A policy and its translation into legislation aims to establish a framework which provides a way for a government to influence – and often to direct – the behaviour of its people. This is a core function of government. If you want to read more about that, read “Seeing like a State” by James C. Scott.
The formalisation into law is often the result of years, decades or sometimes even centuries of common practices, finally put down in a more formal manner, which allows many thousands of people to live together in some form of peaceful manner.
Coercive policy, the stick
Of course, it isn’t because something is written on paper, even the official gazette which formally publishes laws and regulations that people will necessarily comply with it.
For example, it is not because you are legally not allowed to speed on the road that everyone respects the speed limit everywhere all the time.
The way in which you as a government traditionally convince people and organisations to comply is either by stick or by carrot. The stick is the so called coercive policy: it imposes a set of specific behaviours on a person or organisation and raises the spectre that non-compliance will result in punishment.
Now, for certain situations coercive policy is very much required. Not murdering people, for example, is a quite normal societal obligation which, in case it is not being complied with, results in long term imprisonment and in some countries in death. However, coercive policy costs a lot of money, both in prevention – police presence and police force capable of quickly reacting in case your life is being threatened – and in dealing with the consequences of a non-compliant action. In this case, the costs is determined by the costs of the entire police force (identifying you as the culprit), the courts (judging you and where relevant, finding you guilty as charged) and prison system (locking you up and protecting society from you.)
Revisiting the example of speeding, non-compliance detection is done by fixed and mobile cameras, as well as with speed enforcement zones where your average speed over a distance of a number of kilometers is measured. This does not provide full coverage of all roads, because full coverage would just be too costly to install and maintain.
The overall burden of coercive policies on society can be very significant, while compliance is certainly not guaranteed. The cost/benefits of coercive policies are quite difficult to assess because there is a lot of non-measurable aspects. This is why coercive policy is not necessarily the best choice in cases when a government wants its citizens or inhabitants to behave in a certain way. Positive reinforcement often works better. It really depends on the impact non-compliant behaviour has. Usually, the higher the societal impact of the transgression or its knock-on effects, the more likely a coercive policy is called for. Coercive policy is not optimal, but in certain cases it is necessary.
Directive policy, the carrot
There are alternatives for cases where coercive policies are not explicitly required. Therefore, let’s take a closer look at the carrot … directive policy. Rather than imposing behaviour and punishing non-aligned behaviour like a coercive policy does, a directive policy invites people to exhibit a certain behaviour and then rewards that behaviour. Rather than imposing a certain behaviour, people are directed towards a certain behaviour via positive stimuli. The potential beneficiary has choice and options, but within a certain scope. Compliant behaviour results in tangible advantages for the people or organisations complying with the policy.
Within the group of potential directive policies, subsidies are quite a well-known form of such incentives, which directs behaviour without explicitly imposing that behaviour on everyone. If you can show compliance, you get to benefit from the subsidies, under specific conditions. And there are a myriad of possible uses of this policy instrument. For example:
You have the right not to chose solar panels on your roof, but that means you do not get to profit from a direct pay-back of part of your purchasing cost (direct subsidy which represents a cash-out for the government) or from a future tax deduction (indirect subsidy which represents a reduction of future tax income for the government). And of course you will not profit from a reduced electricity bill either.
But there is a bit of an challenge with subsidies as well … whereas coercive policies cost a lot in terms of enforcement, giving subsidies – especially direct subsidies – cost as well: the cost of the subsidy itself and the cost of the enforcement by the government. And as government administrations have no economic incentive to optimise their cost of control (see an earlier post on that subject here), in certain circumstances a direct subsidy is not always the most optimal type of directive policy. Ideally, a subsidy works best if there is a direct related benefit for the government, such as increased taxable income for example by the regularisation of a sector previously operating in the gray zone.
Alternative means of financing directive policy
There is another reason not to always opt for subsidies as the directive policy of choice. When granting subsidies, even if you as a government are striving to create wider, positive societal impacts, the benefits of the few are often financed by the contributions of the many. The approach risks triggering the Matthew Effect. And especially in cases where the required upfront investment is significant, such as building your own home, installing solar panels, purchasing an electric car … , access to the subsidies is not necessarily for everyone. But you may be excluding those who would benefit the most from access to the subsidy. However, and this is of course where it gets really complicated, the more you try to compensate, the more the checks on compliance will start to cost you … so where is the optimal balance?
