Monday, June 1, 2015

Carrot and Stick and Unintended Consequences

What motivates you?  The Carrot or the Stick?

One thing that took me a long time to understand is how a society uses the carrot-and-stick approach to motivate us to do things that benefit society.  Sadly, often these motivators end up having unintended consequences as our brains are neural networks that "learn" new pathways that are not what the carrot-and-stick people intended.   Some call this cheating.   Others call it game theory.

Take for example, car insurance.  It took me a long time to learn how to deal with this, and I was whacked with the stick, over and over again.   Our society wants people to drive safely.  Why this is, is readily apparent if you think about it.  Our transportation system is about 99.5% automobiles, so just take your "public transit" fantasies and put them in your knapsack with your patchouli oil and your stash.  Because that's all they are - fantasies.  Trollies and Zepplins are not coming back anytime soon.  Like it or not, we are a car culture.

And the slaughter on the freeways is astounding.  Tens of thousands of people die each year in car accidents.  We have telethons for Muscular Dystrophy every year (well, until this year, anyway) but no telethon for the 30,000 to 40,000 people killed in car accidents every year.   It is a silent epidemic, and no one talks about it, because we are a car culture, and cars are good for business, and Americans love their cars (and Europeans and Japanese, and Chinese, and just about all humans on the planet).

So that is why NHTSA is funding self-driving car research - for decades now.  It isn't just Google who is into this - they are the Johnny-come-lately in the robot car business.   And that's why your car now has six airbags and a seatbelt that automatically tightens in a crash.  And why we have seatbelt laws - and why the carnage on the highway has gone down somewhat, but has not abated entirely.

Until the Google Car is a reality, we have to rely on individual drivers - millions of them - to make the right decisions, every time, every day, dozens of times a day, or at least hope their bad decisions don't lead to an accident.

To encourage safe driving, nearly every State has a draconian set of rules and laws in place to encourage safe driving.  This is the carrot and the stick.   If you get a ticket, points go on your license, and your insurance company jacks your rates.  You get the stick.   If you are young, you get twice as much stick - maybe 5-10 times as much.

If you drive more safely, your rates go down.  Carrot.  When you get older, you get a lot of carrot.  I pay about $31 a month to insure the M Roadster - a car that I could not even imagine getting coverage for when I was 22 years old.  Lots of carrot for old people.

You get into an accident - more stick.  You get a DUI - lots and lots of stick.   And these rules weren't created by accident or fostered by the "greedy insurance companies" (if you still think in phrases like that, you are destined to be broke the rest of your life, by the way).   It is a system that was intentionally designed by our elected representatives - our government, our society to encourage certain behaviors, and strongly discourage others.

Of course, there are two problems with the carrot-and-stick approach.  The first is the unintended consequences that can occur when you offer carrots for certain behaviors.  The second is the "beating the donkey to death" scenario, where no matter how much stick you apply, people's behaviors refuse to change.   You can either beat the donkey to death, or decide maybe that you really don't need to modify his behavior after all.

With regard to the first, our tax code is an excellent example of the carrot-and-stick approach to life.  I always say that the tax code is not an investment guide and yet most Americans look at the IRS as their investment adviser, often chasing deductions and tax credits as if that was the way to get ahead.   You get a tax credit for buying an electric car.  Buying an electric car isn't going to make you rich, however.   If you need one, get it and take the tax credit.  But don't confuse tax incentives with investment advice.

For example, the home mortgage interest deduction is the big sop to the Middle Class, and most folks believe that having as much mortgage debt as possible is a good thing, as you can "deduct the interest" and lower your taxes.   Taking a deduction is a good thing, of course.  Seeking out massive debt so you can get a pittance back on your taxes makes no sense at all.

And what makes sense at one age or one scenario makes no sense in another.  When I was a young hot-shot lawyer making the six-figure salary and all, having mortgage debt for my house, and a vacation home as well as depreciation deductions for investment properties really lowered my annual tax bill.   

