The Price of Government Policies

The concept of unintended consequences happens everywhere in life. These consequences can take form as a drawback or can sometimes be surprisingly beneficial, but by its definition each consequence results from a purposive action. When individuals experience unintended consequences, rarely do they come close to the amount of harm that can be done by the unintended consequences of governments. Government policies, to their credit, usually have good intentions in mind; but good intentions don’t necessarily mean good outcomes, and indeed, they often mean the opposite.

Recently the Seattle city council passed a ban on plastic bags for environmental reasons, but what they didn’t expect was an increase in shoplifting. With reusable bags entering the stores more frequently, shoplifting became easier for thieves and much harder to track for storeowners. 

While this event only affects a small group of people, let’s take a look at a few devastating examples in history:

1)   The Dodd-Frank Act. With good intentions in mind, its unintended consequences have put US corporations at a competitive disadvantage with foreign firms, costing American jobs.

2)    Limits on free trade. For example, the US government has placed quotas on imports of steel in order to protect steel companies. The results: less cheap steel meant higher prices for automakers, putting them at a disadvantage with foreign companies.

3)   Social Security. In addition to it’s financial flaws, economist Martin Feldstien suggests that the economy would grow much more quickly without social security. Knowing that they will receive social security, workers save less for their old age. That means less savings are available and less investment takes place, thus leading to an economy that grows slower than it otherwise would.

4)   The Federal Reserve Act. While its intention was to stabilize the monetary system, its reality has been a devaluation of our dollar.

5)   Sarbanes-Oxley Act. Its intention was to set new or enhanced standards for public company boards, management and public accounting firms. The results: it provided an incentive for small US firms and foreign firms to deregister from US stock exchanges. 

A few more recent examples:

1)   Financial transaction taxes. Goal: eliminate wasteful trading and reduce market volatility.  Three democrats recently introduced legislation to institute a tax on financial transactions, but seem to have forgotten the lessons that can be learned from New York and Sweden on its unintended consequences. What happened in New York was actually an increase in the cost for capital for investors and an increase in trading volatility by 10%. 

2)   The housing bubble. The push for “affordable housing” caused government created institutions, Fannie Mae and Freddie Mac, to buy up sub-prime loans and securitize them. More and more risky buyers who otherwise would not have been able to receive a loan were able to become homeowners. The housing bubble burst as homeowners, who were risky borrowers to begin with, were not able to pay off their mortgage. As a result, foreclosures ran rampant and the price of housing started to plummet, which lead to the current recession.

The list could go on and on, but the point is that when governments make regulations and rules in order to design an economy to their liking, the unintended consequences can be devastating. Governments ignore the concepts of individual preferences and human nature, and it’s us, the citizens, who have to pay the price for it.

"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."- FA Hayek