 percent. And the top fifth, with income of $207,200, pays 25.1 percent.

At the very top of the income distribution, the C.B.O. reports even higher tax rates. The richest 1 percent has average income of $1,259,700 and forks over 31.1 percent of its income to the federal government.

When the C.B.O. studies the tax burden, it includes all federal taxes, including individual income taxes, payroll taxes and corporate income taxes. In its analysis, payroll taxes are borne by workers, and corporate taxes by the owners of capital. For the richest 1 percent of the population, 9.3 percentage points of their 31.1 percent tax rate comes from the taxes that corporations have paid on their behalf. The corporate tax would undoubtedly loom large if the C.B.O. were to calculate Mr. Buffett’s effective tax rate.

 

The Post Office beats Paperboys (and girls)

As a former paperboy, I was a little disheartened to receive my community newspaper  in my mailbox instead of on my driveway.  I noticed that my name and address was printed on it.

I opened the paper and saw the announcement that it was changing to mail delivery.  I found a couple paragraphs in the announcement interesting.

First, I was surprised by this paragraph:

We’ve been proud to have served as the “first jobs” for hundreds of outstanding independent contractor youth carriers, providing the opportunity for young people to learn responsibility and get real-world customer service, sales and entrepreneurship experience.

I was surprised because newspapers are normally vocal supporters of minimum wage and child labor laws.  I suppose its only okay when they employ children and pay less than minimum wage.  After all, they know they are well-meaning, but they can’t be sure about other employers.

I was also surprised that the paper recognized the opportunity of a “first job”.  This is something editorial boards fail to consider when supporting minimum wage and child labor laws.

Here’s the second paragraph I found interesting:

Kids’ lives (and their parents’ lives) are busier now than ever before.  With the increasing number of school and after-school functions, sports, church, club and family activities, it has become increasingly difficult to recruit and retain a full complement of reliable, dedicated youth carriers…

There’s a couple points to consider here.

One, maybe the gig simply just doesn’t pay enough.  I gave up my paper route quickly.  It was an early lesson in opportunity cost.  I could make as much mowing four lawns what it took in a month of throwing papers.

Two, with all the activities in our kids lives, when do they learn how to be productive in working world, live within a budget and support themselves?  Some of them seem to be learning this way too late.

With one-size-fits all education, it costs only time and opportunity costs (which are hard for children to assess sometimes) to participate in an abundance of activities.

I recall reading several months ago about one school district that had gone to a fee-based approach with extracurricular activities and kids were having to make tough choices.  Instead of running cross country and track, some could only afford to pick one because each cost the student or their parents about $1,000.  The nice thing here is that perhaps being more selective on school activities free up their time to be productive and get a job.

Assignment-based education

I recommend reading Seth Godin’s blog post, Back to (the wrong) school.

In it he reviews the history and rationale of public education and points out it was designed to train people to do what they’re told to do and he wonders if this is the best approach to education today.

If you do a job where someone tells you exactly what to do, they will find someone cheaper than you to do it. And yet our schools are churning out kids who are stuck looking for jobs where the boss tells them exactly what to do.

Do you see the disconnect here? Every year, we churn out millions of of workers who are trained to do 1925 labor.

I agree and I’m disappointed that I don’t seem to have written about this already.

I too believe our education model is generally an assignment-based model.  There are some parts that give more hands-on experience, like nursing and medical doctor training, for example, but for the most part we train kids to take direction and do their assignments.

Godin continues:

As we get ready for the 93rd year of universal public education, here’s the question every parent and taxpayer needs to wrestle with: Are we going to applaud, push or even permit our schools (including most of the private ones) to continue the safe but ultimately doomed strategy of churning out predictable, testable and mediocre factory-workers?

As long as we embrace (or even accept) standardized testing, fear of science, little attempt at teaching leadership and most of all, the bureaucratic imperative to turn education into a factory itself, we’re in big trouble.

In this post last December, I wondered what education might look like if we let the parents, rather than ‘experts’, have more choice.  Something that looks different than the current one-size-fits all model might emerge.

