Posted by Marc Hodak on September 21, 2010 under Government service, Unintended consequences | 
No, this isn’t a story about health care (yet):
Lillian Daniels had the walls of her home in Detroit insulated in July 2010, almost a year after she had applied. The 80-year-old retired nurse practitioner had forgotten she had requested the help by the time she received a call from the community group telling her that workers would be coming.
The whole article here is like one long joke about how the government tries to help us with our money.
The basic choice in the “stimulus” was offering tax breaks to the private sector, including targeted tax breaks to certain industries, or to funnel taxpayer dollars through various agencies and community organizations with all the constraints they must face to maintain a semblance of accountability.
The state Department of Human Services and the Detroit agency exchanged several versions of Detroit’s advertisement before its language was approved. It was January 2010, more than a year after the first advertisement had gone out, before the Detroit agency had a new one to post…
Along with the money came new rules that tripped up even officials familiar with the old program.
States were required to draft new plans detailing how they would use the extra weatherization money, which were then reviewed by the Energy Department…
Weatherization isn’t the only stimulus infrastructure project slowed by bureaucracy. Awards worth $8 billion for high-speed rail connections were announced in January, but the Federal Railroad Administration has only distributed 7% of the funds to date… Few recipients of awards to expand the nation’s broadband network have actually started laying cables; the rest are performing work such as environmental assessments and getting local approvals to attach fiber to utility poles…
Much of the blame goes to new rules pushed by organized labor:
A major reason for delays in the program was a provision in the stimulus bill to apply the Davis-Bacon Act, which requires that workers be paid the local “prevailing wage,” as determined by the Department of Labor.
Democrats have routinely sought to apply the Davis-Bacon Act to federal spending, supported by labor unions, who say that contractors would otherwise be encouraged to lower their bid prices by cutting workers’ pay. Opponents say that the act is inefficient and inflates costs.
In this case, it was far more inefficient than inflating, but it certainly increased costs for everyone involved in terms of delayed employment.
The snags in launching the weatherization effort left construction companies in limbo.
“We didn’t think it was ever going to happen,” said Darnell Jackson, owner of Detroit’s Ampro Construction, who had to lay off three of his eight workers last year. He has since hired them back, and added seven new workers.
Many other construction companies in Detroit are still expanding slowly. Some have slowed down the rate at which they take on stimulus work, because they can’t afford to pay workers weekly, another new requirement in the stimulus bill’s labor provisions…
For newly trained workers, the delays have been hard. Jennifer Wallisch, a 30-year-old former auto worker, hadn’t had a steady job since 2004. She enrolled in a course run by the non-profit WARM Training Center in January after hearing about the $30 million of stimulus dollars that Detroit was getting for weatherization.
She studied energy-saving principles, practiced drilling holes into walls and blowing in insulation, and learned how to install windows. She graduated in March, at the top of her class.
For the next four months, she couldn’t find work.
“I was hanging on by a thread,” said Ms. Wallisch. In July, she was hired for energy-conservation work funded not by the stimulus plan, but by Michigan’s utility companies.
One can go on, and the article does.
Lesson: When a private company can’t get its act together, it eventually fails, succumbing to better managed competitors. Competition raises everyone’s game. There is no competition for the U.S. Department of Labor, or Health and Human Services, or Energy. The government can’t go out of business. If the providers of government capital (i.e., taxpayers) don’t like the return they are getting, the best they can do is choose another president in a few years, or pressure the current one to appoint a different department head, call their congressperson, etc. That’s not exactly zero accountability for performance at the agency level, but it’s pretty close to it.
Posted by Marc Hodak on August 30, 2010 under Unintended consequences |
At least the guy at the head of the organization does:
The U.S. Education Department this summer proposed regulations that would tie access to federal aid programs to graduates’ success in paying off loans.
“They aimed at the bad actors and they wound up scoring a direct hit on schools that service low-income students,” Mr. Graham said in an interview. “That cannot be what the Obama administration wants.”
Is it possible that the Obama administration doesn’t understand all the consequences of its proposals?
Posted by Marc Hodak on August 18, 2010 under Revealed preference, Unintended consequences |
Theory: Ranking employees, and letting them know where they rank, inspires a competition to improve one’s performance, or to continue to excel.
