Sunday, April 10, 2011

The paradox of neoconservative incentive

It has always been a feature of neoconservative economic theory that if a person has a large amount of wealth, then they should be encouraged to accumulate more wealth with generous incentives. These incentives have taken the form of tax cuts, subsidies and deregulation. However, at the other end of the scale the incentives are of more a punitive nature, such as income quarantining, welfare cuts, faux-employment (such as work for the dole) and other coercive measures.

There is an economic theory that describes this seemingly paradoxical position. However, it has become so distorted by the entrenched interests of those that use it to reflect their interests and beliefs - that the wealthy should be rewarded with more incentives from taxpayers, whereas the poor should be punished - that it has become unrecognisable as the original "marginal productivity theory". At its heart, this theory relies on the fact that it is inefficient for a company to pay more wages to an employee than they would produce in profits - which is true. However, the application of this theory tends to be distilled to "people who get paid more are more productive and therefore of greater utility to society" which may also be true up until a point. That point however gets lost when the class of those that are paid at the highest rates are also those who set those rates. It is then that the theory becomes distorted beyond its somewhat reasonable premise.

This is what we see when we examine the sort of executive salaries and bonuses that are handed out at the top levels. It is hard to see how these wages and bonuses are efficient, especially when companies perform worse under the stewardship of an ever more highly paid CEO. In fact, some of the highest paid CEOs in the world were responsible for the recent financial crisis which one would think was hardly an efficient allocation of the company's funds. That is probably why they cynically altered the name from "performance bonus" to "retention payments". However, these captains of industry still have the government conned arguing that any possibility of paying a reasonable share via tax will "send jobs offshore" or "destroy the productivity of the industry". They continue lobbying for even more subsidies, tax cuts and deregulation - arguing that the payment of these monies will spur further productivity which usually translates into a higher executive pay at the top and job cuts down the bottom - remember the marginal productivity theory?

At the other end of the scale we have the punitive measures that are bought to bear on the unemployed. The neoconservative theory goes something like this: "The unemployed are not productive; therefore it is inefficient to pay them". However, this makes the assumption that the unemployed are not made more productive (in the sense that they are more motivated to find work) by giving them money and the only way to give them more incentive is to remove it from them. This only works if the only reason why people are receiving unemployment benefit is for the money which, considering the paltry amount provided by the dole, is not as prevalent as "Today Tonight" and "A Current Affair" would have us believe. However, our very own neoconservative opposition leader is pandering to precisely those views. In a grab-bag of "bludger" bashing he has suggested punitive measures such as: income quarantining, forced re-location and the provision of labour at below minimum-wage cost (work for the dole). None  of these measures have been proven effective at lowering unemployment. However, they are effective at pandering to the ACA and TT crowds and to those that believe that it is inefficient to provide resources to the unemployed.

It is difficult to see how removing the unemployed from the usual workings of the economy by controlling their spending, removing them from their family support networks by forcing them to move to areas of higher employment or making them work at menial tasks at less than minimum wage will encourage them to find work. It is far more likely to marginalise them further.

However, this is a paradox that the neocons feel comfortable with because of this distorted perception of the efficient allocation of resources. When those perceptions are built from the perspective that only those that have access to wealth and resources should have access to further wealth and resources courtesy of the state because it is efficient merely because they have access to those resources. Not only does this allocation at the very top of the economy have no connection to productivity but it also feeds the distorted belief that the allocation of resources to those that have few resources is inefficient merely because they have few resources. Of course, the fact that this view has lead to a distortion of wealth distribution and a severe financial crisis does not seem to register with them, probably because it is in their interests to ignore it.