One of the worst mistakes people make in politics is judging programs by their stated intentions and not by the incentives and constraints that between them drive the actual outcomes.

Consider price controls. A typical example is rent control. The idea is very noble sounding: ensuring that people have “affordable” housing. However, look at the incentives that it creates.

One incentive is that people who have this “affordable” housing may end up using more than they would otherwise. A person might keep a larger apartment than he would otherwise use if he had to pay more or who might rent alone where otherwise he would take a roommate. Or a person might take an apartment of his own when otherwise he would live longer with parents or other relatives. Or they might live father out from the city and accept a longer commute. Thus the incentive is to increase the amount of housing demanded at the rent controlled prices over what they would be in a free market.

On the flip side, however, people who own the apartment buildings find them less profitable. Now, some people might consider this no big thing–after all, if those “fat cat” landlords make less money, who cares? The problem is with the incentives this creates. For one thing, that increased quantity demanded means that if a tenant is dissatisfied and moves out, there are plenty more waiting for that space. There’s less incentive to maintain the building. Quality deteriorates. Oh, the law requires certain things (running water, heat, that sort of thing) to be provided so they have to keep that up, but if the cost of providing those things exceeds the revenue that can be generated under rent control, it becomes practical to just abandon the building, and leave it to the creditors. But even more. Buildings wear out (or get abandoned and end up having to be condemned), especially if they’re not generating sufficient revenue to pay for proper maintenance. New buildings get built. And when someone looks at building a new structure, they can use much the same resources to build an office building or an apartment building. Since office buildings are rarely covered by rent control, there’s far more incentive to turn those construction resources to office and other commercial structures than to places for people to live. Thus, the quantity of housing supplied is lower under rent controlled prices compared to what they would be in a free market.

Reduced quantity supplied and increased quantity demanded, the very definition of a shortage. It is no coincidence that any place where meaningful rent control is instituted (meaningful in that the rent controlled prices are lower than they would be in a free market) you soon end up with housing shortages.

Indeed, nearly any government program to “lower cost” works the same way. The incentives created lead to a reduction in the quantity supplied and an increase in the quantity demanded–shortage in economic terms. This is because government programs rarely address the issues that cause the cost to be high. It simply refuses to pay the cost.

Another issue of incentives vs. intentions is in various government bureaucracies. Government programs are generally created to “solve” a particular problem. Yet very little incentive is given to the organization, and those within it, to actually do so. Failure to solve the problem rarely gets a government bureaucracy disbanded or even cut back. Indeed, when the size and scope of a government organization is largely driven by how dire the “problem” it was created to “solve” is, the incentive is not to solve it, not even to make it better, but to convince the decision maker that the problem is “worse than we thought” and deteriorating. I, indeed, have pointed out that same principle in action in the case of public education.

Further examples of this in action should easily come to mind.