Incentives are a driving force of human behaviour. Because people respond to incentives in a relatively predictable manner, the study of incentives is at the heart of economic theory. Their manipulation is also at the heart of politics.
Incentives influence almost everything we do: how hard we work hard, where we shop, what sort of car we drive, even who we vote for! When given a choice, if one option leads towards an increase in benefits, while the other leads to an increase in costs, then we are more likely to choose the option leading to increased benefits.
It’s that reasoning that drives our political choices: most people support parties that they believe will deliver an increase in benefits to them and their family. In other words, people vote with their back pocket.
An example of this occurred during the election campaign when Labour announced that it would abolish interest on student loans. While most people acknowledge that this is bad policy – since it will create a massive incentive for greater borrowing, leading to bigger loans and a more indebted nation – it certainly helped Labour to win the election. Now people all over the country who had even a remote interest in studying are starting to check out courses and student loan requirements.
Incentives in public policy come in a variety of sizes and shapes. The level of taxation – the major form of income for governments – influences the nation’s attitude to work and investment: if tax on income is kept low, then the incentive to work hard to gain extra income is strong. Similarly, a low company tax rate creates a compelling incentive for investment in the business sector through the promise of increasing returns. That’s why, if governments become too greedy and hike up taxes too much, they risk undermining a nation’s enthusiasm for work and business investment.
A key incentive that has been long favoured by politicians is the use of subsidies.
New Zealand’s experience of these is long and painful, with some of the most infamous subsidies being those that were provided to farmers by the National government in the seventies when Britain joined the Common Market.
As a result of these subsidies it was estimated that some 40 percent of farmers’ incomes came from subsidies. They broke in marginal land that was unsuitable for farming creating ecological disaster zones in many parts of the country. They produced mountains of butter that had to be given away. Some $100 million in sheep carcasses had to be rendered down. And stockpiles of wool sat around for decades.
The problem is that when politicians agree to the demand from pressure groups to introduce subsidies, it is usually in return for votes at the next election. With their focus on the three-year electoral cycle, politicians usually ignore both the impact of the incentives on the wider community, and the longer-term consequences.
Economist Henry Hazlitt in his classic bestseller Economics in One Lesson, puts it this way: “the art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups”. He goes on to state that nine-tenths of the economic policies that cause dreadful harm around the world occur as a result of that basic principle being ignored.
That is certainly the case here in New Zealand with our welfare system. For over thirty years, successive governments have subsidised a system that creates dependency, breeds dysfunction, and damages children. Unsurprisingly, as a result of these subsidies, there has been a tenfold increase in welfare benefits over that period from around 30,000 to over 300,000, as well as a dramatic escalation in child abuse.
Whereas back in the early seventies there were 28 full time workers for every full benefit paid, there are now only four. And with growing pressure for the expansion of the present welfare system from special interest groups and advocates, the number of beneficiaries in the future is expected to grow faster than the number of workers.
By incentivising unemployment, sickness, family breakdown, and illegitimacy, both Labour and National governments have been responsible for creating human misery. People who have had their dignity and confidence taken away from them are rarely proud or happy. Children growing up without a dad to guide and protect them, and without a working role model in the family, not only face greater risks and difficulties, but all too often lead lives of limited opportunity.
Taxpayers, meanwhile, are forced to subsidise people who could and should be working, to be state wards. That means that taxes remain too high, and hospitals, schools and communities are increasingly overwhelmed as they try to cope with people who are being subsidised to be dysfunctional: drinking too much, getting too violent, doing drugs, abusing or neglecting their children, committing crime and generally failing to take responsibility for their behaviour and their future.
The answer is clear: as a society we must stop subsidizing what we don’t want more of. If people are unemployed we should not be paying them to do nothing; instead we should require them to undertake 40 hours a week of work experience. If people are incapacitated but capable of working when they get well, we should be proactively helping them into the speediest possible recovery, rather than paying them to languish on welfare.
We should stop subsidizing family breakdown not only by providing support for single parents to get jobs, but also by introducing shared parenting so that both parents can share in the responsibility of caring for the children. Also, we should acknowledge that children do best with a mum and dad who are committed in a stable relationship, and stop subsidising unmarried women to have children on their own.
This weeks poll: Do you support the removal of subsidies that create dependency?
Selection of Your Comments:
*Such a change of policy attitude could begin by denying any extra welfare entitlement to the parent/mother of any child conceived and born while the mother was already on the DPB.
*The shame of this dependency system is it has become inbedded and therefore a norm. A hand up is better than a hand out and 2 parents caring is better than 1.
*Australia have apparently just introduced the need for mothers to work if they are on the DPB when their children are at school. The wages amount is deducted from the welfare payment – very sensible!
