Punishment and Reward

Economics 101 usually tends to lean right. Once you get to economics 201 and beyond, the truth is much more nuanced and probably leans left. The goal of this posting series is to teach economics 101 in a more balanced way.

Punishment and Reward

Parents and pet owners, already know the first lesson of economics - behaviors that are rewarded are done more often. Behaviors that are punished are done less often. My dog Jake likes to sneak food from the kitchen counter, but he (usually) doesn’t do it because he knows I’ll scold him. And if I call Jake from outside, he'll (sometimes) come in because he knows he’ll be rewarded with a treat and a scratch behind the ears. 

Studying the "incentives" is the first lesson of economics. Whenever you want to predict the effect of a new law or government regulation, the first thing you should ask yourself is which behaviors are punished, and which ones are rewarded. It’s a pretty safe bet that people will do less of whatever is punished, and more of whatever is rewarded. 

Sometimes people understand the first lesson of economics. The goal of “sin taxes” on cigarettes and alcohol is not to raise money for the government, but to change behavior. Smokers are punished with higher prices so they will smoke less. Conversely, we subsidize (reward) donations to charity by giving people tax breaks. Donating to charity is a good behavior that we want people to do more often. That’s why economists say, “you get less of what you tax and more of what you subsidize.” 

Goods and Bads

Our first attempt at making the world a better place is to punish "bads" and reward "goods". Now, this raises the problem of paternalism - having the government limit your freedom in order to force you to do whatever the people in power think is morally good. But the fact remains that the government does have a budget and that budget does have to be paid for with taxes. 

• We currently tax income, which means we tax working, saving and investing. Those are good things. 
• We could instead tax consumption - spending money. Since most people are not saving enough money that means spending money is generally bad.

Economic conservatives often advocate for a national sales tax and taxing consumption is the major talking point (economic conservatives also like that it is a flat tax so the rich would have much lower taxes). But there are other ways to tax consumption, such as by exempting all savings and investment from taxes in much the same way that a Roth IRA is exempted. See various forms of a progressive consumption tax for more information. Another idea would be to have a carbon tax, although it would behave in a similar way to a national sales tax and shift the tax burden to the poor.

In the next post we'll look at the law of unintended consequences and the conservative case against the welfare state and very quick skeleton of a rebuttal.