But as I get older and lurch toward retirement, with less income and less taxes to pay, such deductions make less and less sense.   When I retire, I will live on my savings, and my taxes will be based on how much I withdraw from my IRA.   If I withdraw a lot, I end up paying a lot more taxes, as our tax system is progressive.   So it makes sense to structure my life to stay in the 15% bracket, where the effects of a mortgage interest deduction are minimal.   It makes sense for me, at this point in my life to be debt-free, take out as little as possible, and pay less in taxes and screw the deductions.

On the other hand, my neighbors who have a combined income of over $100,000 in government pensions (!!!!) have a huge tax bill.   They have mortgage debt and the income to service it - not by choice, either.   They have little in savings, too.   But their situation is becoming scarcer and scarcer.  Our generation - the 401(k) generation - has to live on savings.  So chasing deductions in retirement makes no sense at all for us, as we won't see the benefits of such deductions, or the benefits will be de minimus.

The tax code is rife with carrots and sticks, and it is the major way Congress tries to control our lives.  You may think Gay Marriage, for example, is a "social issue" - but the main reasons behind it are not social, but tax-based.   I don't want my partner to pay 50% of my IRA in taxes when I die.   If married, he pays no taxes, but only the 15% income tax when he withdraws.   It is not a matter of being "recognized by the community" or some such nonsense, but being recognized by the IRS.   It comes down to money.  Carrot and stick.

But often, the carrot-and-stick approach can backfire.   If you make very little money, you pay no taxes, so that is an incentive to make less money.   Moreover, since people in this country are decent folks who don't want you to starve, if you make less money, you qualify for all sorts of government benefits, such as TANF, SNAP, WIC, Obamaphones, Section-8 housing, and more.   In a way, these are an incentive to make less money, and yes, people have been known to structure their "family" lives to make them more eligible for government benefits.  Act shocked.   These are the unintended consequences that occur with carrot-and-stick incentives.

Unemployment is another good example.   During the 2009 recession, Congress extended unemployment benefits for years so that people could collect government money.   Unfortunately, this meant that a number of folks were making more on unemployment than they were working at a job.   And many of these folks "downsized" or RIF'ed or laid off or whatever at age 55 (the magic age for layoff) were forced, eventually, to take lower-paying jobs as part of a second career.    What extended unemployment benefits did, was to allow them to remain unemployed a lot longer.   Why take that service-sector job, when "unenjoyment" pays more - or about the same?   Again, unintended consequences.

Of course, the big granddaddy of them all - in terms of unintended consequences - was the Real Estate Meltdown of 2009.   Since the government encouraged us to borrow on our homes, many folks did. I did.  You probably did too.  Why pay a monthly car payment or a credit card bill, when you can roll it over into a home equity loan or re-fi, at a far lower rate and deduct the interest as well (perhaps not legally, but the IRS didn't check much)?

And since you can take a depreciation deduction on an investment property, why not buy a home or condo and speculate in Real Estate?  You can knock thousands off your taxes and maybe make a little money in the process, right?

So the government provides the carrot.  And boy did the Donkeys go after it!   Real Estate went crazy in the 2000's, and despite all the carrots and a huge Capital Gains stick (which was the financial crises that got me started writing this blog!) I got out.  Screw the carrot.  Screw the stick.  The people with the carrots and sticks were trying to lead us off a cliff!   I was one of the lucky few who saw it in time.  Other folks, chasing the carrot, ran right off a cliff.

So the government - or society, take your pick - needs to be careful about carrots and sticks.   Just because it would be "nice" to pass a law to do something, doesn't mean we should.   For example, in France recently, they passed a law requiring restaurants throwing out food to donate it to a shelter.  This sounds, to a liberal, like a good idea.  And that is the definition of a liberal - a person who thinks every good idea should be a law.  Liberals are not evil, but the unintended consequences of their good intentions often are.

