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"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."
- F.A. Hayek, 20th Century Economicst
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Perverse Incentives Create Havoc
The past couple years has brought us several instant examples of how individuals often respond to economic incentives. Whether it is cash for buying cars or tax credits for purchasing houses, these incentives have an undeniable impact. The outcomes, however, may not always be as positive as they seem.
Just last week, it was reported that new home sales for May fell to the lowest rate in 47 years. This lone statistic is likely the direct result of the homebuyer tax credit (which expired on April 30) pulling demand forward. Our economy is full of these incentives and quite often they work out differently than anticipated by policy makers. We purposely quoted F.A. Hayek above as he was a forceful defender of free market capitalism, particularly on how prices communicate signals allowing individuals to respond and plan accordingly.
Our economy contains many incentives that appear to work in contravention to our long term goals. For instance, we tax earnings on savings and investments but provide tax deductions for mortgage debt (and until 15 years or so ago-all debt). Yet in the 21st century, capital is fungible and we need a somewhat mobile workforce. Is it desirable to encourage everyone to buy a home given that backdrop?
As financial planners we emphasize to clients not to let incentives alone dictate their strategy or actions. We shouldn't buy a house and obtain a mortgage just because the incentives are there unless that fits within our long term goals (the same can be said for Roth IRA's, 529 Plans, etc.).
Our time tested wealth planning system focuses on consistency and transparency. We provide often needed discipline to help clients achieve long term goals. This includes steering clients away from big financial mistakes.
- James E. Wilson, CFP® My Blog
 In Barriers to Financial Security, we discuss the very real cost of investor behavior. Previous chapters introduced the series and the importance of investor behavior. Chapter six is available here. |
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WealthRx® is J.E. Wilson's unique wealth management process, designed with successful physicians in mind. Learn more. Contact 
