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Making incentives work

By David Leyonhjelm - posted Thursday, 20 August 2020

To borrow a phrase from Paul Keating, every galah in every pet shop has an opinion on the Covid-19 situation. Also echoing Keating, those opinions reflect the widely varied self-interest of their proponents. This leaves the government with a challenge – how to negotiate a path that is sound policy, politically saleable and achievable, despite lacking a majority in the Senate.

Broadly speaking, opinions tend to fall into two groups – those who worry mainly about the risk of infection, and those primarily concerned about the economic harm.

People whose jobs are lost or threatened, or have a business at risk, tend to favour opening borders, ending lockdowns, lowering taxes, reducing red tape and deregulation of labour in order to boost the economy.


Those with secure incomes (including welfare recipients) tend to worry more about the disease. They want borders closed, increased lockdowns, compulsory facemasks and rigidly enforced testing and quarantine. They are also more likely to favour eradication.

Both agree on government spending to pump up the economy, albeit with differences as to how much and how long it should continue, and neither would reject more support for themselves. They also agree that jobs are a vital concern, though whether they should have priority over preventing more infections remains a point of difference.

Self-interest is simply a reflection of incentives. If you have a secure income you can afford to worry about your health. If you are in danger of having nowhere to live, a disease with comparatively low mortality is less important. And if the government is handing out money, you'll take it and want more.

Were the government to align the incentives of each group, its task would be easier. A major step towards this could be achieved by linking the funding of the ABC, SBS, the Commonwealth public service, grants to State and Territory governments and maybe even welfare payments, to rises and falls in the unemployment rate.

As the ABS measure of unemployment excludes a lot of people and can be influenced by public service recruitment, I'm assuming a better measure could be used.

Under this plan, rather than a funding freeze, the ABC and SBS would suffer an actual cut in funding as unemployment rose, while funding would increase as unemployment fell. This would generate an incentive for their employees to take an interest in the jobs of other people, motivating them to favour less devastating methods of controlling Covid-19 than lockdowns.


The same would apply in the public service. Instead of being largely indifferent to the impact of their decisions, public servants would have an incentive to reduce red tape in the industries they regulate in order to increase employment. Their administration of existing rules would change and, I suspect, they would also discover ways to improve them. As unemployment fell they would be rewarded with increased funding to put towards higher wages and more resources, something the government could better afford as more people were working and paying tax.

Linking welfare payments to the rate of unemployment would also change incentives. Recipients would take a keen interest in the job market, making them more likely to vote for candidates that offer pro-job policies. This would prompt a major rethink by the political parties and lobby groups, perhaps even setting off a contest to see who could put forward the most job friendly policies.

And subjecting payments to the States and Territories to this discipline might put a stop to them imposing costs on the economy through lockdowns while passing on the cost to the Commonwealth.

As different as it might seem, this idea is not particularly radical. Tying university funding to graduate employment is already a move in the same direction. Back in 2014 I proposed something similar to then Education Minister, Christopher Pyne, while negotiating his higher education legislation. My aim was to make universities more accountable for the job outcomes of graduates in order to limit unpaid HECS debts. Governments should always look to incentives to pursue their agenda rather than resort to coercion.

For all the talk about what should be done differently, so long as the pet shop galahs have sharply differing views, the government stands little chance of implementing anything that will make a real difference. The most likely outcome is that nothing will get done. A change from politics as usual is required if we are to repair the massive economic downturn now occurring. An alignment of incentives would be a good start.

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This article was first published in the Australian Financial Review.

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About the Author

David Leyonhjelm is a former Senator for the Liberal Democrats.

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