Thursday, March 06, 2014

Breaking news-OBM discovers economics prinicple of "incentives matter"

Several of my favorite economists have said that the real good stuff in economics is revealed in the econ 101 courses. One of the secrets revealed is that "incentives matter".

Milton Friedman said most of economics could be boiled down to two thoughts; 1) there is no free lunch 2)demand curves slope downwards which simply means people tend to buy more if something costs less and tend to buy less if something costs more.

Another principle is that generally supply curves slope upward which means that someone will tend to supply more of something if the price increases and tends to supply less if the price is lower.

The Chicago economist Casey Mulligan has been making that point for some time  in regard to certain aspects of Obamacare.Obamacare provides subsidies for folks when their income falls below a specified threshold.If they work more and earn more and exceed that threshold  they loose that subsidy.Hence the incentive to work less.In other words, less labor will be supplied if the effective pay is less which is what happens when someone works more and loose a subsidy so your net income falls. As Mulligan says you can decrease employment by changes in the supply side as well as by changes in the demand side.

The downward sloping demand curves notion enters into the Obamacare employment issue as well. If an employer has to provide health insurance or be fined if he employes more than 50 people the incentive is to keep his employee count under that number because the cost of hiring the 51th person is too high. He will tend to hire fewer employees when the cost of hiring increases.

See here for a WSJ article on Prof.Mulligan and his work and comments and how OMB finally caught on.

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