A doodle

I found this doodle in my notebook.    The caption on the the first doodle is “Entrepreneur” (though I spelled it wrong in the doodle).


In the second, “Politician”.

I thought it was a good graphic representation of some of the topics from my recent post, What is wealth and where does it come from?

See below the fold if you need help interpreting.

Continue reading

Someone listened for once

I was impressed by the New York Times column, Some of Sarah Palin’s Ideas Cross the Political Divide by Anand Giriharadas.

After taking some requisite lefty swipes at Palin, Anand tentatively praises her for the substantive part of her speech:

She made three interlocking points. First, that the United States is now governed by a “permanent political class,” drawn from both parties, that is increasingly cut off from the concerns of regular people. Second, that these Republicans and Democrats have allied with big business to mutual advantage to create what she called “corporate crony capitalism.” Third, that the real political divide in the United States may no longer be between friends and foes of Big Government, but between friends and foes of vast, remote, unaccountable institutions (both public and private).

In supporting her first point, about the permanent political class, she attacked both parties’ tendency to talk of spending cuts while spending more and more; to stoke public anxiety about a credit downgrade, but take a vacation anyway; to arrive in Washington of modest means and then somehow ride the gravy train to fabulous wealth. She observed that 7 of the 10 wealthiest counties in the United States happen to be suburbs of the nation’s capital.

Her second point, about money in politics, helped to explain the first. The permanent class stays in power because it positions itself between two deep troughs: the money spent by the government and the money spent by big companies to secure decisions from government that help them make more money.

“Do you want to know why nothing ever really gets done?” she said, referring to politicians. “It’s because there’s nothing in it for them. They’ve got a lot of mouths to feed — a lot of corporate lobbyists and a lot of special interests that are counting on them to keep the good times and the money rolling along.”

It took nearly three years, but someone on the left appears to have finally discovered the main driver of the tea party/libertarian movement (though I’m not certain that Anand realizes that yet).   Anand got past the fallacious name calling and inaccurate characterizations and liked what he heard.

And it’s something that Milton Friedman told us about long ago.  At the 2:40 mark of this video, as a matter of fact, he tells us how special interests get the political power to use government to bend the rules in their favor:

What he says about government regulation:

There are always…two groups of sponsors.  There are the well-meaning sponsors and there are the special interests who use the well-meaning sponsors as front men.  Who, almost always, when you have bad programs, have an unholy coalition with the do-gooders on the one hand and the special interests on the other.

There’s an old saying in poker.  If you don’t know who the patsy is, then you are the patsy.  If Anand keeps poking along at these thoughts, he (or she?) might discover that the well-meaning folks on the left and right, have been played as the patsies for the special interests seeking control over government influence.

What is wealth and where does it come from?

David Mamet corroborates my previous post on pp. 42 and 43 of his book, The Secret Knowledge:

The Left (as Thomas Sowell points out in Intellectuals and Society) believing in what it calls “social justice,” believes that wealth should be “shared,” but enters the discussion in its middle.  For wealth may or may not be shared (in fact, it is shared, as efficiently as possible, through trade), but the a priori question, to the Left, is unasked and unanswered: Where did it come from?

Where does wealth come from?  Great question.  So rarely is it asked and even more rare it answered.  Get ready.  Here’s the answer (in bold):

It was not, again, quoting from Professor Sowell, descended from heaven, like manna, and spread evenly over the ground.  It was created by individual expenditure of effort and individual willingness to undertake risk.

As my generation did not live through the Depression, World War II, and the agony of the immigrants who are our grandparents and great-grandparents; as we were raised in the greatest plenty the world has ever known and in the most just of societies, we have grown lazy and entitled (not unlike Marx, who lived as a parasite upon Engels, and never worked a day in his life).  The baby boomer generation, my own, is content, if of the Left, to live out our remaining years upon the work and upon the entitlements created by our parents, and to entail the costs upon our children–to tax industry out of the country, to tax wealth away from its historical role and use as the funder of innovation.

Risk taking and trial-and-error innovation.  That’s where wealth comes from.

It doesn’t come from laws or legislation.  It doesn’t come from taxes.  It doesn’t come government.

