Unintended Consequences: legislation as the problem not the solution

Even if we grant that the drafters of legislation and regulations have the country’s best interests in mind (which I believe is a reasonable assumption, at least most of the time) it is not a rare event that the unintended consequences of policies are so bad as to call into question the overall benefit of the policies. I have heard of such cases over and over again and thought it would be interesting and perhaps helpful to document some examples. I will edit this post over time to provide examples as I come across them. Please add a comment if you know of other examples that would help demonstrate the point.

This approach cannot be a proof that all legislation is hopelessly misguided and doomed to failure but I hope it will provide support for the notion that the burden of proof should be on the side of any drafter of legislation to prove that their effort will not make the world worse rather than better off. I also hope it will help provide a broader perspective when considering what the government can or should do – and that anyone contemplating government action should not just assume away or ignore unintended consequences.

Topics in this series include:

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Faulty Logic

I am sometimes amazed at the tortured logic people can use to defend a position. I’m going to start chronicling them here for fun. The first was, of course, intended to be fun:

William Shakespeare: As You Like It

TOUCHSTONE. Such a one is a natural philosopher. Wast ever in court, shepherd?
CORIN. No, truly.
TOUCHSTONE. Then thou art damn’d.
CORIN. Nay, I hope.
TOUCHSTONE. Truly, thou art damn’d, like an ill-roasted egg, all on one side.
CORIN. For not being at court? Your reason.
TOUCHSTONE. Why, if thou never wast at court thou never saw’st good manners;
if thou never saw’st good manners, then thy manners must be wicked;
and wickedness is sin, and sin is damnation. Thou art in a parlous state, shepherd.

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Robin Hood

Arguments that espouse taking from the rich and giving to the poor act as if this is a zero sum game being played. Under this frame of mind you can take surplus from the rich and give it to the poor and the total income of the population will not change. However, we know that at some point increasing taxes will reduce the incentive to work and thus decrease output. On the other side of this math giving more of the tax taken from the rich will not increase the poor’s output. Thus the more you tax the rich to give to the poor the lower will be aggregate income.

This argument also can illuminate potential positive effects on society: pure supply and demand theory tells us that the less you tax work, the more of it you will get. More work will produce more aggregate income. Thus reducing taxes on the rich may be a better way to improve aggregate income than the opposite. Increased demand for goods and services created by this increased aggregate income should increase the demand for, and thus the pay to, the working poor. Any argument that favors direct transfers from rich to poor should consider this relationship before concluding that we all will be better off.

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Advice from long ago to avoid the financial crisis

I have been reading Henry Hazlitt’s “Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics”. It was first published in 1942 and most recently edited in 1979. It is an insightful book with many lessons for the modern day. Hazlitt saw the coming of the current financial crisis long ago. Too bad his advice wasn’t taken by the powers that be. He said:

“Government-guaranteed home mortgages, especially when a negligible down payment or no down payment whatever is required, inevitably mean more bad loans than otherwise. They force the general taxpayer to subsidize the bad risks and to defray the losses. They encourage people to “buy” houses that they cannot really afford. They tend eventually to bring about an oversupply of houses as compared with other things. They temporarily overstimulate building, raise the cost of building for everybody (including the buyers of the homes with the guaranteed mortgages), and may mislead the building industry into an eventually costly overexpansion. In brief in the long run they do not increase overall national production but encourage malinvestment.”

Henry Hazlitt. Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics. Page 47. Three Rivers Press, New York. 1979.

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