From the late 18th century to the mid 19th century, Britain sent convicts to Australia. You probably knew that. What may come as a surprise is that after the initial voyage made its way across the world with a 5% mortality rate, that rose to a horrifying peak of 40% before falling back down to 2% and eventually all the way down to 1%. Why did this happen? Incentives! While the initial fleet was paid cost-plus (profit was guaranteed at some rate over costs incurred), the subsequently disastrous voyage was paid per prisoner that boarded in England. After public outcry, this was abandoned in favor of a method that paid for living arrivals. By paying for the desired outcome, they kept costs down while incurring the lowest mortality rate.
To summarize, a cost-plus method provided acceptable outcomes expensively, rewarding the wrong thing provided a terrible outcome cheaply, and rewarding the desired outcome provided the best outcome cheaply (especially if measured by cost per healthy arrival). In other words, you get what you pay for even if what you pay for is not what you want.
This lesson can be applied to a whole host of problems today, but I’d like to focus on education. We want highly skilled citizens with the ability to tackle the complex 21st century economy, but what we pay for is for people to board the boat (go to college). As a result, the cost of post-secondary education has skyrocketed and we have legions of college graduates who have expensive degrees they are unable to use. Nearly half of bellhops have 4-year degrees.
Partial subsidies have caused spiraling costs, so we can safely assume fully covering college tuition will cause another explosion in the inflation of educational costs. Variance in quality will also likely expand with fewer incentives for colleges to compete. Useless degrees will propagate. How, then can we design the right incentives?
We need to reward the outcome we want. Measuring skills acquired is difficult, but we do not actually need to do that. We can let the market measure the value of an education with the salary they pay new graduates of colleges and vocational training programs. A portion of the income tax collected from a graduate can go to the institution that provided the education over a period of 5-10 years. The market created by this policy will automatically sort students into high-value degrees and post-secondary educators will be incentivized to help their students find financially rewarding careers.
At this point you may be asking, “What about pre-existing inequality?! Won’t people from lower-income families be discriminated against?” You’d be right, too. That’s why we would have to adjust the portion of post-graduate income tax based on parental income to reflect the different expected outcomes the students have before they start their education. There is plenty of data available to design an equation that negates this effect by sliding the percentage of income tax going to the educational institution (e.g. maybe a fifth of the income tax collected from a student from a family in the top 10% goes to the school for the first 10 years and four fifths from a student in an income bracket from the bottom 10% goes to the school). With more widely available education and a market optimizing for educational outcomes, we can put America on the path to a stronger and more equal future. This is an investment that will more than pay for itself and it will create happier, better educated citizens. It’s imperative we use the right set of incentives to get there.