Government’s Perverse Incentives

It might seem reasonable to think that in the early days of a pandemic involving an unfamiliar pathogen, the public ought to allow the government leeway in its imposition of extreme measures, such as the virtual shut down of economic activity. But the initial impression ought to dissolve when one reminds oneself that we’re talking about government, a monopolistic organization shot through with perverse incentives because it gets its revenue through coercion (taxation) and faces no profit-and-lost test.

Obviously everyone will know less about a newly emerged virus on Day 1 (whenever that may be) than on Day 30 and beyond. That ought to mean that policymakers and their advisers in the world of science should be prepared and eager to retreat from the early extreme measures when the data point in that direction. But, again, we’re talking about politicians, bureaucrats, and the anointed experts who have their ears and don’t wish to lose them. They all face perverse incentives that induce bureaucratic sclerosis. (Other perverse incentives also apply.) This phenomenon has long been identified with the Food and Drug Administration. Look at the incentives facing a bureaucrat who must choose between approving a new drug or not. If he approves and headline-catching unanticipated rare side-effects emerge, the bureaucrat’s name on the dotted line could be mud, no matter how beneficial the drug is on the whole. Career ruined. But if he doesn’t sign off and people keep dying because the drug remains unavailable, few among the public will call the bureaucrat a killer because his responsibility will escape most people’s notice.

You can see the parallel with the pandemic. Even if new information showed the initial extreme measures to be inappropriate, officials would have almost no incentive to remove them. If they did and the number of cases and death rose, they would be pilloried in the press, whether or not their policies had anything to do with the rise. But if they didn’t remove the extreme measures and cases or deaths surged, they would not be on the hook. In fact, they would say their policy actions kept the surge from being even greater. (The policy makers would be even less accountable for the deaths directly caused by the policies themselves, which is the case with the shutdown.)

However formidable, these perverse incentives are not insurmountable, and occasionally someone in the government world admits a mistake. But this is not to be expected often. Government is deadly.

The only cure is full freedom, decentralization, and open debate in an environment where dissenter are not officially stigmatized, shunned, or repressed. In other words, we need a radically freed market, which rewards rather than penalizes the identification and correction of errors.

Sheldon Richman, FEE

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