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Incentives & Punishment

The most basic principle of human behavior involves punishment and reward. In other words, behavior that is rewarded tends to be repeated, while behavior that is punished tends to decrease in frequency. When you think about it, virtually everything involving government is the reverse of this common sense point. Work and investment are punished with higher taxes. Not working or investing are rewarded with unemployment and other government benefits. The few remaining politicians in power that recognize this obvious point sometimes try to adjust for this. But when government is involved, even a well-intentioned incentive program can lead to worse results. And that’s without even factoring in the potential for fraud, kickbacks, and crony capitalism.

Let’s take an example. Consider a factory that can power its facilities for an average of $100,000 per year using typical fossil fuels. But it can build a wind farm to provide the same power for an average of $140,000 per year. Government gets involved with the intention of incentivizing the use of wind over limited fossil fuels, so they offer tax breaks that save the company $50,000 per year if they switch. The company analyzes this, realizing that $140k-$50k is only $90,0000. So it saves $10,000 per year, and they therefore go ahead with building the wind farm. The incentive achieved the desired outcome, which is great, right?! Well, not so fast. The government has now added a cost of $50,000 to society which must be paid with taxes, with the company now spending $140,0000 more. So the total overall cost to the nation is $190,000…instead of the original $100,000 which would have been spent had government stayed out of the way.

You see examples like this throughout our tax & regulatory system, which is especially bad lately with Democrats worshiping at the alter of “Climate Change.” High gas prices and other inflation are the result not only of incompetence and money supply expansion but also deliberate attempts to discourage the use of fossil fuels. Don’t expect things to change anytime soon in America unless true free market libertarians gain power, which will likely take decades of rooting out lifelong politicians.

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