Incentives do matter, and to suggest otherwise is to betray basic principles of economics.
In the 1980s, the inventive rock band Devo put forward the theory that mankind was experiencing de-evolution — that by destroying the planet, we were on a path to take the earth back to its roots. The subsequent decades were certainly less cataclysmic than the group had expected, but the idea that things could be unlearned and progress could be reversed will always be with us. That idea is especially relevant now as one considers the de-evolution of economic thinking among many on the left. One might even say that a significant fraction of the Democratic Party no longer practices economics when formulating policy, but instead commits itself to de-economics. Frankly, it’s the only explanation for the ridiculous arguments that abound today.
Economics is, after all, founded on the principle that models of firms and workers can be very useful for understanding how the world works. These models begin with the idea that resources are constrained and incentives matter. If something you like costs less than you’d value it at, you buy more of it. How much incentives matter is, of course, an empirical question, and economists have spent the last half century using more and more sophisticated computer techniques to quantify how firms and consumers respond to them.
In almost every first-year economics class across the country, it’s common to begin the semester with the principles of supply and demand. If you have lots of supply, then, because incentives matter, you can still clear the market because people will buy more of the product when the price drops. If you have lots of demand, then suppliers can clear the market by lifting the price until demand declines to equal the amount supplied. That covers just about everything essential — except, perhaps, for one last foundational idea.
Consider the following: If you want to have a better standard of living five years from now, you can do that by putting money in the bank and building wealth or by investing in honing your own talents, which will increase your wage five years from now. If you are lucky, maybe the firm you work for will give you better machines to work with, which will also increase your wage. But in any case, progress requires that somebody has the foresight to invest in financial, physical, or human capital.
Against this backdrop has emerged an enormously destructive de-economic view that incentives do not matter. Under this theory, one can lift the unemployment-insurance benefit to the heavens, and people will still go to work just as they did when the benefit was low. The individual income tax can be lifted, and people won’t respond by working less. The capital-gains tax can be lifted, but people will not invest less and the economy can still grow. The corporate tax in the U.S. can be, as President Biden proposes, lifted above the effective rate that President Trump inherited, and yet the economy will still grow. The minimum wage can increase, and nobody will lose their job. The Keynesian multiplier is two, so government spending can make society richer, but when government spending collapses by 10 percent relative to GDP — as it is currently scheduled to do — GDP will not suffer.
This of course makes little sense at all. Yet that is the position we now find ourselves in — something so cataclysmic that even Devo might be impressed. You want demand? How about we lift government spending to levels not seen since the height of World War II. You want supply? Away, conservative conspiracy hounds. Supply is like the sun and the moon, it will be there no matter what. What emerges is our current supply policy, where the Biden administration promises unprecedented supply contractions through higher regulation, higher corporate taxes, and a straitjacket for the energy sector. There was a time when a college freshman would have been able to explain that increasing demand and reducing supply would lead to an explosion in prices. Today, instead, we hear from our policy-making experts that the most recent reading of an 11.4 percent annual rate of inflation is temporary and unrelated to anything the Biden administration might be doing.
But, our earnest freshman might argue, “Why not try to help supply out a little bit and end the expansion of unemployment-insurance benefits? “No,” the de-economists will respond, “Incentives don’t matter!” And when an annoying young economist such as our own Cale Clingenpeel points out the Republican states that ended the expanded benefit saw a collapse in claims, while those that did not saw claims increase, why it’s time to rev up the cancel machine, and assault him and his offspring on Twitter. If Zuckerberg is not too busy, we might even be able to suspend him from Facebook.
The de-economists also tell us that the American system is biased against African Americans, who are getting less and less of the pie because of racist Republican policies. And when Scott Turner points out that free-market policies lead to record low African-American poverty and unemployment rates, and record-high income growth, well, the threats again begin to swell. But don’t worry too much about Scott; after nine years in the NFL, he is quite capable of taking care of himself.
The de-economists tell us that wealth and economic inequality are the Achilles heels of the capitalist state, and the most important metric of a successful society. Unless, of course, these metrics improve at an inconvenient time, as they did dramatically under President Trump. This reality requires one to look the other way and stifle any burgeoning curiosity about the policies — such as opportunity zones — that use incentives to make the most needy in society better off.
As for energy, the de-economists tell us that we should shut down the Keystone pipeline, but open up the Nord Stream pipeline. That we should shut down U.S. energy production, but then beg the Russians to increase production when the price of oil surges.
All this might give the impression that economics is dying, and that policy chaos lies before us. But if you look at the top journals — or head to the National Bureau of Economics website — you will see that the profession is as vibrant as ever. Yet the John Cochrane and Casey Mulligan types willing to stand up for economic logic and speak out in public are few and far between. Undoubtedly this is because support for the idea that incentives matter has become associated with the GOP. (After all, only their economists dare to defend the profession.)
Espousing nonsense is professional suicide because the silent majority in the economics profession is too smart to fall for all this. Until, of course, Capital Matters and places like it are canceled. While they’re alive and well, though, the de-economists have something to worry about. Their efforts may appear in the New York Times, but sooner or later, a tenure or promotions committee will notice what a fool you are.