Friday, July 07, 2006

Incentives Matter

I spend quite a bit of time on this blog railing against one government program or another. Its not that I don’t think the government should help people, I don’t think that the government should help people in ways that destroy incentives.

The Journal’s Jonathan Eig reports on a poverty program in Chicago that uses an incentive program to give low-income people the chance to earn rewards like high-income people who rack up frequent-flier miles or bank points. “For the past year,” Eig writes, “residents in a low-income neighborhood here have been earning rewards for paying their rent, getting their children to school every day and seeking work. At one rewards banquet, more than 150 people gathered in a church basement to celebrate and cash in points for prizes. ... ‘It’s like American Idol,’ said Evette Clark, a 39-year-old mother of eight who signed up her whole family for the rewards program.”

The program is run by an outfit called Project Match, which has dispensed $19,000 in cash and prizes in a year and a half. This reminds me of a long-ago Bronx schoolteacher I heard about recently, who paid her students nickels and dimes as they learned to read better; even small prizes had a huge effect.

When the government (or anyone for that matter) just give away money it changes peoples’ behavior as they try to collect that free money. So if you give everyone that makes under $10,000/year a check for $500 people that make $10,400/year will find ways to make a little less money to cash in.

Reasonable people can disagree about which activities should be subsidized and what the thresholds should be to receive that subsidy, but if there are not incentives in place the programs are doomed to create more problems than they are intended to solve, leaving the needy in want of more need.

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