Experimental result: Not
[Professor] Barankay [of Wharton] randomly divided workers into two groups — a control group receiving no ranking and a treatment group receiving feedback with a ranking. He then sent an e-mail to all of the workers inviting them to return to do more assignments. The content of all the e-mails was the same, except that individuals in the treatment group found out how they ranked in terms of their answers’ accuracy. The aim was to determine whether giving people feedback affected their desire to do more work, as well as the quantity and quality of their work. Of the workers in the control group, 66% came back for more work, compared with 42% in the treatment group. The members of the treatment group who returned were also 22% less productive than the control group.
Prof. Barankay also offered workers either a job where they would be ranked or one where they wouldn’t be.
[T]he job without the feedback attracted more workers — 254, compared with 76 for the job with feedback.
“This was a surprising outcome, but it speaks to the paradigm of revealed preferences,” he notes. “Economists are usually very skeptical about what people say they will do. We focus on what people actually choose to do. Their choices convey information about what they care about. In this case, it seems that people would rather not know how they rank compared to others, even though when we surveyed these workers after the experiment, 74% said they wanted feedback about their rank.”
So, people generally don’t like to be ranked against their peers, even though they say they do, and rankings appear to encourage the high performers to slack off and the poor performers to give up. Contrary to theory, it also encourages high performers to leave and poor performers to stay. High performers are given the confidence to go out and find new challenges, while poor performers appear to get demoralized, and may have fewer options besides.
This research stands in contrast to research on tournaments, which appear to motivate more productive behavior. Thus, the research indicates that it depends on how the feedback and reward mechanisms interact. Competition can breed excellence, and competition includes comparisons and consequences. But comparison alone can breed complacency or demoralization.
Posted by Marc Hodak on August 16, 2010 under Invisible trade-offs, Unintended consequences |
David Leonhardt suggests that “The part of the [financial services overhaul] law that will directly affect the most people will be the new Consumer Financial Protection Bureau, which has already been the subject of heated debate. And the central question facing the bureau will be how to distinguish between corporate malfeasance and consumer frailty.”
This is how I would expect a NYT columnist to see the central question, i.e., as a distinction that experts must make about when a financial instrument or transaction goes from being merely too hard for someone understand to being deceptive. While many pundits and readers no doubt share this view of “the central question,” I think it distracts us from far more interesting questions:
Read more of this article »
Posted by Marc Hodak on July 29, 2010 under Patterns without intention, Unintended consequences |
A frequent complaint about standardized tests as a measure of scholastic achievement is that teachers, who know the general content, can simply “teach to the test,” i.e., they will focus on those content areas to the exclusion of others in order to maximize the performance of their students so that they, as teachers, look good. This is not good. It limits the range of inquiry to those that are bureaucratically mandated, and can actually inhibit real learning.
If the teachers know the particular content of a test, then you get a double distortion: On top of the inhibition on real learning, you will now also get artificially high scores that don’t reflect any learning at all. And if the teachers are being paid or selected based on their students achievements on such tests, then the teachers must teach to the tests as a matter of personal career survival–a real and legitimate sore point for teachers and their unions.
The problem is that we can’t generally know when a teacher is teaching to the test. In certain extreme cases, one can use statistical analysis to see if a teacher is actually cheating. But generally, it’s hard to see in a sea of “gains” how illusory those gains are, and how much of them were the result of teaching to the test rather than real learning, even learning limited to the content of the content areas to be covered by the test.
Well, now we know the answer for New York State. By slightly increasing their standards, proficiency in English went statewide dropped from 77% to 53%.
Read more of this article »
Posted by Marc Hodak on July 25, 2010 under Unintended consequences |
Everyone knows the economic theory, right? Price floors reduce demand for the artificially expensive item. If the New York Times were forced to raise its subscription price, it would expect to see a reduction in the volume of subscriptions. If the young, who tend to have minimal work skills or experience, were forced to significantly raise the wage at which they must be hired, we would expect to see a reduction in youth employment. Over time, that is exactly what we see.
Well, apparently everyone doesn’t know the economic theory. And even those that do are willing to argue that, just in the case of labor markets, it doesn’t really apply.
But the results keep coming in.
In fairness to math, the WSJ link is the weakest since correlation does not equal causation. But when one compares the drop in employment among adults versus teens (instead of the increase in unemployment, which suffers from a serious base-rate bias), then one would more clearly see how we are eating our young with this silly policy.
