Human beings react to every rule, regulation, and order governments impose, and their reactions result in outcomes that can be quite different than the outcomes lawmakers intended.
Friday, September 6, 2019
Antony Davies and
James R. Harrigan @ Foundation For Economic Education
Every human decision brings with it unintended consequences. Often,
they are inconsequential, even funny. When Airbus, for example, wanted
to make its planes quieter to improve the flying experience for
travelers, it made its A380 so quiet that passengers could hear, with
far too much clarity, what was happening in the plane’s bathrooms. Other
times unintended consequences have far-reaching, dramatic effects. The
US health care system is a case in point. It emerged in its present form
in no small part because of two governmental decisions.
First, wage and price controls during World War II caused employers
to add health insurance as an employee benefit. Why? The law prohibited
employers from raising wages, so to attract workers, they offered to
provide health insurance. Then, in 1951, Congress declared that
employer-provided health insurance benefits would not count as taxable
income. This made it cheaper for employees to take raises in the form of
increased tax-free insurance benefits rather than in the form of
increased taxable wages.
Consequently, not only do workers now receive health insurance
through their employers (unlike, for example, their car and home
insurance), but those insurance plans also tend to be more luxurious
than what they would have been had Congress never given them special tax
treatment. These two political decisions helped to create the health
care system we now have, a system that nearly everyone agrees is broken.
No one set out to create a broken system, no more than anyone ever
set out to make bathroom noises more conspicuous on airplanes. These
were unintended consequences. And you can see them everywhere when you
know to look.
Unintended consequences happen so often that economists call them “
Cobra Problems,” after one of the most interesting examples.
Cobras
In colonial India, Delhi suffered a proliferation of cobras, which
was a problem very clearly in need of a solution given the sorts of
things that cobras bring, like death. To cut the number of cobras
slithering through the city, the local government placed a bounty on
them. This seemed like a perfectly reasonable solution. The bounty was
generous enough that many people took up cobra hunting, which led
exactly to the desired outcome: The cobra population decreased. And
that’s where things get interesting.
As the cobra population fell and it became harder to find cobras in
the wild, people became rather entrepreneurial. They started raising
cobras in their homes, which they would then kill to collect the bounty
as before. This led to a new problem: Local authorities realized that
there were very few cobras evident in the city, but they nonetheless
were still paying the bounty to the same degree as before.
In the end, Delhi had a bigger cobra problem after the bounty ended than it had before it began.
City officials did a reasonable thing: They canceled the
bounty. In response, the people raising cobras in their homes also did a
reasonable thing: They released all of their now-valueless cobras back
into the streets. Who wants a house full of cobras?
In the end, Delhi had a bigger cobra problem after the bounty ended
than it had before it began. The unintended consequence of the cobra
eradication plan was an increase in the number of cobras in the streets.
This case has become the exemplar of when an attempt to solve a problem
ends up exacerbating the very problem that rule-makers intended to fix.
Air Pollution
There is, of course, nothing special about cobras. The same sort of
thing happened in the late 1980s in Mexico City, which was at the time
suffering from extreme air pollution caused by cars driven by its
18 million residents. The city government responded with
Hoy No Circula,
a law designed to reduce car pollution by removing 20 percent of the
cars (determined by the last digits of license plates) from the roads
every day during the winter when air pollution was at its worst. Oddly,
though, removing those cars from the roads did not improve air quality
in Mexico City. In fact, it
made it worse.
Come to find out, people’s needs do not change as a result of a
simple government decree. The residents of Mexico City might well have
wanted better air for their city, but they also needed to get to work
and school. They reacted to the ban in ways the rule-makers neither
intended nor foresaw.
The people released their cobras into the streets, except this time the cobras were cars.
Some people carpooled or took public transportation, which was the
actual intent of the law. Others, however, took taxis, and the average
taxi at the time gave off more
pollution
than the average car. Another group of people ended up undermining the
law’s intent more significantly. That group bought second cars, which of
course came with different license plate numbers, and drove those cars
on the one day a week they were prohibited from driving their regular
cars. What kind of cars did they buy? The cheapest running vehicles they
could find, vehicles that belched pollution into the city at a rate far
higher than the cars they were not permitted to drive. The people
released their cobras into the streets, except this time the cobras were
cars.
Unintended Consequences Everywhere
These examples of unintended consequences aren’t aberrations.
Unintended consequences arise every time an authority imposes its will
on people.
Seat belt and airbag laws make it less safe to be a pedestrian or cyclist by making it safer for drivers to be less cautious.
Payday lending laws,
intended to protect low-income borrowers from high lending rates, make
it more expensive for low-income borrowers to borrow by forcing them
into even more expensive alternatives.
Requirements that corporations
publicize
how much they pay their CEOs in order to encourage stockholders to
reduce CEO pay resulted in lesser-paid CEOs demanding more pay.
Three-strikes laws,
intended to reduce crime, increase police fatalities by giving two-time
criminals a greater incentive to evade or even fight the police. The
Americans With Disabilities Act
gives employers an incentive to discriminate against the disabled by
not hiring them in the first place so as to avoid potential ADA claims.
Electrician licensing requirements
can increase the incidence of injury due to faulty electrical work by
reducing the supply of electricians, thereby encouraging homeowners to
do their own electrical work.
Venezuela
But perhaps nothing illustrates the scope of the potential problems
arising from unintended consequences better than Venezuela’s terrible
game of whack-a-mole that began with the 1976 nationalization of its oil
industry. The government’s intent was to keep oil profits in the
country. And that’s how it went—for a while.
But when the government takes over a once-private industry, the
profit incentive to maintain physical capital is lost, and physical
capital deteriorates. The deterioration plays out over a decade or so,
and that’s what made it appear—at least for a while—that unlike
everywhere else socialism had been tried, Venezuela’s socialism was
working. But as the oil industry’s physical capital broke down, oil
production fell. Coincidentally, it was around this time that oil prices
fell also—a fact socialism’s supporters point to as the real culprit.
The ultimate unintended consequence of Venezuela’s nationalizing its oil industry was slavery.
That is without question incorrect given that no other oil-producing nation suffered what Venezuela was to suffer.
As oil revenues and production plummeted, Venezuela’s government
acted the way governments inevitably do when revenues disappear. It
borrowed and taxed as much as it could, and then it started printing
money. The printing led to the unintended consequence of inflation, then
prices rose so high that people could no longer afford food. To respond
to this unintended consequence, the government imposed price controls
on food. But this created a new unintended consequence wherein farmers
could no longer afford to grow food. And so the farmers stopped growing
food. Finally, the government forced people to work on farms in order to
assure food production.
The ultimate unintended consequence of Venezuela’s nationalizing its oil industry was slavery.
The Lesson
None of this means there is no place for legislation. What it does
mean is that lawmakers should be keenly aware that every human action
has both intended and unintended consequences. Human beings react to
every rule, regulation, and order governments impose, and their
reactions result in outcomes that can be quite different than the
outcomes lawmakers intended. So while there is a place for legislation,
that place should be one defined by both great caution and tremendous
humility. Sadly, these are character traits not often found in those who
become legislators, which is why examples of the cobra problem are so
easy to find.