I believe that question may actually be the wrong question to ask. A better, more pertinent question is whether we have other models available, models where policy based on incentives rather than punishment – i.e. directive policy – can be financed by those gaining a some benefit from the behaviour while still having a wider, ideally societal, impact? Turns out there are, and Belgium is quite the champion in using them.
The holy grail of policy making
Few people know that the holy grail of policy making can be found in Belgium. We haven’t really discovered it, that honour we leave to the British, but we are quite good at using it to our advantage. What is that holy grail? It’s simply the answer to the following question:
“Can I, as a government, enact a policy without incurring a significant budget cost for it?” or, more bluntly “How do I enact policy while making others pay for it?” We do it, and it actually makes sense. Our prime example is are the eco and meal voucher systems in place in Belgium.
Two very important side notes here.
The first one: the positions I take in this blog post are mine and only mine, and in no way represent the position of my current or any of my former employers. This is important to understand as I currently work for a company responsible for implementing such directive policies while having worked for a politician I respect a lot but who represents a party with certain members who have tried a number of times to end the system. So I’m not going to try to convince anyone I’m neutral in this debate, but I am informed. Which gives me the right to an opinion, because, to quote Harlan Ellison: “You are not entitled to your opinion. You are entitled to your informed opinion. No one is entitled to be ignorant.”
The second side note: The ongoing discussion about the relevance and the appropriateness of voucher systems is not the subject of this blog post but there is a forum for that discussion at the Voucher Issuers Association. My sole consideration is … is this really where you want to start reducing burdens? See also the article I wrote a couple of days ago here. Now back to the blog post …
So, let’s return to that holy grail: Does a voucher, paid for by the employer and giving the employee a certain fiscal advantage – as the amount is not taxed in full under certain specific conditions – incite a behaviour that is beneficial to society and can it therefore be considered as a relevant policy tool? Actually, from this perspective, any policy and its related instruments need to provide a satisfactory answer to at least the following questions:
- Financing: is (most of the) the burden (cost) carried by the one benefiting the most from a behavioural change? Is the cost to the government optimised? (do we counter or at least dampen the Matthew Effect?)
- Effectiveness: does the policy – or the use of its tools – lead to the intended behaviour in an optimal manner?
- Adoption: is the policy adopted by a large enough target group?
- Secondary (societal) impacts: are other societal benefits being realised by this policy?
Assessing the policy tool relevance questions
Let’s examine these questions in a bit more detail:
Most of the existing voucher systems have the employer financing the most significant part of the purchase of the voucher, coupled with a small contribution by the employee. The employer carries the cost and is able, thanks to the fiscal advantages, to give the employee a higher net compensation, be it limited in its use to the objectives of the policy. Government pays only indirectly, in foregone tax income from the fiscal advantages. However, there are some compensating mechanisms for “government loss” that as well. Think for example higher spending within the country’s territory with local businesses leading to higher VAT and income taxes.
With a coercive policy, everything is based on enforcement. Directive policy and its tools don’t necessarily and exclusively work that way. If the only way to enforce directive policy would be to set up controls, it would significantly limit some of its relevance as compared to coercive policy – while still likely being much cheaper because the full coercive control and supervision structures are not necessarily required.
Recent research I will come back to in later posts clearly shows the financial benefit of a voucher creates adequate incentives to trigger the searched-for behaviour. The systems actually turn out to be among the more effective in order to direct behaviour.
Effectiveness is also influenced by good information, communication and training. The more people know about why a certain behaviour is sought as well as what their own advantage could be, the more they understand the impact on themselves and their environment, the more likely it is they will chose that behaviour provided they have an additional financial incentive to do so.
Even if as a beneficiary you would want to exhibit certain behaviour, if you want to follow the guidelines, use the system, are you capable of doing that in an easy way? Are enough places available where you can acquire what you want to acquire without too much hassle for you? This depends on two factors:
- the scope of the network developed by the government, responsible for the policy or by the organisations they charged by the government with the development of such a network.