And, let me be clear on what wealth is.  Most people view it the state of being a rich person.  Here, I mean it to be our standard of living.

Wealth is what separates us from our hunter-gatherer ancestors.

They had the same 24 hours in the day that we have (plus a few microseconds).  But, they only managed to use those hours to eek out a sustenance standard of living or get just enough calories to keep from starving.

Most of us aren’t worried about starving.  We spend a fraction of the time getting more than enough calories and we spend the rest of the time doing lots of other stuff.  And we have a lot more time to do lots of other stuff, because we live longer than they did.  We survive illnesses that they didn’t.

All that separates us from the hunter-gatherer lifestyle is wealth.

That wealth resulted from innovation that was made sometime between then and now.

Those innovations resulted from encouragement individuals found in trading with each other and discovering that finding better ways to do things would enable them to move even further away from the life of hunter-gatherer grandpa.

Take a look at the products around you right now that make your life better than a hunter-gatherer.  Your carpet, phone, house, furnace, refrigerator, food in the pantry, the pantry, floor joists, electric wire and so on.

Consider that all of those resulted from an experiment — a risk someone took at some point in time.  It may have been an accidental risk.  It may have been planned.  But, it was a risk no less, because nothing is guaranteed to work or to be wanted.  Someone had to think of it and give it a try.  Very few of them came from a government project.  And even the ones that did were usually accidents that found an unintended purpose and what they have become had nothing to do with government.

When I drive around, I like to ask, “where did all these buildings come from?”  Each of those were a risk.  An individual or a group of individuals decided building that building would be a good idea. What things are in this world because you decided it would be a good idea?  How have those things improved your life or the lives of others?

Understanding what wealth is and where it comes from is important if you’re interested in continuing to improve everyone’s standard of living.

Government is still overhead

Given the President’s job speech, I thought I’d link to this post of mine, Government is overhead.

To sum that post up, individuals working in the private sector produce all the wealth that results in the standard of living we enjoy.  Individuals working in the public sector  consume some of that wealth.

The public sector would not exist if not for the private sector.

They should co-exist in a beneficial parasite (public sector)/host (private sector) relationship.  However, the parasite can get too big and and significantly weaken or kill off its host.

A wise vampire once said:

We like to talk big… vampires do. “I’m going to destroy the world.” That’s just tough-guy talk. Strutting around with your friends over a pint of blood. The truth is, I like this world. You’ve got…dog racing, Manchester United. And you’ve got people. Billions of people walking around like Happy Meals with legs. It’s all right here. But then someone comes along with a vision. With a real… passion for destruction.  He could pull it off.  Good-bye, Picadilly. Farewell, Leicester-bloody-Square.

This vampire understood he was the parasite and knew where his food came from.  He didn’t think there was much sense in killing off his host (bonus points if you can name that vampire).

Those in the government seem to have a tough time figuring out where their food comes from.

No argument from Hoffa

W.E Heasley makes a great observation on his blog, The Last Embassy.  He points out that in Jimmy Hoffa’s now infamous speech, no arguments were actually made.  From his post:

“We got to keep an eye on the battle that we face: The war on workers. And you see it everywhere, it is the tea party. And you know, there is only one way to beat and win that war. The one thing about working people is we like a good fight. And you know what? They’ve got a war, they got a war with us and there’s only going to be one winner. It’s going to be the workers of Michigan, and America. We’re going to win that war. . . . President Obama, this is your army. We are ready to march. Let’s take these son of bitches out and give America back to an America where we belong” — Teamsters President Jimmy Hoffa speaking at a rally for President Obama in Detroit on Sept. 5. (1)

In the above quote exactly what entails the “war on workers”? Exactly how does the tea party [a non existent political party] articulate a “war on workers”? The non-defined and example-less “war on workers” is going to be refuted by means of marching? Marching will “…take these son of bitches out…“? Hence we have an argument with no underlying the arguments.

I think it is very important that we train ourselves to recognize when nothing of substance is actually said.  This happens often.  We fall for the style of the speech or the meaningless platitudes that are uttered, but neglect to ask what exactly does that mean and why?