The Lesson of Unintended Consequences

The Lesson of Unintended Consequences

Those of you interested in economic policy who are not familiar with Henry Hazlitt's fable of the broken window, now is the time to learn it.  I was reminded of it, and the late, great Hazlitt's wonderful book "Economics in One Lesson," after reading a recent Economist editorial, "Piling On."   The fable, and the Economist editorial, both focus on the law of secondary (or unintended) consequences.  Simply put, any purposeful action will lead not only to those results that the instigator was trying to achieve, but inevitably to unintended results as well.

When the instigator is Congress, and the purposeful action is economic policy, it can spell trouble for American business.  That's because when Congress delves into economic policy to protect one group, it may inadvertently punish that group (and others) as well.  Take for example the recent credit card consumer-protection legislation. In enacting this law, Congress is attempting to protect consumers from excessive credit-card fees.  But the restrictions may also force banks to slash billions of dollars in available credit to avoid risk.  After all, interest rates are simply a tool that lenders use to balance risk, and Congress has removed this tool from the bankers' tool box.  So banks will hold onto their money rather than make risky loans.

Most economists predict that if Congress enacts a universal healthcare policy — which is designed to make healthcare coverage cheaper and thus more accessible — the restrictions and regulations placed on physicians and hospitals will ultimately make it harder for people to get treated. As noted economist Thomas Sowell observed in a recent column, just ask Britons or Canadians, who typically wait much longer than Americans for surgery or even MRIs in their healthcare systems.

The Economist sees other unintended consequences in upcoming economic policy, such as in climate change legislation:

Under a mammoth carbon-emissions bill now working its way through Congress, 85% of valuable permits to emit carbon dioxide (which might all have been auctioned) will be given away free. This creates a huge new pot of favors for government to hand out, and new incentives for businesses to lobby. It will be costlier to fight climate change, while harder to avoid political favor-trading.

The point is this: While the recent financial meltdown was caused by reckless lending and ridiculous investment practices, Congress and the Obama administration shouldn't take this as an opportunity to overregulate the entire economy.  Businesses expect this round of political leaders to tinker with economic policy.  But don't kill the goose that lays the golden egg. 

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