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Warren Meyer in Forbes has a great post listing the ten reasons legislation goes bad. It is kind of a road map of unintended consequences. The last two are pure Frederic Bastiat.
Every year I get to teach a day of a high school economics class. Just as the school’s resident radical progressive does a day on Marx, I get to come in as the token libertarian. While I am always tempted to go off on a long rant about individual liberty and the role of coercion in both the Republican and Democratic platforms, seeing that it is an economics class I have tried instead to introduce some interesting bits from an array of libertarian favorites, from public choice theory to Austrian economics to Bastiat. What I have decided to do this year is to discuss why bad things happen to well-intentioned legislation. Specifically, I offer these 10 economics traps that legislators frequently fall into:
1. Ignoring incentives In evaluating how the public will respond to a piece of legislation, one needs entirely to forget the stated purpose or intentions of the law, and look instead at how individuals are likely to respond to the taxes, payments, mandates and rules embodied in the legislation. Tax a behavior, or make it more time-consuming to pursue via regulation, and you will get less of it. Make something cheaper or easier, and you will get a lot more of it.
Sometimes this is the whole point of the legislation. For example, large taxes on cigarettes are meant to deter consumption. Mortgage interest tax breaks are meant to increase the number of people who own rather than rent their homes.
However, at other times, in the rush to achieve some well-intentioned goal, or even just out of sheer neglect, the incentives built into legislation create significant unintended consequences. Consider two examples
In GAAP accounting, interest on debt is treated as an expense, whereas dividends are treated as a return of capital to shareholders. When the corporate income tax system was put in place, it relied on these existing accounting definitions to define taxable income — all perfectly logical. But the net effect was to make the cost of debt tax deductible, while the cost of equity is not. Over time, as corporate tax rates have risen, this has induced a substantial bias towards debt over equity financing, arguably making corporate finance more risky.
When AFDC (welfare) was passed, it was a well-intentioned effort to help poor families, particularly single mothers. Unfortunately, as structured, it created incentives for mothers to remain unmarried, to avoid getting a job, and to even have more children than they might have. Over the following decades, the number of unemployed single women exploded.
2. Public Choice Theory Speaking of incentives, it turns out that they are important for legislators and government officials as well. …
Walter Russell Mead posts on the looming Detroit bankruptcy.
… Leftie intellectuals spend a lot of time analyzing the “false consciousness” that keeps American workers voting for Republicans who (in the view of the intellectuals) support anti-worker policies. We don’t hear nearly as much from these incisive social thinkers about the false urban consciousness that keeps voters supporting policies and politicians that have ruined the cities, but there you are. Many of the policies that are dearest to the hearts of powerful Democratic politicians are responsible for wrecking the lives of many of their most loyal supporters, but the loyal supporters turn out year after year.
When American cities embraced the high cost, high regulation statist model two generations or so ago, they were often the richest and most dynamic places in the country. Increasingly “progressive” policies, with higher wages for unionized teachers, bigger bureaucracies enforcing tighter regulations, more “planning” by qualified technocrats and more government services and benefits to improve the quality of residents’ lives were supposed to take the American city into a new golden age.
It’s hard to think of many social experiments that have more disastrously failed. Now many of these once flourishing cities are hollowed out shells, while around them suburbs and increasingly exurbs flourish away from the deadening influence of urbanist politics. …
Also in Forbes, Joel Kotkin writes on the continuing foreign investment in our country’s economy.
Declinism may be all the rage in intellectual salons from Beijing to Barcelona and Boston, but decisions being made in corporate boardrooms suggest that the United States is emerging the world’s biggest winner. Long the world leader as a destination for overseas investment, the U.S. is extending its lead as the favored land of overseas capital.
Since 2008, foreign direct investment to Germany, France, Japan and South Korea has stagnated; in 2009, overall investment in the E.U. dropped 36%. In contrast, in 2010 foreign investment in the U.S. rose 49%, mostly coming from Canada, Europe and Japan. The total was $194 billion, the fourth highest amount on record.
Foreign investment is already reshaping the American economic landscape, shifting wealth and income from differing regions. The transformative role is nothing new. After all, the country started as a colony of England, and for much of the 19th century remained dependent on European investors for everything from building canals to railroads. Without European capital, the settlement of the West and the rise of cities such as New York would have been far slower.
Today this pattern is re-asserting itself as foreign countries rediscover America’s intrinsic advantages: a huge landmass, vast natural resources, a large, expanding consumer market and a relatively predictable legal system. Our relatively vibrant demographics demographics — at least before the Great Recession depressed birthrates and immigration — marks a strong contrast with such key countries as Japan, South Korea and Germany, all of which are aging far more rapidly than the United States. China’s authoritarian political system leaves many investors reluctant to expose themselves too much to the regime’s often less than tender mercies.
The investment boom is concentrated not so much in the most celebrated sectors, such as tech or trophy real estate, but in the more basic industries that are best suited to our large, resource-rich country. Investment in the burgeoning energy sector more than tripled to $20 billion between 2009 and 2010. Some of this investment has come into the renewable industry, where Europe and China also have heavily subsidized companies, but the vast bulk has been devoted to the country’s expanding production of oil and gas. …