Saturday, November 5, 2016

Public Policy Ignores Basic Economics

It is routinely assumed in public policy debates that incentives do not matter.  Policy wonks increasing talk as if increasing a price has no effect on demand and as if providing a subsidy has no impact on behavior.  The fact that 94 million working age Americans are no longer part of the work force is attributed to what?  Why has the American savings rate collapsed?

Economists increasingly look for non-economic arguments to explain obvious economic facts.  Why?  Because the economic arguments would undermine the support for the policies that economists wish to support.

Here's an example.  In China, pensions are provided by the provinces, not by Beijing.  A recent WSJ article interviewed Chinese citizens regarding their faith in whether or not they will eventually receive their pensions.  What they found is that the average Chinese do not have any faith that their pensions will be paid.

What about America?  Whenever anyone criticizes the absence of sound funding for social security or for state and local public pension funds, the left tries to silence such critics by arguing that criticizing the funding scares people and creates public anxiety.  So, instead, the left argues that everyone should pretend that social security is actually properly funded and nothing needs to be done to repair state and local public pension funds.  All is well, they say.

Leftist economists argue that there is no difference between the situation in China and the situation in the US regarding pension funds -- both are woefully underfunded and it is likely that pensioners will not receive what is promised.  Are these two situations the same?

No, they aren't.  Because the Chinese citizens know that they are not going to get the full value of the pension promises, they have taken action on their own -- they have raised their savings rate.  Chinese private savings rates are at the 30 percent level.  Even if the pension funds don't materialize, the average Chinese are taking steps to avoid disaster because they are well aware that disaster is what lies ahead.

What about the average American?  The average American's saving rate is zero.  The average American believes the lies told to them by the left and public policy wonks.  They believe that social security and medicare will solve their problems in old age.  So, they take no action to ward off disaster.

The difference is in the information they have.  If you know that no one will provide you with a pension, you save.  If you are fed lies about how well funded your pensions and health care systems are, then you don't save.  Then incentives take hold.  You take action to protect yourself if you are properly informed.  The facts show that incentives matter.

The Chinese are in a better situation because they don't believe the lies their government puts out.  Woe be it to the average American who believes the patently false lies about the funding of social security and medicare.

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