Friday, November 27, 2009

On Short Term Kindness & Long Term Cruelty.

When we analyze the unintended consequences of many "progressive" policies, we see a pattern of "short term kindness & long term cruelty." In other words, they often address social and economic problems through means that engender even greater long term problems.

The concept of incentive structures and vicarious learning are key components in this discussion. When an individual or enterprise faces the positive or negative consequences of their behavior, that behavior is reinforced. These consequences transmit vital social and economic information to other members of society. For example, when it became widely known that a major real estate firm was heavily fined for not properly maintaining an escrow account, other real estate firms scrambled to get their books in order. And conversely, other firms observed and sough to model the behavior of the few companies that maintained profitability during the economic downturn. In other words, we learn from the consequences that others face.

The problem we find with many policies is that they shield individuals and institutions from the consequences of their behaviors. Not only does this prevent individuals and organizations from adopting more socially and economically sound behaviors, it limits the mechanisms of vicarious learning. The first example that comes to mind are the multiple bailouts of banks and automobile companies. If the Bush and Obama Administrations had not undertook these measures, the companies and their many of their workers would have faced bankruptcy and buyouts that would certainly have caused economic and social pain. But, by not allowing more financially sound and dynamic companies from buying out and restructuring them, we are left with stagnant companies that only survive with government subsidies and protections. In the medium to long run this will lead to an economy that is less dynamic and less capable of generating jobs and general prosperity. And as other CEOs witness the fall of fiscally irresponsible corporations and the executives than run them, they are fall less likely to engage in those behaviors. And as they watch their compatriots float down to a happy retirement with their golden parachutes, they chances of them vicariously learning and engaging in good corporate governance diminishes.

The principles of short term kindness and long term cruelty are most readily seen in our immigration policies. In California "progressives," ethno-political lobbyist and their corporate allies (who are addicted to cheap labor) aggressively block most enforcement efforts and even measures to limit access to welfare and social services. On an emotional level their positions are completely understandable, because they generally stem from humane and compassionate impulses. But, the problem is that millions of individuals outside the United States vicariously learn from their compatriots that if they are able to illicitly cross the border they (or at least their children) will be rewarded with generous social services. Over the long term they have allowed the population of uneducated, unskilled workers to surge, with the end results of: depressed wages, overburdened social services and a deterioration in law and order that have been most felt by Latin American immigrants and their children. And of course the increase in social services has led to a greater tax burden for California's middle class. During "crueler, pre-progressive" times, immigrants that were unable to economically advance returned to their countries of origin. This may have been harsh, but it helped foster more rapid and profound economic and social integration of immigrants and a more dynamic economy as a whole.

Another example that comes to mind are some of the single mothers I met when I managed property in the south side. One woman who had four children from several different fathers enjoyed subsidies that paid for most of her food, housing and health care. While I recognize that a humane society does not let children and their irresponsible parents suffer from a want of food, shelter and health care, I am also troubled by how the state has subsidized and reinforced her pathological behavior. This transmits information throughout a community that those who engage in such behaviors will enjoy financial rewards, rather than negative consequences. Basic psychology and economics dictates that such behaviors will increase, so predictably the phenomena of single motherhood has surged.

I am not sure how we could strike the necessary balance between providing for the needs of the children of single mothers while allowing the mothers to face the negative economic and social consequences of their behavior. Perhaps the welfare bureaucracy could have made it a prerequisite for this young lady to go on birth control after she receive benefits for her 1st child. Coupled with that she would face the penalty of receiving diminished subsidies for future children. But, since most bureaucrats have little reservations about fostering long term dependency (that ensure their job security), the chances that they would conceive of, let alone implement such measures is slim to none. And as a bureaucracy expands its client rolls, it receives increased funding, additional employees and greater influence, in other words there are zero financial incentives for them to curb the pathological behavior of their clients. An economist's answer to this would be to offer an incentive structure that would financially reward bureaucrats who fostered measurable improvements in their clients behaviors.

I do not fully blame politicians for these flawed policies, because in a sense their behaviors have been shaped by vicarious learning. For example, the few politician who proposed necessary reforms to save social security from the "long term cruelty" of financial insolvency were faced with extremely negative feedback from the public. Other politicians watched and vicariously learned from their colleagues failure to get re-elected and chose to take the path of short term kindness and not touch the benefits or structure of social security. And as the election of Obama shows, those who promise to simultaneously increase government services, while cutting taxes and the budget deficit will always get elected. Indeed we get what we deserve.

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