Incentives Matter

It’s Hump Day already!

I didn’t realize this past Sunday was the first day of summer. But, of course, as it’s sunny and hot here year-round, I lose track of these things.

Of course, it’s the time you want to take off and not go back to work, especially if you had a sweet gig going on.  Like getting paid not to work…

    • If you pay people to stay home, they’ll stay home.
    • If they stay home and get paid for doing nothing, they’ll rebel when the program ends.
    • None of this should surprise us, but we’ve got some great writers who spelled it out for us decades ago.

Indiana Rebels!

“Show me the incentives and I will show you the outcome.”

Charlie Munger

You can probably tell I’m not a fan of the welfare state.  Before you hurl strawmen at me, such as, “Do you want people to starve?” or “Do you want poor people to stay poor?” just try to understand incentives.

If you pay people to stay home and do nothing, they will stay home and do nothing… most of the time.

Occasionally, they will pick up a pen and write Harry Potter, but very rarely.  To my knowledge, that’s only happened once.

A far likelier scenario is that the beneficiaries will get angry and sue, as in Indiana.

Let’s set the scene.

There are 116,000 job openings in Indiana.

So the Indiana Governor, Eric Holcomb, decided to end benefits by the end of this week to get his people back to work.  The benefits were due to expire in September.

The temporary benefits amounted to $300 per week.

Geez, that’s a lot of money for nothing.

At the risk of sounding soft, maybe he could’ve given them a week or two to get used to the idea.

But he probably was just thinking about how much money was getting flushed down the drain every single day.

Now, it’s easy to trash “the freeloaders” and applaud the governor. But instead, let’s go back to first principles to see why bribing your population is a bad move to begin with.

America, Before Bismarck

One of my favorite exercises is to go to https://constitution.congress.gov/constitution/.  Then I hit CTRL-F for “find.”  Then I type in “democracy.”  Of course, the site then reads, “Not found.”Just like in the below screenshot.

Why?

Because the Founding Fathers hated the notion of democracy.

They didn’t want numbskulls having any say in how the new nation would be governed.  A simple watch of the 6 o’clock news explains why.

The problem with democracy is that the numbskulls get to vote.  And they will vote money into their own pockets every single time.

It’s just the nature of the beast.

It works both ways, though.

So, if the public can vote money into its pockets, the politicians can bribe them.

Copying Bismarck Was a Mistake

In Royal Flash, George Macdonald Fraser wrote Otto von Bismarck as a monster whose only purpose was to reunite the German-speaking people under one flag.  In other words, GMF was essentially correct in his portrayal.

Bismarck did so by any means necessary, including financial.

Robert Higgs writes:

The modern welfare state is often viewed as originating in Imperial Germany in the 1880s, when the Iron Chancellor, Prince Otto von Bismarck, established compulsory accident, sickness, and old-age insurance for workers. Bismarck was no altruist. He intended his social programs to divert workingmen from revolutionary socialism and to purchase their loyalty to the Kaiser’s regime; to a large extent he seems to have achieved his objectives.

Unfortunately, at that time, American social scientists would travel to Germany to see how things were down there.

That “knowledge” infiltrated the American system and contaminated it, as it had pretty much the rest of the Western world.

Bertrand de Jouvenel, along with Hayek, Friedman, and Rueff, founded the Mont Pelerin Society, and watched these developments with horror.

In his masterpiece On Power, Jouvenel wrote:

The whole of society without exception reached the point of demanding security. Security has to be paid for. It is for that reason that we are today the participants in what the old writers called a pactum subjectionis, by which men surrender to the state their individual rights in consideration for the social rights received back from it.

He followed with:

The essential psychological characteristic of our age is the predominance of fear over self-confidence.  “The worker is afraid of unemployment and of having nothing saved for old age. His demand is for what is nowadays called “social security.”

Everyone of every class tries to rest his individual existence on the bosom of the state and tends to regard the state as the universal provider.

And finally:

“The new rights of man [from FDR] are given out as coming to complete those already proclaimed in the eighteenth century. But the least reflection is sufficient to show that in fact they contradict and abrogate them.

The old ones, in decreeing liberty, made each man the sole master of his own actions; the state could not guarantee their consequences, which had to be borne by the individual alone.

Whereas, on the other hand, if the state is to guarantee to a man what the consequences of his actions shall be, it must take control of his activities.

In the first case, a man is thought of as an adult, he is freed from tutelage and left to face the risks of life himself.

Whereas, in the second, the purpose is to keep him out of the way of risks; he is treated as an incapable [person] and put in leading strings.

The conclusion is, then, that the promises of today in fact close the cycle that was opened by the declarations [of independence] of earlier days. The liberty then given is taken back in exchange for a security that is desired by all.

Apologies for the liberal quoting, but it’s important to get to the heart of the matter.  It’s uncanny, as he might have written these words yesterday.

Perhaps surprisingly, Jouvenel wrote On Power in 1945, right when State power was genuinely overtaking the America of old and terraforming her into a welfare/warfare empire.

Back to Indiana

Scarier still is that while there are 116,000 openings, there are over 200,000 people out of work.  So even with the Governor’s hastened ending of the handout, not all those people will land jobs.

The trick is not to get your population high on handouts, to begin with.  Once you pay them to sit at home, whatever the reason, they’ll do just that.  And now we see how they react when their candy is taken away.

A reckoning is on the way for those who think The State will protect them forever.  Indiana is just one place.  Two dozen other red states are following suit in ending benefits early.

No one wants to take the pain, though.  And it’s tough to blame them.  Like investors who don’t want the Fed to stop accommodating, these workers want the government to keep on handing out.

And since the lockdowns can be rightfully interpreted as government-mandated private sector shutdowns, one can argue workers have every right to complain.

It’s economic heroin: the worst sort.

Until tomorrow!

All the best,

Sean

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