The Dynamic Nature of Economic Decisions

One of the most astonishing aspects to progressive politics is how poorly its practitioners seem to understand the dynamic nature of economic decisions — that people change their behavior in response to incentives. The results are often tragic when they are not simply stupid.


I went to see my family physician recently for a sinus infection. In the course of that discussion, he told me that the medical group of which he is part-owner was wrestling with a serious problem: should the medical group abandon the health insurance plan that it provides for its employees? Yes, a bunch of doctors, people who should be seriously committed to seeing that everyone has access to quality medical care, were considering dropping coverage.

The reason was very simple: all of their employees (except the doctors who own the group) make less than $93,000 per year. Under Obamacare’s numbers for Idaho, all of them will be eligible for subsidized health insurance next year: a maximum of $2250 out of pocket per person. At the same time, the penalty that the medical group will pay for failing to provide health insurance was so minor that the doctors concluded that they could take the enormous savings of dropping coverage and give each owner a big bonus — enough that nearly all of them would be able to buy individual health insurance, and have gobs of money left over.

Brilliant: Obamacare provides an incentive for these doctors, who are already well-paid professionals, to move costs that they are currently paying onto the state and federal governments. Rich people get richer; middle class working people will now have to buy health insurance from the exchange.  Even with the government subsidies, for many of the employees, they are going to be worse off than before. What, exactly, was Obamacare supposed to do?


Another example: I work part-time for the College of Western Idaho. They recently announced to their employees what a lot of colleges around the country have announced: all adjunct faculty will be limited to nine units per semester. Otherwise, the College of Western Idaho will have to provide health insurance to these adjunct faculty next year.  Keep in mind that adjunct faculty are already paid incredibly poorly. The most that you are allowed to work now is 21 units per year, which is a gross pay of $15,750 per year. (Obviously, we do not teach because we want to get rich. And do you have any question why adjunct faculty lean left?)

Obamacare has created another powerful incentive that changes behavior: it means that adjunct faculty, many of whom are struggling to raise families because they have to buy their own health insurance (or hope that no one gets sick), will next year have even less income with which to buy health insurance.  Powerful incentive, that requirement to provide health insurance to employees above 30 hours a week: colleges are making sure that everyone that does not have coverage now will never work 30 hours a week again. I would like to think that my fellow adjuncts who do not have full-time jobs elsewhere with health insurance (like I do) will recognize that Obama duped them when he promised that he was going to make their lives better. But I am sure that NPR, PBS, and Mother Jones will persuade most of them that it is all George Bush’s fault.

Here’s another example of where static analysis of social problems leads to destructive results. The Atlantic, a generally left-of-center magazine, recently published an article about why free-wheeling, libertarian, libertine Amsterdam is about to start regulating its legal prostitution businesses. The argument for legalizing prostitution was that bringing it out in the open reduces the need for pimps, makes it easier for prostitutes to seek police protection from rough customers and organized crime, and makes it easier to impose safe-sex practices on the trade. These are persuasive arguments; I have used them myself when I was a very earnest young Libertarian Party activist, back when pterodactyls roamed the skies, and we distributed our earnest ideas on cuneiform tablets.


But as the Atlantic article explained, that is a static analysis of a dynamic process. Legalizing prostitution made it more profitable, because it could be advertised openly, and because making it legal increased total demand for these services. Increased demand and increased profit meant an increasing number of prostitutes working in Amsterdam — and an increase in human trafficking. Increased demand for prostitutes to work there meant more procurers importing women (and often girls) from places of desperate poverty — and many of these prostitutes had no choice about their line of work.

Yes, theoretically, the victims of human trafficking could call the police — but many do not speak Dutch or English, and worldwide, pimps that engage in this enslavement rely on brutality to terrorize these prostitutes into silence. A recent study of human trafficking from the London School of Economics concluded that where prostitution is legal, there is more human trafficking, because it is feeding a legal trade. Without a very thorough level of regulatory oversight, it is often difficult to distinguish lawful from unlawful trade.

One of the reasons that I have become much more conservative in my old age is the horrible realization that many ideas that sound great on a written page do not work so well in the real world, where human frailties and the dynamic response to incentives conspire to destroy brilliant theories. Abandoning existing laws and institutions should be done only with very careful consideration of why people of the past made those decisions. Sometimes, previous generations were wrong; sometimes, circumstances have changed. But the older I get, the more obvious it is that the leftist mindset has too strong a bias in favor of scrapping everything of the past simply because it of the past. I contend that an ounce of experience is worth a pound of theory; many of our traditions are the summation of decades, centuries, sometimes millennia of experience.



Trending on PJ Media Videos

Join the conversation as a VIP Member