Archive for category Unintended Consequences
Foreign Aid: Not So Effective
Posted by The Marginalist in Unintended Consequences on June 23rd, 2009
Ever hear of that thing called “unintended consequences?” From the A.P., $196 billion of aid U.N. Aid is mostly ineffective.
They found some benefits, like increased diagnosis of tuberculosis cases and higher vaccination rates. But they also concluded some U.N. programs hurt health care in Africa by disrupting basic services and leading some countries to slash their health spending.
It reminds me of one of my favorite libertarian quotes of all time:
Liberals look for problems to fix, and find the best way for government to solve the problem.
Libertarians look for the same problems to fix, but find the best way to fix them.
War on Hugs
Posted by The Marginalist in Unintended Consequences on May 28th, 2009
THE War on Terror, the War on Drugs, the War on Crime and now the War on Hugs. (Hey, that rhymes!)
A measure of how rapidly the ritual is spreading is that some students complain of peer pressure to hug to fit in. And schools from Hillsdale, N.J., to Bend, Ore., wary in a litigious era about sexual harassment or improper touching — or citing hallway clogging and late arrivals to class — have banned hugging or imposed a three-second rule.
Suggested unintended consequences from this:
- Hugs will become even cooler, because now there’s a badass element to it. The reduction in the quantity of hugs will be diminished by the added badass effect of hugging (the policy won’t be that effective).
- The administration will greatly diminish its legitimacy (and therefore power) amongst the students.
- There’ll be an underground hugging community anyways.
- The administration will use all of the above to crack down even harder on hugging, desperately pouring resources into a useless, wrongheaded, and ultimately stupid venture.
As all domestic wars end.
The WSJ on Bank Regulation
Posted by The Marginalist in Unintended Consequences on April 27th, 2009
From the Wall Street Journal: Regulators Fell One Bank, Spare a Rival
The starkly different fates of the neighboring banks show how the U.S. government’s approach to dealing with the industry’s worst crisis in a generation has shifted. The decision to allow only one of the two banks to survive has fueled criticism that regulators are picking winners and losers, without disclosing their criteria for making the calls. That, in turn, has shaken the confidence of bankers and private investors trying to decide whether to wade into the troubled sector.
The apparently arbitrary nature of how the government is choosing which firms to let survive and which to let die scares me.
Think about it: If you were an investor, how would you choose which companies to invest in? You’d choose companies you think will do well in the future — companies you think will be successful. But if the government steps in and selects, in an apparently random fashion, which companies will succeed, your choice becomes much harder — and much riskier.
It’s another unintended consequence of government action — by stepping into the economy, they’ve made things much more uncertain for investors (or any risk-taking individual or firm, for that matter), discouraging them from investing and starting up new companies.
– The Marginalist
Cafe Hayek on Drug Prohibition
Posted by The Marginalist in Links, Unintended Consequences on April 14th, 2009
Don Boudreaux says,
When goods and services can be produced, sold, and consumed legally, suppliers of these goods and services are peaceful and not violent.
Basically, free markets make for peaceful arrangements. Yet another unintended consequence of governmental policy!
Link.
Freakonomics on the Wall Street Exodus
Posted by The Marginalist in Financial Crisis, Personal, Politics, Unintended Consequences on April 14th, 2009
The Freakonomics Article
IT seems that not only has the Obama plan created unintended consequences, but economist have predicted this before it ever happened.
From Freakonomics:
Remember when we wondered if stricter regulations and restrictions on executive compensation would spark an exodus of talented bankers from top Wall Street firms? Turns out it’s happening, and it’s probably not a bad thing.
Click the link for the full article, which includes a very different (read: not libertarian) perspective on this phenomenon.
The lesson: when thinking about governmental policy, think about what incentives they create and how this might change human behavior.
What does this mean for me?
IN the second comment, Ken B writes,
There’s also the small matter of the financial sector going through a profound contraction, since there are far fewer interest-only and negative-amortization mortgages to be written. Finance grew to an absurd size during the credit bubble.