*I would like to see political leadership in reducing welfare dependency. Drink driving is actively discouraged but welfarism harms children. Where are those public warnings?
*There are times when a female gets caught and ends up pregnant, however when one hears and knows of someone having several children all by diferent fathers and thinking it is their right that welfare will look after them all, then it is wrong. We should ony under cetain circumstances provide welfare for one (the mistake) after that, it is their own responsibility – though this would possibly need looking into too as we already have children without care who cause trouble, be it burglary, home invasion etc.
*I have also heard of a person who already has a 10 year old child who is divorced who is now looking at IV to have another child. How is it possible for someone on a benefit to be able to get IV? All because she wants to have another baby.
*New Zealanders have been encouraged to know their rights, whereas knowing what their responsibilities are is even more important.
*I manage a training centre aimed at preparing people for employment. Currently working with one gentleman who informed me that he would not accept a job unless it paid him $16 per hour; and WINZ have to pay for him to get his licences back… complete lack of personal responsibility that has been encouraged for too long!
*People must stand up and tell the truth, as you do Muriel, about the insidious destruction of the family unit and values. This country will self destruct, both socially and economically, if we don’t turn away from the ever burgeoning socialist welfare state. Self reliance and personal responsibility are critical traits within a healthy society. Have we as a nation learned nothing from history?
*Absolutely agree with your comments and insights into this dysfunctional component of our society. I believe that after a stand down period of say 3 – 6 months, those on the dole should be required to undertake work for the common good. Some may say this is demeaning, I say why should my taxes support some one elses lifestyle choice? Having that component of earned income also keeps those unemployed in the working frame of mind, and avoids the pitfall of losing experience that impacts detrimentally on their employability. Employers don’t like to see gaps in the employment record of potential candidates.
*My husband earns $60,000 p/y as a school teacher. It is demoralising to us to realise that having 5 (I think) kids on welfare is equal to what he is paid a year plus he is being taxed of course!. That people can get this sort of money for sitting around and being paid for the priviledge of having children, is just amazing to us.
*NZ is in a downward spiral with a large part of Helen Clarke’s support base being those who are dependent on the State. Which keeps the taxes high, which leads to those who are fed up of supporting beneficiaries leaving for Australia, which then increases her support. Hence the spiral.
*In my opinion a single mother under a certain age (e.g. 20) should not receive a benefit. Her parents should be responsible for the upkeep of the child or it should be given up for adoption. If the single mother only has a welfare dependent parent then the baby should be given up for adoption. No mother on welfare should have an increase in her benefit if she has another child/children. While this may seem radical I’m sure that within a short period of time the numbers of illegitimate children would drop dramatically.
*I live in a rural community. I work in the health arena. I sit on the PHO Services committee. They sit and formulate strategies as to how to make the limited dollar go many extra miles – in effect another form of subsidy to those already on many other benefits. The committee struggles to come to grips with the social issues of long term dependency – teenage suacide among them. The answer – more benefits and subsidies. There is no education given to teach people to be self sufficient and manage their own conditions in a pro-active manner. I sit on the committee and watch as we set ourselves up to fail in the worst possible manner. There are no incentives for the young people to improve their lot – they have no goals and are directionless – partly due to there being no encouragement from family/whanau, and mostly from the lack of positive male role models in their communities and families. We are now reaping the rewards of many years of welfare culture that has been bred into our society. It will take many years to grow out of the dependency culture. We MUST START NOW.
*I agree that those people capable of work should work for an income. If they are out of work and receive the benefit we should get them to do work on community project and I believe that many of them could be employed cleaning up the country site. If they do not like that then they can stay home but they do not get paid either.
Welfare dependancy
*On welfare, incentives and disincentives is the key as you state. I propose something radical but I believe sensible as a solution. Everything connects to everything else. So welfare connects to employment and tax.
*Income Tax is in practice a penalty on productivity even though it is meant simply to be a way of raising funds. Evolution allowed income tax to change from being a voluntary levy to pay for roads in colonial NZ to the beast it is today. Income tax is efficient but has become a weapon of mass wealth destruction.
*Welfare recipients of forced charitable donations are locked into a system that allows them to earn $80 per week extra and they are docked for all earnings above that. That is the disincentive trap from which many of the disadvantaged are unable to break.
*For most people, if their income is suddenly lowered for a short time or they choose to pursue some goal which lowers their income, they either resort to spending savings or they may borrow against assets. That is how businesses start. So borrowing is the normal method of making up a shortfall in income. The Reserve Bank Governor reminds us that NZers are very good borrowers.
