The Straw Man in the Incentives Debate

There seems to be concern that "incentives do not matter" is a "straw man." -- that nobody actually believes this, so that my raising the issue is just rhetorical smoke and mirrors rather than a rebuttal of a real-live argument.

Some of the big government advocates are too smart to come out and say "incentives do not matter." But it is true that incentives are conspicuously absent from their public policy commentary and design, especially as it relates to the so-called fiscal stimulus.

1. Why would someone who genuinely believes that incentives matter, build into mortgage modification marginal tax rates that exceed 100%? Why would they do so without out even commenting on why they think 100+% tax rates are OK in this instance?
2. If incentives really mattered, why did the Obama Administration's stimulus bill analysis neglect to indicate how the bill (either in the form of spending or "tax cuts") would affect incentives to work and to earn?
3. If incentives really mattered, why did the Obama Administration's stimulus bill analysis choose "multipliers" from the economics literature without even a cursory mention of whether the stimulus bill's effects on the incentives to work and earn would be similar to the government spending episodes studied in the literature?
4. When Professor Krugman wrote about the stimulus (e.g., here, here, and here), he did not devote even one sentence to the incentives that would be created by the federal spending. If he thought incentives mattered, why is lots of attention devoted to "multipliers" and none to incentives?

The real straw man in this debate has been the characterization of my analysis:

1. I never blamed the entire recession on unemployment insurance, or on mortgage modification, or even the combination of the two. Moreover, I have repeatedly been clear (e.g., here -- the paragraph that starts "To be clear", and here) that we would have had some kind of recession even if government had not destroyed incentives.
2. I never said that unemployment insurance is wrong. I called it "compassionate, but inefficient" and a minor contributor to the overall bad incentives created by our government during this recession.

With that said, I appreciate any citation, no matter how distorted it may be!

Comments

[VennData:]

Some of the big government advocates are too smart to come out and say "incentives do not matter" is a straw-man argument. Who? Which ones? What percent of "the big-gov't liberals?"

This is the famous Bush administration argument "Some might say" that creates a fictitious straw man to hold up.

Until you say who won't say, your argument has no merit.

Sep 10 07:08 AM

[Tony Petroski:]

The article has some flaws although I agree for the most part with Professor Mulligan.

The title, "The Straw Man in the Incentives Debate," is misleading because there's been no debate about incentives. In this I agree with Professor Mulligan although the title should be "Where is the Debate Over Incentives?"

From the article: "There seems to be concern that "incentives do not matter" is a "straw man." -- that nobody actually believes this, so that my raising the issue is just rhetorical smoke and mirrors rather than a rebuttal of a real-live argument."

Professor. In the Carter stagflation years, the Keynesians would argue that incentives do matter but that raising taxes would be a plus for the economy because the average worker and especially "the rich" would work harder in order to remain at their current after-tax income. We now know that was nonsense, but at least there was a debate about incentives.

I, like you, am astonished at the rapidity at which we all became Keynesians again and how "stimulus" became the default policy choice by all. It would have been bracing to have at least a little debate about the beneficial effects of reducing or eliminating corporate taxes, reducing regulation, etc.

I don't think we really are all Keynesians now. We're in a brief period during which elites, especially those coming from the Northeast seaboard and including the establishment media, have all jumped on the same train and will be on it until the tracks have been jumped.

Then comes the re-writing of history.

I would stop defending your position on unemployment benefits. It's like pointing out that raising the minimum wage causes unemployment for the marginal worker (please review the latest teen unemployment numbers). You are certainly correct, but "compassion," i.e., robbing Peter to pay Paul, trumps all reason.

Sep 10 09:11 AM

[NUCLEAR1929:]

very smart

Sep 10 02:20 PM

[Danny Newton:]

There seems to be no lack in faith in incentives when it comes to energy. If incentives seem to be lacking in their ability to deliver a value added project, we simply imagine external benefits that make up the difference like added security. Once intangibles become monetized, there is no policy that does not seem to be a good idea. The more that incentives are polluted with intangibles, the less one needs a rational side of the brain.
The ultimate faith is that the wealth of the rich will never exceed the needs of the non-rich. The Post Office can make money on a 44 cent stamp only if the delivery is local. There is no tipping point until the winners encourage the creation of added losers that need to go longer distances, like Alaska. As long as there continues to be cash in the register at the end of the day, there is no need to worry that the wealth created by the winners may have created an increased demand by the losers. There is no curiosity about a rational analysis or crafting a rational system of control defining or causing one to be aware of where the tipping point is as long as the answer continues to be raising the cost of the stamp. If there is a lack of incentive, it is a lack of incentive to study the effects of Socialism.

Sep 11 07:36 AM