Posted by Marc Hodak on July 23, 2010 under Reporting on pay, Unintended consequences |
The headlines run amok:
– New York Times: “Federal Report Faults Banks on Huge Bonuses” (the link to this story said the headline was “Feinberg Says Bonuses Paid by Troubled Banks Were Unmerited”
– Washington Post: “Bank executives received $1.6B; Treasury: 17 banks overpaid execs while receiving billions in taxpayer-funded bailout money.”
– Boston Post: “17 Firms Issued Excessive Pay”
– Fox Business News: “Pay Czar Feinberg Blasts Banks on Bonuses”
And it goes on like that in an MSM echo chamber.
From those headlines, you’d think Ken Feinberg was foaming at the mouth about how bad these banks were behaving against some standard of morality or reason. Alas, the whole story can be summarized thusly:
The banks made $1.7 billion in payments before the passage of pay restrictions that would not have been allowed under the pay restrictions.
That’s all he said. Feinberg did not use the terms “fault” “huge” “overpaid” “excessive” “unmerited” nor did he deliver this report in a “blasting” manner. All he was charged with doing was tallying up the total amount that had been paid that would have been impermissible under subsequent rules, and that’s what he did. All of the accusatory, judgmental, sanctimonious verbiage was added by the media.
In the last part of his report, however, Feinberg did go too far, essentially arguing for higher bankers pay in normal times.
Read more of this article »
Posted by Marc Hodak on June 17, 2010 under Unintended consequences |
From the WSJ:
Bank of America Corp. and other banks are preparing new fees on basic banking services as they try to replace revenue lost to regulatory rules, in a push that is expected to spell an end to free checking accounts for many Americans.
Free checking accounts, which have been widely available for more than a decade, have been a boon to middle-class consumers and attracted low-income customers to the banking system for the first time.
The actual name of the act was The Fairness and Accountability in Receiving (FAIR) Overdraft Coverage Act. That sounds much better than the title of this post.
Posted by Marc Hodak on May 20, 2010 under Unintended consequences |
Travis Dove for The Wall Street Journal
There has been a lot of breathless speculation on both sides of the debate about what government-run health care would look like. On the one hand, there are those who contend that it will provide universal access, guaranteed minimum benefits, and at a reasonable cost to the taxpayers–heck it will even reduce our deficit! On the other hand, there are those who believe that the distribution of care will be politicized, that central planning will result in unfair and inefficient outcomes to both providers and patients, and that government rules will constrain rational trade-offs, making the system grossly uneconomical.
Well, Medicare is not a speculative program. It’s been around for decades, and has had every chance to realize those savings and work all the bugs out. Here’s the update:
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Posted by Marc Hodak on April 16, 2010 under History, Unintended consequences |
The top marginal tax rate in post-war America on income over $400K was so high that anyone making large, but lumpy income would have a strong incentive to insure that the lumps were spread out across tax years:
The 1950s was the era of the 90 percent top marginal tax rate, and by the end of that decade live gate receipts for top championship fights were supplemented by the proceeds from closed circuit telecasts to movie theaters. A second fight in one tax year would yield very little additional income, hardly worth the risk of losing the title. And so, the three fights between Floyd Patterson and Ingemar Johansson stretched over three years (1959-1961); the two between Patterson and Sonny Liston over two years (1962-1963), as was also true for the two bouts between Liston and Cassius Clay (Muhammad Ali) (1964-1965). Then, the Tax Reform Act of 1964 cut the top marginal tax rate to 70 percent effective in 1965. The result: two heavyweight title fights in 1965, and five in 1966. You can look it up.
Of course, tax-driven behavior continues to create unintended consequences. In a lecture I gave today in Switzerland, I pointed out how the U.S. government’s elimination of tax deductibility of salaries over $1 million created a growing shift in the mix of executive pay from salary toward bonuses and equity. The mix went from about 70/30 (salary versus bonuses/equity) before the tax law to about 10/90. This change in the mix of pay contributed significantly to the huge growth in total CEO pay we saw in the ensuing ten years. And that is how American tax policy intended to reduce CEO pay actually led to its increase.
Something about other people’s high pay just drives congressmen a little nuts.
Hat tip: Marginal Revolution
