Where did it all go so badly wrong? (Last – incentives, and stasis)
[This is the last in a series of posts relevant to the all-consuming topic in Ireland at the moment: the fall of the Fianna Fail/Green Party Coalition Government, and the resulting general election to take place on the 25 February 2011. My title approximates a question/comment posed by a guest (I think it was Jim Glennon, the former FF TD) on George Hook’s programme on Newstalk].
Note 1: The full series is available as an article: Where did it all go wrong article in pdf.
A truism of human behaviour is that people are incentive-driven (even by perverse incentives). Our economy became focused lopsidedly on property development because of tax incentives which people rationally responded to, resulting in a huge excess of un-needed properties. Groupthink suggests bulldozing them. However, we could incentivise property purchases by granting Irish residency to non-EU Nationals who purchase these properties for cash (no mortgages please)! If it is possible to incentivise investment in fixed assets such as property, it is possible to incentivise investment in new asset classes and businesses that are tradeable and saleable. Anglo-Irish Bank would not be in such trouble if it had a diversified loan book. Ireland Inc would not be in similar trouble, if there were multiple investment vehicles for rational investment in intellectual property, as opposed to the singularly obsessive concentration on investment in commercial and residential property. If we want an entrepreneurial culture which creates desperately-needed mass employment, then entrepreneurial activity needs to be incentivised. Adding taxes and other burdens on the self-employed reduces the risk-taking required to create employment on the scale needed to rescue the economy quickly. Risk-taking needs incentives; otherwise, why bother?
There are many other cognitive errors (for example, availability and affect heuristics, motivated reasoning, competence illusions, illusory superiority) which humans are also prone to (especially under duress). Memory (particularly recall) is badly affected by stress and lack of sleep. The decisions taken on the night of the infamous bank guarantee surely would have been better, if the Government had access to expertise and bought itself time (for example, by having a forced bank closure for 48 hours). This would have led to decisions in the cold light of day, with appropriate supports and inputs (of course, having an Economic Advisory Council in place would have helped). Memory for the precise sequence of events would be improved too!
Our elites must recognise that individual rationality and cognition is limited and error-prone. A system driven by the unrestrained cognition of individual ministers or others will fail; imposing political control where good policy formation should obtain is a recipe for disaster. And we know this, but this is the mistake we repeatedly make. Thus, our institutions must be re-engineered to be adaptive, plastic, and capable of learning (especially upsetting and unpleasant truths). Robust institutional processes are required to recognise error and failure quickly and to change course rapidly. However, the glacial pace with which our elites move leaves me believing this is a forlorn hope; we have seen little recognition of the need for change, despite the disaster that has occurred.