Re­ward­ing ef­fi­ciency more ef­fec­tive than pun­ish­ing op­po­site.

Re­ward­ing ef­fi­ciency is more ef­fec­tive than pun­ish­ing in­ef­fi­ciency

The Washington Times Daily - - FRONT PAGE - By Richard W. Rahn Richard W. Rahn is chair­man of Im­prob­a­ble Suc­cess Pro­duc­tions and on the board of the Amer­i­can Coun­cil for Cap­i­tal For­ma­tion.

Kin­der and gen­tler gov­ern­ments use mar­ket-based price in­cen­tives and less co­er­cion. But all too many gov­ern­ment of­fi­cials forget about the su­pe­ri­or­ity of the price sys­tem, and re­sort to the threat of or ac­tual vi­o­lence to get the peo­ple to do what they want. Busi­ness peo­ple use the price sys­tem to at­tract cus­tomers with lower prices and good em­ploy­ees by of­fer­ing higher wages (the price of work) rather than co­er­cion.

But then you have the oc­ca­sional busi­ness (United Air­lines, for ex­am­ple) that for­gets that prices tend to work bet­ter than vi­o­lence, and acts like co­er­cive gov­ern­ment. Just think of the amount of money and grief United would have saved it­self by of­fer­ing a price suf­fi­ciently high to get one pas­sen­ger to give up his or her seat rather than drag­ging a ran­dom cus­tomer out of his seat.

A ma­jor high­way bridge burned down in At­lanta a cou­ple of weeks ago, caus­ing enor­mous dis­rup­tion. The eco­nomic cost may run into hun­dreds of mil­lions when count­ing all the wasted hours of peo­ple wait­ing in traf­fic and loss of busi­ness to thou­sands of firms. Wisely, the gov­ern­ment of­fered high­way con­trac­tors big bonuses for com­plet­ing the re­build­ing in a man­ner of weeks, rather than months or years. De­spite the big in­cen­tive pay­ments, it is a safe bet that the to­tal eco­nomic loss would be less by of­fer­ing even big­ger bonuses for even quicker com­ple­tion times.

The time to com­plete a con­struc­tion project is largely de­pen­dent on the num­ber of work­ers and equip­ment that is ded­i­cated to the project (and yes, there are some phys­i­cal time lim­i­ta­tions, such as hours needed to set con­crete).

Back in 1994, there was a big earth­quake in Los An­ge­les, which col­lapsed sev­eral high­way over­passes, in­clud­ing two sec­tions of the Santa Mon­ica Free­way (the world’s busiest at the time). The high­way con­trac­tors were of­fered big bonuses for each day they could shorten the con­struc­tion time for the re­build­ing — and the in­cen­tive did work — but could prob­a­bly have worked even bet­ter if the bonuses had been much larger. The daily bonus was es­ti­mated to be about one-fifth of the daily eco­nomic cost of the dis­rup­tion caused by the free­way be­ing closed. If the gov­ern­ment of­fi­cials dou­bled or tripled the daily bonus to get the work done even faster, it would have been a win, win, win — for the con­trac­tor, for the busi­nesses that were dis­rupted, and for the poor com­muters — in that the to­tal eco­nomic loss would have been lower.

Prices al­lo­cate scarce re­sources and mo­ti­vate fu­ture pro­duc­tion. It is a ba­sic con­cept that seems to elude many who think like so­cial­ists. One of the ma­jor rea­sons the Soviet Union col­lapsed was the mas­sive mis­al­lo­ca­tion of re­sources be­cause of a non­func­tional price sys­tem. A ma­jor rea­son Oba­macare is col­laps­ing is be­cause it re­lies too much on co­er­cion and bu­reau­crat pric­ing (as con­trasted with mar­ket pric­ing).

The U.S. mil­i­tary used to rely on the draft for its man­power needs, but four decades ago, the al­lvol­un­teer army was cre­ated, which re­lied on both mar­ket wages and pa­tri­o­tism to at­tract peo­ple. The re­sult is a far bet­ter mil­i­tary, com­posed of peo­ple who want to be in the armed forces, rather than many mal­con­tents — and far less so­cial and po­lit­i­cal dis­cord.

Bet­ter un­der­stand­ing of the price sys­tem by pol­i­cy­mak­ers, mem­bers of the me­dia and the pub­lic at large would do much to mit­i­gate con­tentious prob­lems, and open minds to non­con­ven­tional solutions. Var­i­ous types of auc­tion sys­tems could be de­vel­oped to deal with the im­mi­gra­tion and work per­mit is­sues. For in­stance, al­low­ing em­ploy­ers to bid for work per­mits for for­eign tech­ni­cal work­ers would put Amer­i­can work­ers at a price ad­van­tage, and would also al­low com­pa­nies to ob­tain work­ers with cer­tain types of spe­cial­ties in short sup­ply. An in­no­va­tive mar­ket-based sys­tem for tem­po­rary sea­sonal agri­cul­tural work­ers has al­ready been de­signed (the Red Card So­lu­tion) by im­mi­gra­tion ex­pert He­len Krieble, which has ob­tained wide­spread en­dorse­ment by many po­lit­i­cal lead­ers on both sides of the aisle, in­clud­ing Newt Gin­grich.

Pri­vate con­tract­ing cou­pled with mar­ket prices could solve prob­lems at all lev­els of gov­ern­ment. Most De­part­ments of

Mo­tor Ve­hi­cles are a joke, with peo­ple wait­ing around for hours (a huge waste of hu­man cap­i­tal) while slow-mov­ing gov­ern­ment bu­reau­crats op­er­ate with sys­tems from a by­gone era. The gov­ern­ment could li­cense pri­vate con­trac­tors to pro­vide the DMV ser­vices, sub­ject to strict qual­ity and law en­force­ment stan­dards. The pri­vate firms would then com­pete with each other on the ba­sis of price, con­ve­nience and qual­ity of ser­vice — much of which could be done over the In­ter­net.

The next time you are stuck in traf­fic be­cause of some gov­ern­ment road re­pair project that seems to go on for­ever, and where you ex­pect a quicker com­ple­tion if the con­trac­tor were given a bonus or a penalty for de­lay, put the time to good use. Think about all those things that gov­ern­ment could do

Pri­vate con­tract­ing cou­pled with mar­ket prices could solve prob­lems at all lev­els of gov­ern­ment.

bet­ter and cheaper if it used the proper price in­cen­tives rather than bu­reau­cratic co­er­cion. The money the gov­ern­ment takes is only one form of tax; equally de­struc­tive to the tax­payer’s fi­nan­cial well-be­ing and hap­pi­ness is the “time” tax that need­less gov­ern­ment pa­per­work, such as that required by the In­ter­nal Rev­enue Ser­vice and other gov­ern­ment in­ef­fi­cien­cies, im­poses on the cit­i­zen.

ILLUSTRATION BY HUNTER

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