by Charles Hugh Smith
Either Reverse All the Perverse Incentives or the System Will Implode
Every perverse incentive is the cash cow for a vested interest or cartel.
I hope it’s not a great shock to discover all the incentives in our status quo are perverse: those who rig the financial system while creating zero real value, jobs, goods or services reap all the big profits; those who take near-zero responsibility for their own health are subsidized by those who take responsibility for their own health; those who try to start enterprises and hire workers are saddled with endless regulations, junk fees and taxes while those who game the system to get welfare (household or corporate) skim the cream for doing nothing for their community or for the nation.
Systems in which all the incentives are perverse implode under their own weight. Those who struggle to pay the mounting costs of Imperial Over-Reach, crony-capitalism and all the skimmers and scammers eventually go bankrupt or quit in disgust, while the army of state dependents and cronies explodes higher.
It has taken decades for the incentives to become so perverse, so we no longer notice the perversity or the pathological consequences.
High-frequency traders and financiers with the ready ear of well-paid political lackeys, stooges, toadies and sycophants run never-lose skimming operations and pay lower tax rates than self-employed and small business owners.
Corporations have increased their share prices not by earning more money by producing more goods and services but by borrowing cheap money from the Federal Reserve and buying back outstanding shares.
Corporations pay less tax if they move production overseas and keep their profits in other countries.
If I wreck one vehicle after another due to reckless irresponsibility, what happens to my insurance premiums? They skyrocket, of course, reflecting the higher risks that result from my behavior and poor choices. Nobody thinks safe drivers should subsidize irresponsible drivers.
But if I wreck my health by recklessly pursuing risky behaviors, I pay the same as people who are careful “drivers” of their health. What sort of incentives does this system generate?
If I want to buy an over-priced home, the system is loaded with incentives to encourage that potentially poor financial decision. But if I want to launch a small enterprise, the incentives are all perverse: steep upfront fees, taxes from the first dollar, and in many cases, fees and taxes on revenues, regardless of whether I am making a profit or losing my shirt.
Corporate profits have soared as financialization and rigging the system have paid much higher returns than risking capital in new goods and services.
The incentives for home ownership have turned the bottom 90% into debt-serfs in servitude to banks while the top 5% own income-producing assets and businesses.
Larded with the most perverse incentives possible, the U.S. healthcare system in the final stages of maximum costs, just before it implodes:
It’s not hard to design positive incentives. For example:
1. Make preventative care essentially free to everyone ($5 co-pay) but weight the risks and costs created by irresponsible behaviors that ruin health. Reward those who take responsibility for their health by reducing the premiums they pay.
2. Tax all profits on securities held less than a day at 95%. Raise corporate taxes generated by financial activities to 50%, and lower the corporate tax rate on profits earned from producing domestic goods and services to zero.
3. Lower the tax for the first $25,000 earned by small enterprises to zero. Limit total government fees to 5% of revenues for all businesses up to $10 million in annual revenues.
4. Phase out the mortgage interest deduction. Limit mortgage interest deductions to the first $100,000 of mortgage debt.
5. Eliminate the personal income tax (and the need to file a return) for every household with income of $100,000 or less.
6. Automatically sunset every government regulation. Make city, county, state and federal governments renew every regulation every few years via a majority vote or it vanishes from the law books.
7. Make every politician wear a NASCAR-style jacket plastered with the names and logos of their corporate, union and financier contributors. The California Initiative to make this a reality is seeking signatures of registered California voters. Since politicians are owned, let’s make the ownership transparent.
8. Treat drug abuse and addiction as medical conditions rather than crimes.
9. Eliminate the Federal Reserve and its free-money for financiers perverse incentives for debt-serfdom and financial plundering.
10. Eliminate all student loans and debts. Make colleges compete for students on a cash-only basis.
As you no doubt noticed, every perverse incentive is the cash cow for a vested interest or cartel. That’s why the perverse incentives will endure until the system implodes under their pathological weight.