As a future economics major, suddenly finance doesn’t seem like such a good place for me to be in. Now my incentives have changed, too, and this crisis and the subsequent policies may alter how I think about my post-college plans (and where I decide to go to school, too!).
Young Americans for Liberty On “Recession”
Posted by The Marginalist in Financial Crisis, Links, Politics, Unintended Consequences on April 13th, 2009
Reactions to the same article I featured in “Recession” are mixed at the Young Americans for Liberty blog on the same article.
Matt Varvaro argues:
misguided regulation would drive away competent workers to firms who are not dependent on government funds and are not burdened by the many “strings” attached to them, which in turn would harm the taxpayer — liable for these companies’ losses — even more.
Others, such as Bonnie Kristian, argue:
The bust of the boom-bust cycle is supposed to get rid of these sorts of companies, and propping them up longer — even in hopes of regaining some of our tax dollars — will only exacerbate the problem while simultaneously making it look as if the government’s plan has worked.
Which has been my position in that previous post. Basically, Varvaro is arguing that the government is hurting the economy because of the long-term damage the bailout will do to these firms. Kristian is arguing that the government’s policy is wrong not because it’s hurting these firms, but because it’s propping them up (and they need to fail). I think they’re both good arguments, and not necessarily mutually exclusive.
Why the government is forcing healthy firms to take money.
Now, My uncle works at Morgan Stanley in New York, and what he’s told me is that many firms, such as Morgan Stanley, are getting money from the government not because they need it, but because the government is forcing them to take the money.
Why would the government force a Wall Street firm to take money when it’s not necessary? Put yourself in the shoes of the Obama administration. The Obama administration believes it’s not a great idea to let these financial titans fail (yes, I disagree with them, but play along for a while). So one of the answers is, essentially, to give them money.
The problem is that receiving bailouts from the government has the unintended consequence of basically advertising, quite blatantly on the cover of the NYTimes, which firms are failing. According to my uncle, giving money to all the major firms allows the administration to hide, to some extent, which firms are healthy and which firms are not.
This is important because an impression that a bank is unhealthy will quicken its descent into collapse — investment is harder to come by or it may be rated lower by a rating agency, which would cause all sorts of problems. All of these work against the Obama plan to save Wall Street firms from falling.
This is basically the side of the government plan that Kristian is arguing against on the Young Americans for Liberty post — the Obama administration is interfering with the recession that’s supposed to get rid of unhealthy Wall Street firms.
However, forcing healthier firms to take the money creates the problems that Varvaro argues against.
Why there are unintended consequences.
These problems are basically those mentioned in the New York Times article.
When a firm takes money from the government, the government is more likely to be able to reach in and interfere with the practices of that business (eg, executive pay). Some firms, who aren’t in great danger of collapse, know that they know how to run their business better than the government does.
That’s the reason why some firms are simply holding on to the money and waiting for the soonest chance to return it to the government.
The result of this is the exodus of talented Wall Street executives and finance workers that we’ve been seeing lately.
Edit, 10:00 PM: When the government gets involved, things get very hectic and messy at a firm. It gets harder to reward good executives (populist outrage), there’s lots of red tape, etc. It’s not a very fun place to work, and sometimes can be hazardous to one’s career if you worked for a while at a firm that received “bailouts” from the government. So these financiers and execs have some incentive to leave these large firms.
The policy of forcing healthier firms to take money was intended to solve a problem caused by government handouts to unhealthy firms… but ironically, it ended up hurting these healthier firms.
Hopefully this government policy won’t create more unhealthy firms (prompting more bailouts!). It’s a vicious cycle.
Who’s right?
Unfortunately, both. Kristian is right — the government should have no business propping up firms. But Varvaro makes the correct point that by propping up these firms, competent workers are less likely to go there. And unfortunately, the combination of these two statements means that we’re propping up an incompetent firm, and by doing so, are making it more and more incompetent.
You see… it’s a cycle.