Ed Miliband has long had a problem with voters not perceiving him as “normal”. His famous struggle with a bacon sandwich in some ways says it all. But at a much more important level, he seems to have little or no empathy with one of the most fundamental of human motivations. The most profound insight of economics is that people respond to incentives. When incentives change, behaviour also changes. This certainly does not exclude other motives, such as altruism, but incentives are key to understanding how people make decisions. It is this which Miliband appears unable to grasp.
Consider the political situation in Scotland. A rampant SNP threatens many Labour seats. Yet despite the pleadings of his colleagues, Miliband finds it very difficult to rule out forming a coalition with the Nationalists after the election. In these circumstances, the incentives facing a Labour-inclined voter North of the Border are clear. Voting SNP promises a potentially powerful bloc in Parliament to press the case for extracting even more money from the English. And at the same time, you could still get a Labour government via the coalition route. For all except the truly faithful Labour supporter, incentives in Scotland point to voting SNP.
Pensions are another area where neither Miliband nor his political mentor Gordon Brown have shown the slightest sign of understanding the effect of incentives. Miliband proudly proclaims that he will finance a reduction in tuition fees by reducing the tax advantages of putting money into a personal pension scheme. One of Brown’s first acts as chancellor in 1997 was to abolish the tax relief pension funds earned on dividends from stock market investments. This crippled many final salary pension schemes. Pension pots are an irresistible lure for politicians with profligate spending aims. But at a time when life expectancy is rising sharply, it is an act of profound economic illiteracy to reduce the incentive for people to put money away for retirement.
Miliband played a prominent role in the last Labour government, first as a key adviser and fixer for Brown, and then as an MP and member of the Cabinet. Brown was at first an excellent chancellor, keeping us out of the euro and maintaining fiscal probity. But he soon went in for a massive increase in public spending, with entirely predictable results. Workers in the public sector were portrayed as angels, selflessly serving the nation. But they proved only too human, just like the rest of us. They responded to incentives.
The incentive to take advantage of the increases in public spending was strong. The outcome was a huge increase in the pay of the public sector relative to that of the private, even more attractive gold plated pension schemes, shiny new offices, more staff, and endless re-gradings and promotions. Most of the rise in public spending did not go into improving service provision. Instead, it went into subsidising the private consumption of those employed in the public sector.
Like it or not, responding to incentives is a very deep-rooted aspect of human behaviour.
As Published in City AM on Wednesday 11th March