Last week, my brother-in-law asked on Facebook if it made sense for schools to measure a middle school music teacher’s competence by the students’ ability compared to those in other feeder programs as they moved up to high school. The responses pointed out some valid arguments against this method, such as the myriad of variables that go into how nimbly a child can pull that bow past a cello’s f-holes.
This question isn’t just limited to middle school music teachers. It’s the age-old question of how to you get someone to do what you want. What incentives serve to inspire people to act. These are issues debated in business schools and boardrooms across the world every day.
My brother-in-law has a valid suggestion for judging a teacher. And the commenters have valid reasons why it could prove problematic. That’s the world of incentives. There’s never one perfect, obvious measurement that can be implemented to make everything sail forward smoothly. Measuring and rewarding one item could very well lead to other very important unmeasured metrics never being met.
Note that this is a huge issue in the private sector, but for now, both based on my brother-in-law’s question and some other thoughts swirling around in my head, I want to focus just on governmental incentive systems.
One of my favorite examples used to be a real issue as pointed out by Thomas Sowell. To paraphrase something he said much better, lets say that a leader in Soviet Russia saw a need for farming trucks, so he would put in an order for 5 red trucks, the red being the color of patriotism in the USSR. The glorious truck manufacturers would then finish the truck, only to find they were fresh out of patriotic red waterproof paint. They had plenty of the green stuff, which would work just as well, but the order said red.
What were the workers to do? If their incentive system rewarded timeliness, they’d paint the truck green and maybe make it up the color discrepancy by offering a financial discount. In the USSR, however, they were rewarded for obedience–or more like punished for disobedience–so they had every incentive to let the trucks sit on the lot until the red paint finally came in.
Sitting on those trucks slowed down everything from the manufacturer down the line to the farmers, waiting on their dang trucks. But looking at it from the truck builders’ point-of-view, it was the logical decision, even if it created a bad outcome for the country.
What about the US? We couldn’t possibly screw up our incentives like those Soviets, right?
Of course we do. All the time.
The VA scandal is a great example, where the administrators of a few of the Veterans Hospitals were so incentivized to have better wait times that they removed some of the patients from the wait lists to improve that metric.
That sucked, and was a huge scandal. But we don’t even have to go to the world of scandals to see some of these bad incentives playing out.
Let’s look at the IRS. Right now, if a business pays someone more than $600, the business is most likely required to file a Form 1099. A 1099 is a simple informational form made so both you and the IRS know that the $600 you got paid for painting Sam Jones’ house down the street should be reported as taxable income. And if you are a small business, you’re going to have a heck of a time getting this form submitted.
The 1099 has certain submission requirements that likely haven’t been updated since sometime around the Wilson administration. If you’re willing to shell out the money, you can buy software (or pay a CPA firm that has the software) that will submit your 1099 electronically. But if you have only one or two 1099s to file, that can be a lot of cost for so few forms. So instead you have to find special carbon copy paper to fill out the form.
You can request single pages of these 1099s from the IRS, but they run out pretty quickly. That leaves your only option paying nearly $20 bucks to get a 25 pack. Which, of course, will be worthless next year.
This process is screaming to be updated. But since the companies are required to file the 1099s or face stiff penalties, and it’d be a huge headache for the IRS to hire someone to get an electronic system in place, the IRS has little incentive to make it more convenient for them.
For our next example, take a look at city buses in most places across the country. Occasional riders have to have exact change or (at least Denver) pre-plan their trip with a trip to a transit station to buy ride packets. This barrier alone has made me seek for other transportation methods during the times I might have used the bus. Even though this could be modernized with credit card swipes or NFC phone payments, that kind of cost to make things more convenient makes no sense for a bus service that’ll continue to exist thanks to government funding, even if fewer people are riding than otherwise would.
Don’t forget your last trip to the DMV, where the office has little incentive to modernize to something quicker and cheaper. You have to be there. Figuring out a way to get you out quicker is hard, and the only pressure to do so is if the voter complaints move from a dull roar to a breaking point. Considering all the other problems voters have to complain about, don’t expect that to happen any time soon.
This is actually waiting in line at the Eiffel Tower, but it was as close to the DMV as I could find on Pixabay
Then there’s health care. No, maybe I shouldn’t go there. Let’s just say that’s been a mess at least since Eisenhower agreed to codify businesses–rather than individuals–the ability to deduct health insurance costs.
As pointed out in the Financial Times, 88 percent of the inflation we’ve experienced recently is related to four sectors: health-care services, housing, education, and prescription drugs. What do these four sectors have in common? If you said heavy government involvement, you’d be absolutely right. That’s because government regulations don’t care if things are done quicker, better, and cheaper. They just need to fit in the talking points. Our version of patriotic red paint.
So back to my brother-in-law. His idea, if implemented, could possibly create some perverse incentives. But that really isn’t the question at hand, because whatever system they’re using is undoubtedly already creating perverse incentives. Every reward system does. The question is if his system would create fewer perverse incentives than the one in place right now.
If it were the private sector, someone would give it a try, and (in a perfect market) if it worked they’d be financially rewarded, and if it failed they’d be financially punished. This kind of tinkering and tweaking to try to find a better solution is hard for businesses, and almost impossible for governments. Which is unfortunate, since it means we’re leaving a lot of good ideas behind. And picking up 88 percent inflation and a lot of long waits at the DMV along the way.