It's the incentives, stupid!

One of the lessons I try (and try and try and ...) to get across to my students is that incentives matter. In fact, I think that's THE fundamental concept of economics and I think it explains why economists regularly conduct very good research in areas as diverse as how to field a winning baseball team to how to pick a spouse to why crime rates change over time. Many of these fall outside the conventional view of economics, but they're all simply cases of analyzing incentives. Of course the reverse of "pay attention to incentives" is the "law of unintended consequences". From the folks over at marginal revolution, I've got a couple of recent examples.

First, Fairfax County (VA) officials wanted to reduce motor pool spending. They figured (probably correctly) that there were a lot of folks driving a county car that really didn't need one. So they came up with a plan to determine just who needed a county vehicle.

To eliminate unneeded cars, the county established a minimum annual mileage -- 4,500 -- and told its 11,500 employees and supervisors that any cars with odometers that did not meet that figure would be taken away.

Anyone want to guess what happened? It shouldn't have taken a rocket scientist, or even an economist, to predict how workers would respond.

Of all the perks of public service, few are more treasured than the government car. So when the county established 4,500 miles as the annual minimum to determine whether a vehicle could be weeded from its fleet to save money, many employees and managers got creative. Their efforts -- heightened even as gasoline prices soared this year -- are documented in hundreds of e-mails and memos obtained by The Washington Post under the Virginia Freedom of Information Act.

I'm not surprised at how hard individual employees worked to run up miles, but I was a bit taken aback by some supervisors' actions.

"I understand the difficulty in getting miles when you live so close," reads the Aug. 1 e-mail that vehicle coordinator Ben Coffman sent to Robbins. "There are only so many places you can drive to on a given day! We need to get around 500 miles a month to keep above the minimum . . . a few missed days of driving (going to a class, leave, etc.) could drop your mileage below the minimum."

This is from the vehicle coordinator, a guy I'd assume would be in charge of tracking/enforcing this policy. Geesh!

Then there's an email from the director of another department:

We need to think about scheduling with Tricia to use her vehicle for everything we can think of, so she won't lose it.

Other supervisors constructed elaborate schemes to "trade off" vehicles between employees to make sure the required mileage accumulated on each. That wastes time, but it's not as bad as the schemes to invent reasons to drive vehicles more just to get to the magic number. Remember, all this was occurring during a time of unusually high gas prices!

My favorite part of the article, though, is the bit about the lack of "success" of the new policy. "Last week, board members were surprised to learn that just 11 vehicles were turned in this year." They were surprised? Are they complete dolts? I think they might be because here's their "solution" -- INCREASE THE MINIMUM MILEAGE TO 5000! Any guesses about what will happen if they do?

My second example of ignoring incentives isn't so blatantly stupid, but it did inconvenience me the other day. You've probably heard about new laws restricting the purchase of sinus medicines containing pseudoephedrine (e.g., Sudafed, Tylenol Sinus, etc.). Evidently pseudoephedrine can be used to manufacture crystal meth so the powers that be decided restricting access to pseudoephedrine would help battle the the crystal meth crisis. I don't doubt this to be true, but the powers that be failed to consider the unintended consequences of new laws. Basically if you want to buy a medicine with pseudoephedrine, you now have to get a card from the sinus medicine section of the store and then go get your actual medicine from someone in the pharmacy. Not only do you have to wait for service, but they take your ID and enter your purchase into a statewide (nationwide soon?) tracking system to make sure you haven't exceeded the allowed amount. Given all this hassle, what do you think people have done?

Of course they've started buying sinus meds containing phenylephrine rather than pseudoephedrine. Hmm, customers don't want to go through the hassle of getting pseudoephedrine drugs, so what are drug companies doing? Of course they're switching active ingredients, replacing pseudoephedrine with phenylephrine. That wouldn't be so bad except for this story reporting that phenylephrine doesn't seem to work very well as a decongestant!

Evidently the switch to phenylephrine was justified by a 1976 FDA report that labeled phenylephrine "safe and effective at a 10mg dosage." It turns out, though, that only 4 of the 11 trials (that's 36%) in the study showed phenylephrine to be effective. So, is the FDA looking into phenylephrine's effectiveness? No, because, "The FDA is not aware of any data that refute the 1976 report." That's it. The drug is claimed effective because 36% of trials from 30 years ago said it was good and no one has proven otherwise. Again, geesh! Further, there's some rumbling about phenylephrine's effect on blood pressure -- it was originally developed as a treatment for low blood pressure. I can't wait for that round of lawsuits.

So how did this affect me personally? Well, I'd tried, a couple of times, to get some of the good stuff at Kroger in recent months, but I couldn't get anyone to wait on me at the pharmacy counter. Imagine that, the pharmacists were all busy filling actual prescriptions! Anyway, I'd put off my purchase again and again, but I was desperate the other day. So I waited and waited at the Wal-Mart pharmacy. In the end I stood in line for 5 minutes or so and had to watch some guy enter all my info into the state database just to purchase a $3.20 box of (generic) Sudafed! Starting to see why I'm (almost) a Libertarian?