Why is this a bad law?  Well Mark used to run a gourmet grocery store.  Every day they would throw out a lot of stale bread (which would be hard as a rock by next morning) baked goods, expired or soon-to-expire goods, fresh produce, and the like.  Now, most stores use a lot of this stuff.  If you buy the soup in the deli, chances are it is made of soon-to-expire canned vegetables or fresh vegetables ready to rot.   And those croutons in the salad bar?  Yesterday's bread, toasted.  Most food stores are pretty efficient with food.

But even then, there are leftovers.   Not wanting to see good food go to waste, he called several local shelters and food banks.   They all wanted the food delivered, so he would have to pay the company driver overtime to use the company truck to deliver these goods.  OK, so already this is costing them more.  But he wants to "do the right thing" - right?

Well, the shelter only wants 200 loaves of pre-sliced white bread.  They don't want baguettes or fancy artisanal breads.  They are making baloney sandwiches for 500 people, and they all have to be uniform and the same, otherwise the bums, excuse me, clients, get upset and knife each other.  Ditto for baked good. Yes, they want 500 donuts, but all the same, please, delivered.

Odd lots of expiring food?  Not wanted.   So Mark would make grocery bags of food and hand it out to some "regulars" who came to the loading dock around closing time.  Even that is fraught with peril, as the City did not want homeless people congregating at the store, nor did the neighbors.  And if there wasn't enough food for everyone, well, fights would break out.  The corporate office was not pleased.

And let's not forget, this took a lot of time and effort to do, and without any profit to the company.  If you start becoming more concerned about the free food you are handing out on the loading dock, you forget about the paying customers coming in the other end of the store.  And that's why you're in business, right?  Sorry, lady, you'll have to wait.  This homeless drug addict is waiting for his free sandwich.

Sometimes, "doing the right thing" is hard to do.   Maybe a better approach is for the government to hand out food vouchers instead.  Oh, right, we already have that, it's called food stamps or SNAP.   That is a lot more workable approach to feeding people than mandating that restaurants donate food.  And how does France propose to enforce this law?  Dumpster police?  Fines?  The amount spend trying to salvage a half-eaten baguette would pay for a dozen meals.  It makes no sense. Unintended consequences.

The second problem with the carrot-and-stick approach to governing society is the beating the donkey to death scenario.   If you whack your donkey on the rear end, and he doesn't budge, what do you do?  Whack him more?   Pretty soon, you've flailed his flesh and he hasn't budged an inch.  You keep beating and beating, until he is dead, and now you have to go out and buy a new donkey.  Guess what?  Same thing happens again.

This is what happens when society passes laws that are impossible to enforce or that everyone just ends up breaking.   Prohibition is a good example.   No matter how much money the government spent trying to enforce prohibition, people kept drinking.   You could throw them in jail, take all their money, or even kill them - folks kept on drinking.

The 55 mph speed limit was another.  A good idea - to save gas during a fuel crises - that had unintended consequences in that it made everyone a scofflaw.   People still were speeding, but they used CB radios and radar detectors to avoid the law.   Respect for law enforcement and the law decreased.   When the law was finally repealed, an odd thing happened.  Speeding went down, only because what we defined as a "crime" changed.  Today, I can drive on I-95 in a 70 mph zone, and many folks aren't even doing the speed limit!

Today, we see this with drugs.  We have draconian drug laws and staggering mandatory minimum sentences.   You could serve less time for killing a cop than you would for selling drugs.   What sort of unintended consequences  does this produce?   Perpetrators who are willing to shoot a cop, rather than be arrested for a drug bust.  Logically, it makes sense, in terms of risk and reward (carrot and stick) evaluation.

And has the use of drugs abated?  No, if anything, it has expanded, as users look to alternative drugs when their main "high" becomes scarce.   Some in our society are starting to think that maybe we are beating a dead horse or at least beating a dead donkey.   Maybe if the donkey won't move, we should either give up, or try the carrot instead.   Because no matter how draconian the punishment, people seem to want to do drugs.  In Arab countries, they behead people for dealing drugs.   Based in the number of beheadings going on, it doesn't appear that the drug traffic has stopped.

