Incentives for the long-term

It might take decades for changes in incentives to affect behaviour. This is the thought prompted by Bryan Caplan's question: "Did tax cuts in the '80's spur Internet entrepreneurship twenty years later?"
I'd add other ways in which there might be long lags between changes in incentives and behaviour:
1. One reason why New Labour has been so keen to reduce the numbers of workless households is the belief that if children grow up in homes where neither parent works, they'll believe it's normal to be without work, so they won't look so hard for it when they grow up. Reducing worklessness, it thinks, can therefore raise labour supply in 10-20 years time.
2. Incentives  can affect social norms slowly, as Assar Lindbeck argues here (pdf). For example, if a society has a strong work ethic, the introduction of sick pay or high marginal taxes might not reduce labour supply much immediately. But as the generation with a strong work ethic retires and is replaced by one more accustomed to generous sick pay and high tax, labour supply might fall.
3. In the 1980s incentives  (and opportunities) to work in the public sector fell relative to incentives to work in the private sector. The upshot is that many people of my generation (early-mid 40s) who would have become academics or  civil servants in earlier times went into the City. This might have created a supply of entrepreneurs and hedge fund managers that would not have existed otherwise.
My hunch is that changes in incentives are much more important in the long-run than short-run.
But that's all it is - a hunch. As Bryan says, it's hard to say for sure using formal empirical methods . And this raises a question. Why, when the full effects of policies are so uncertain, are so many people so dogmatic about their likely effects? Are introspection and common sense really sufficient to justify strong beliefs?

Comments

[spencer]

There are two problems with the Caplan thesis.

By the way Larry Kudlow made this argument years ago.

First the main driving force behind the capital spending boom was a sharp drop in the cost of computing power. I know of essentially no evidence that tax policy played a role in this. If anything government made a major contribution to it by subsidizing research and the education of engineers and scientists. Even the internet portion of the boom was dependent on the early development of the system by the Pentagon.

Second, even though we talk about the role of entrepreneurs like Bill Gates, the 1990s capital spending boom occurred almost completely in the corporate sector where individual income taxes do not enter into the calculation. Actually, small business and individuals did not really participate in the boom until large firms with full scale technology departments worked the bugs out of the systems and developed simple software. Only about 11% of nonresidential fixed investment in the US is done by s-coprs, partnerships, etc.., that are
subject to the individual income tax and this share actually fell in the 1990s --exactly the opposite of what the Caplan-Kudlow thesis predicts.

[jameshigham]

"But that's all it is - a hunch. As Bryan says, it's hard to say for sure using formal empirical methods . And this raises a question. Why, when the full effects of policies are so uncertain, are so many people so dogmatic about their likely effects? Are introspection and common sense really sufficient to justify strong beliefs?"

This really says it all, Chris and applies as equally to climate change and its sceptics, Christianity and its sceptics, everything and its sceptics.

One is then reduced to following indicators - trails, if you like, of cause and effect.

[Kevin Carson]

Anyone not a child or with child must have a rabbit.