*The same principle should be applied to welfare recipients. Without assets, they borrow from the bank of last resort being the government. Most NZers [say 90%] support the principle that people in need should be supported. But no-one has ever said it has to be an immediate gift. So the debt would grow month by month. I do not think that is radical. It is obvious.
*Some will never pay it off. They will go to their grave knowing that other NZers supported them to the tune of say half a million dollars. That must be good news to a person that their fellow human beings value them that highly. Let us measure it so they know. Clearly a proportion of sickness beneficiaries are not capable of work. E.g. if someone is dying of cancer then they would continue to receive a sickness benefit. However many should be reassesed for fitness to work.
*Making welfare a debt sends the right signals and accords with normal daily life for most of the population. Like student debt, it should carry interest. Students use debt to pay for living essentials. It is exactly the same for welfare recipients.
Debt write-off
*Now here is the first radical idea. The above debt structure assumes that a system is in place for them to obtain work. See below for that. When the welfare recipient obtains income there will be no income tax on their earnings. They keep all of what they earn. That will be more than what they received on welfare. As they pay off debt, the first payment will be accompanied by additional debt write-off. So every repayment will get an equal amount written off dollar for dollar. If they earn more, they repay more, then the rate of debt foregiveness increases. That creates a huge incentive to earn more. It could get to say five for one. Repay five hundred dollars to get two thousand five hundred dollars paid off. They will also have the pleasure of standing up as human being to know they can provide for themselves.
*That creates a huge incentive to earn more. So instead of income being penalised, former welfare recipients get a bonus for higher earnings. [Wouldn’t it be nice if the banks wrote off extra dollars for higher pay back]. The incentives are all in the right place and set the scene for savings.
Managing employment
*The second factor relates to how to provide the jobs for the unemployed. Every employer company currently pays profit taxes. What a stupid evolutionary counter productive method. Why would anyone in their right mind want to penalise profit. That is the incentive which makes the economic world go round. [Let us not side-track on to excessive profit or other excessive wealth which is a different question].
*It is fundamental that the whole economy depends on the economic activity of all employers to provide the wealth of the nation. Everyone depends on that economic activity. So employers currently carry the cost of the unemployed anyway although indirectly. Profit taxes currently pay a lot of welfare money but the employers get no benefit from that non-deductible expense. Most employers belong to the Employers and manufacturers association.
*This second proposal takes that situation and is a little more radical. Every company will be given the option to switch [no return] from Income Tax on profits to a NZ INC expense which represents their share of the welfare burden. In return every employer, having paid for extra employees can draw from that source as required.
*So a specially legislated NZ EMA special trust can buy WINZ for One Dollar.[ I am sure Richard Prebble would have been pleased to arrange that sale.] There will be a huge incentive for the employers NZ EMA WINZ trust to find productive work for those in the EMA WINZ scheme members. They are paying their wages anyway. If anyone can find them work, it is the employers. Some will say that many are unemployable. I am not prepared to so easily write people off. Maybe their harsh background caused a problem which needs other remedial treatment eg personal development, motivation etc. That is another story probably relating to parenting skills.
*If someone does not turn up for work, then no pay as for everyone else. We had the ridiculous example recently of orchardists unable to find employees while thousands enjoyed the summer on the dole. Currently the building industry is in great need of plasterers to for homes. They are being imported from Portugal. Many stay on illegally still working and filling the job which should have been given to the guy on the dole.
*Bottom line: privatise the dole. The incentives are then in the right place. NZ Inc gets full employment. Very few will be incurring debt of last resort. Could it become real? Or is it all too radical to pass muster in this conservative lttle corner of the world?
*I have now sold my Motel. For 9 years I made it my goal to get the DPB ladies back into the workforce – ideal hours 9am to 1pm. Key reasons were to assist with self esteem and show them how to clean and take pride in their homes. Plus ultimately encourage them to use the FREE continuing education available to them. Success? NO! Only four over the 9 years took advantage of my assistance and moved into fulltime employment. Still I guess that is better than none. In my final year I gave up because it was too hard to carry the poor attendance rate and so I employed Chinese students whose performance and attitude was 100% compared to the Kiwi counterparts.
*Well said! I’m currently doing a Masters degree part time, and the Labour election bribe of interest-free student loans is certainly attractive, especially when papers are nearly $1000 each. I think this offer is economically stupid, but when there is free money around, why pay out of your own pocket for education? I didn’t, and would never vote Labour – I reckon we’ve all had enough of their PC and social engineering stuff that is actually harming the whole social fabric of this country.
*Adam Smith made a similar argument in his work The Wealth of Nations. He made the point by stating that it must be enlightened self interests not simply self interests that should be the driving force that will enable an economic system to prosper. Most subsidies are an expression of self only, there is nothing enlightened about them at all. You make this very clear in your comments.