And that is where a lot of Libertarians start to make (a little) sense.   If we are going to govern ourselves, maybe we need to minimize the amount of government to what is enforceable and what makes sense.  Trying to control every aspect of a person's behaviors, through laws, tax incentives, or whatever might not be such a good idea.  Just because something sounds like a good idea doesn't necessarily mean it should be a law.

For example, back in the 1940's, my great uncle Teddy used to hang out in gay bars in Greenwich Village.  Being gay back then was basically illegal - and society shunned gay people.  Yet the urge to be gay was so powerful that people risked everything to meet in seedy bars run by the Mafia.   And by agreement with the Police, the Mafia would allow the Police to "raid" such bars occasionally, and then the next day, the arrests would be reported in the paper, with names, and sometimes pictures of the "perverts" arrested for... well, basically drinking a cocktail in a bar.

And folks like my great-uncle would "do the honorable thing" and blow their brains out with a revolver.  That's how our society worked back then - lots of stick.

Today, we've decided that punishing people for being gay really makes no sense.  Well, most of us have - Alabama is holding out - on a lot of things.   Why bother trying to force someone to behave in a certain way if it doesn't affect society very much?   How they drive their car is far more important than who they fall in love with.

And today, with video cameras and license plate recognition systems and whatnot, law enforcement has far greater capabilities to catch and prosecute law breakers.   We need to figure out how this new technology will impact our society - in an era where technology means 100% enforcement of the laws.   Perhaps today, we need to decide which laws really are worth enforcing and chuck the rest.   Because we could end up creating a society where everyone is a criminal.  Carrot and stick, once again.

But, that was not the point of my posting (and I did have one).   The point I did have was that as an individual in society, you have to understand what these carrot-and-stick scenarios are all about, and why they are put into place.   What distinguishes the poor from the rich in our society is the ability to understand how the system works, and to either work with it (as the middle class does) or work around it (as the wealthy do).   Only the very poor try to fight it.  I fought the law, and the law won.

Our society discourages smoking, through laws and taxes.  The rich gave up smoking years ago, or if they do smoke, it is the occasional illegally imported Cuban cigar.   The poor are addicted to cheap cigarettes and pay through the nose to smoke them.  The middle class just stopped smoking altogether.

And so on and so forth.   Rebelling against society turns out to be the worst move.  Giving in to the carrot-and-stick is usually a better move.  Figuring out how not to get caught is usually how the wealthy get by (they never went dry during prohibition, did they?).

Being a middle-class schmuck, I figured out eventually that giving in was the easiest way to get ahead.   And I understood why these carrot-and-stick deals were in place.  Smoking pot was fun, but as Daniel Tosh once said, "I'm not in the 7th grade anymore and I've got shit to do."   So I gave it up, and got ahead.   Others, well, they ended up in legal troubles (stick) and never succeed much in life (no carrot).  I eventually learned to drive more slowly (stick) and my insurance rates went down to nothing (carrot).

On the other hand, I realized that some carrots-and-sticks didn't apply to me.   For example, the idea of perpetual debt - so ingrained into our society and tax code - really didn't make sense for me.  Without the burden of a huge mortgage, I could survive on a very small amount of money, which meant paying a lot less taxes (carrot!) than making big bucks and taking big deductions.   The bonus, of course, being that I work only 20 hours a week now, if that.  Which is why I have time to blather on about shit like this.

Maybe this doesn't make much sense.   But it is a thought that occurred to me.  If you are "struggling" in life and being hit with bank bounce charges (stick) and getting into "hassles" all the time, maybe it is a good idea to step back and figure out why these things are happening.  Because if you don't, it appears that just a lot of random shit is happening to you, it raining one day (stick) and sunshine the next (carrot) - and your behavior not seeming to affect any of this.   This creates a condition called learned helplessness where a person can't understand how their behavior affects their environment.  To them, carrots and sticks are random events that occur for no rhyme or reason.   And it is not surprising that the folks who end up this way end up poor, or in prison. 

Something to think about.


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