Monday 20 February 2017

Incentives work

When I was writing last week about the middle ground of effective politics, I treated taxes as necessary to provide the infrastructure on which civilisastion depends.  But there is another side of taxation: it serves as an incentive for citizens to Do Right - as that is determined by the current ethics of society. Those ethical values are not set in stone: time was when slavery and thumping children was okay but homosexuality wasn't.  That's important because recognising those changes gives licence to push against our unconsidered certainties like right-to-life [the old rather than the unborn]; the desirability of depillating (female) oxters; that owning a car, a TV & a cell-phone and having access to broadband is a Right.

Every budget here in Ireland, the tax on booze and cigarettes is likely to increase. This generates enough money to pay for the armed forces, the justice system and all the zimmer frames the country currently requires. But, insofar as the cost of booze has an impact on consumption [not so much apparently: alcohol consumption being price elastic], taxing the stuff also reduces the rate of liver disease and drunk driving. In the 1990s we were all repelled by the drift of cheap carrier bags all over the streetscape and landscape. In March 2002, the Irish government introduced a levy of 15c on each plastic bag at point of sale. The effect was amazing, lots of people acquired canvas bags and everyone eschewed the tawdry 'free' bags and were able to empty a kitchen drawer full of the repellent sacs. Folks like me don't ignore speed limits (so much) now that speed camera vans are hidden in random dips and curves of the road network. Disincentives seem to work.

Incentives work as well, if you can write off part of your mortgage payments against income tax, then you will be encouraged out of rented accommodation and into owner-occupier land. We bit into this cherry cake in 1986 in England and have become absurdly rich as a result of getting on the 'property ladder' early. Because we had bought cheap in a rising market we had more disposable income. We didn't want to get rich but we did buy into the idea of home-ownership. Enough to take maximum advantage of the SSIA scheme in 2001-2002, a cunning plan for catching votes put out by the same government that dealt with plastic bags. SSIA allowed citizens with disposable income to save part of it regularly for 60 months and get a 25% bonus from the government at the end of five years. €254 (the max monthly) * 60 is more than €15,000 without including any interest payments. When this became accessible in 2007, the government added another €3,800. It was like the lotto! The rich (well, the hard-pressed middle) did very well out of this so long as they didn't invest their windfall/savings in property . . . in 2007 . . . at the top of the bubble. My pal K, 30 years younger than me, paid €320,000 for a new-built, shoddy-built, 2-bed flat in Outer West Dublinia where there were neither buses nor shops nor schools. The poor couldn't ante-up for a deposit [some refused on principle] so they stayed poor and because the SSIA gravy-train had left the station, they effectively became poorer. Mortgage interest relief and SSIA were among a raft of measures which pleased the middle-class voter but drove a deplorable wedge between the haves and the have-nots. K will die in debt simply because he's a generation younger than me but, even with my pension contributions in rag-order, I'll be comfortable in my old age.

Here's an interesting article about perverse incentives and unintended consequences during the birth of Australia. As everbode kno, white Australia was started as a dumping ground for undesirables after governments started to get squeamish about the death penalty for stealing a pheasant or a handkerchief. The first fleet left England on 13th may 1787 and arrived in Botany Bay 36 weeks later. The 11 ships brought more than 600 male and 172 female convicts having sustained a mortality of 5.4% on the long long voyage. We lily-livered moderns whinge on when London-Sydney takes 22 hours in tourist class. The convict transports Alexander, Charlotte, Friendship, Prince of Wales, Scarborough and Lady Penrhyn were contracted by the government on cost-plus basis. William Richards the contractor was paid for the use of the ships for the service but could also claim allowable costs - provisions, rum, water, storm damage, a flock of chickens for the officers - up to a maximum amount. Lime juice for the scurvy probably wasn't on offer although it was 'in the air' following the advocacy of Captain Cook, and became standard issue on Royal Navy ships in 1795. Richards wanted to make money but he also wanted further contracts and so had an interest in doing a good job in delivering all the cargo that he'd shipped.

Transportation was thus deemed a success and let's have more of it. But the cost made people gasp and stretch their eyes: it came in at Oz$100 million in today's money, which made it seem like the convicts had been on an all-you-can-eat cruise-liner. In 1790, a second fleet was assembled by a well known slaving company Camden, Calvert & King who had a wide experience of shipping people across the ocean but rather fewer scruples than Cap'n Richards. They also had a different form of contract - fixed-price per head loaded - which was considerably cheaper than cost-plus. There was no penalty if the cargo didn't arrive at the other end and the vessel's captains were free to sell surplus provisions at the other end of the world. The consequence of the costing system was a mortality rate of 27% on the voyage and a further 15% on delivery. The 600 desperately sick and lousy folk that survived had to be looked after carefully by the local government.

I picked up the sorry tale when it was flagged on metafilter.The comments there make numerous comparisons to current economic practice w.r.t. health services etc.

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