- the completeness of what can be acquired. This again is a decision of the government or the organisations they charge with the responsibility of establishing the list of approved uses.
There is a third factor, which is often not adequately recognised: the quality of the network. As a beneficiary I assume that when I spend my vouchers in a network, the quality of the network is assured. Quality is currently not explicitly considered as an enforceable factor by the parties responsible for developing and maintaining the network. However, social networks and the dynamics therein may actually provide part of a future solution for this.
So, in essence, voucher systems as directive policy are more likely to be adopted if the scope, the completeness and the quality of the network is assured. This is an implicit requirement from the beneficiary who does his spending within a limited network.
Secondary (societal) impacts
All three criteria mentioned above deal with the beneficiary and the government. But a policy has a purpose. Canteens and meal vouchers aim to provide a good meal for the employees to make them more productive and happier. It also constitutes a moment to share with colleagues we work and socially engage with. Sport vouchers, hugely popular in Eastern Europe, aim to establish the healthy body in which resides the healthy mind, not just increasing productivity but reducing down stream health care costs to government. Ecological vouchers provide a means to engage in less polluting spending on goods which impacts our ecological footprint for the good of current and future generations.
And it is not only the individual impact, but it’s the size of the target group that makes the difference. Take eco-vouchers in Belgium for example: over 10 years we grew the spending to more than 250 million euro per year in ecologically more relevant purchases, on a yearly basis more than 5 times what Belgium committed just one time at the COP21 Paris Climate Conference. And that amount of 250 million euro per year is entirely funded by private sector, not by the government. The only impact on government is the reduced taxation the vouchers entail, which again is compensated in part or entirely by the additional tax revenue from income taxes of local business and VAT.
Finally, we should not overlook the fact that voucher spending is spending exclusively on the Belgian territory, with merchants registered as Belgian entities, hence impacting Belgian employment and contributing to the Belgian economy, directly, again resulting in taxable profits, which benefit the government.
Summarising the relevance
The above makes it abundantly clear that where possible, directive policy is likely to be much more effective and less costly than coercive policy, with costs allocated much closer to the beneficiaries, where they should be rather than spread out over the whole of the population, a population that via its taxation is responsible for financing the entire monitoring and control structures of coercive polilcies.
Directive tools are more preventative in nature than coercive tools which aim to correct things once they go wrong. Directive tools can for example offer you the choice to stay healthy rather than impose the cost of medical bills on you when you get sick. Yet it remains a choice, there is a fundamental freedom. You may chose to spend your vouchers otherwise, in an adequately developed network with multiple choices.
Directive policy and tools such as vouchers also put the responsibilities where they should be: government develops a policy and regulates, while private sector competes to build the best, most relevant network for the beneficiaries. As a market mechanism this is more effective than having government taking care of it all, provided the right checks and balances are in place (i.e. a coercive control layer regulating the industry coordinating the tools of a directive policy system, if you really want to go down the rabbit hole).
Where to next?
Directive policy could provide an answer to much wider societal challenges we are currently being faced with. Think the escalating costs of healthcare and elderly care, for example. Narrowing on health care, your food choices now, compounded, will have an impact on your health profile in later years. The introduction of currently non-binding systems such as the nutri-score, a purely informational tool, could be combined with vouchers to help beneficiaries to make better choices. This was recently mentioned in an interview with Prof. Dr. Wim Marneffe, of the UHasselt, who is also in charge of the ASA’s measurement bureau.
But this is but one example of the use of a policy instrument which has many advantages and recognises the need for government and private sector to work together. Referring to a quote by Dirk Verhofstadt, whom I already quoted in 2017:
“The government should not itself become an economic actor, with the exception of establishing and maintaining those state structures that, while they contribute in the best possible way in a positive manner to the most just society, are of such nature that the benefits will never outweigh the costs they represent for one or a few people and which cannot be expected to be established or maintained by one person or a small group of people.”
When optimising our society for the challenges to come, let’s look at the mechanisms and systems we have, consider them, optimise them and face the fundamental changes we will go through in the most optimal way possible. Directive policies, where we provide incentives paid for not by all but by those reaping the most direct benefits yet benefiting us all indirectly are a much more effective manner than coercive policies.