Beware Unintended Consequences

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What’s the problem with subsidies and tax penalties? For one thing, they are incentives, and individuals naturally respond to incentives. Unfortunately, policymakers do not seem to grasp the unintended (or at least, hidden) incentives built into their laws—incentives that could prove counteractive to their very goals.

What’s the problem with subsidies and tax penalties? For one thing, they are incentives, and individuals naturally respond to incentives. Unfortunately, policymakers do not seem to grasp the unintended (or at least, hidden) incentives built into their laws—incentives that could prove counteractive to their very goals.

Take Obamacare for instance. In the Washington Examiner, columnist Veronique de Rugy, lays out several ways in which the plan could encourage American workers to be less productive.

First, she notes how Obamacare cuts down on the demand for workers.

“On the demand side, the health care law requires employers with more than 50 workers to provide health insurance to all full-time employees (defines a full-time job as 30 hours or more per week) or pay a $2,000 penalty per worker.

In that sense, the law increases the cost of current and future employees. It also gives businesses an incentive to hire more part-time workers to avoid the costs of providing health insurance or paying the penalty for full-time employees.”

De Rugy says this trend has already started appearing in places such as Walmart, Forever 21, and Virginia community colleges.

She points out that Obamacare also incentivizes people to work less if their income is just beyond the Obamacare subsidy cutoff (400 percent of the poverty level). Since insurance premiums will probably rise under Obamacare, she would not be surprised if some people try to lower their income, a move one article has already recommended. In turn, less work means less economic growth and revenue, according to a conclusion she draws from research by Nobel Laureate Ed Prescott.

Did policy makers intend to squeeze the job market and lower American productivity by touting access to affordable care? Not necessarily. But good will or bad, the fact is that built-in incentives set off a chain reaction because individuals gravitate for the easiest route.

With that in mind, would we be better off if America paid more attention to hidden incentives before adopting new policies?

>>Source: De Rugy, Veronique. “Why Obamacare will make America less productive.” Washington Examiner. 18 Oct. 2013.

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