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Posts Tagged ‘Unintended Consequences’

One of the many frustrations of working in Washington is that politicians, when dealing with a problem created by government intervention, routinely propose that the solution is to give even more power to government. And since they are either unwilling or unable to connect the dots, they don’t care that their “solutions” will make matters worse. I’ve referred to this unfortunate pattern as “Mitchell’s Law.”

Of course, this concept isn’t new to me. It’s been around for a long time. I just like the phrase, “Bad government policy begets more bad government policy.”

Other people also have been publicizing this concept. I especially like what Chuck Blahous of the Mercatus Center recently wrote about the 5-step Washington tradition of “doubling down” on policy mistakes. The final step could be called the lather-rinse-repeat cycle of government failure.

Chuck also cites some very powerful (and very depressing) examples from healthcare policy.

He starts with the tax code’s healthcare exclusion.

With the best of intentions the federal government has long exempted worker compensation in the form of health benefits from income taxation.  There is wide consensus among economists that the results of this policy have been highly deleterious.  As I have written previously, this tax exclusion “depresses wages, it drives up health spending, it’s regressive, and it makes it harder for people with enduring health conditions to change jobs or enter the individual insurance market.”  Lawmakers have reacted not by scaling back the flawed policy that fuels these problems, but rather by trying to shield Americans from the resulting health care cost increases.

I fully agree.

He then points out that Medicare, Medicaid, and other spending programs have a similar impact.

The federal government has enacted programs such as Medicare and Medicaid to protect vulnerable seniors and poor Americans from ruinous health care costs.  …it is firmly established that creating these programs pushed up national health spending, driving health costs higher for Americans as a whole.  Consumer displeasure over these health cost increases subsequently became a rationale for still more government health spending, rather than reducing government’s contribution to the problem.  Examples of this doubling down include the health exchange subsidies established under the Affordable Care Act (ACA), as well as its further expansion of Medicaid.

I fully agree.

Chuck also shows how government involvement has created the same unhealthy dynamic in other areas, writing about college costs, Social Security, and Obamacare.

The moral of the story, as displayed by this poster, is that more government is the problem instead of the solution. Which is something Bastiat warned us about back in the 1800s.

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Alex Pollack of the American Enterprise Institute explains how even supposedly benign interventions have negative effects. Using deposit insurance as an example, he explains how the benefits of intervention are often obvious, but the costs are usually hidden and indirect – and generally of a greater magnitude. The politicians get applause for the supposed benefit (in this case, peace-of-mind for despositors) while avoiding any blame for the hidden costs (moral hazard, financial crisis, malinvestment, etc):

On one hand, there is the fervent political desire to make deposits riskless for the public, so that depositors do not need to know anything about or care about the soundness of their bank. But their deposits fund businesses that are inherently very risky, highly leveraged and cyclically subject to much greater losses than anyone imagined possible. The combination of riskless funding with risky businesses is inherently impossible. The attempt is made to achieve the combination through regulation, but this inevitably fails. Governments are therefore periodically put in the position of desperately wanting to transfer losses from the banks to the public, as once again in this cycle. An alternative is to prefund the losses through deposit insurance. But because the losses can get bigger than the fund, it ends up needing a government guarantee, thus bringing the risk back to the public. …Has government deposit insurance “put a premium on bad banking,” as Sen. Bulkley warned it would? Certainly in some cases it did, especially when risky, rapidly expanding real estate-lending banks could fund themselves by rapidly expanding brokered deposits. More generally, did deposit insurance help inflate the real estate bubble, especially in commercial real estate? Without doubt, it did. Leveraged real estate has been the cause of many banking busts. Over the past several years real estate loans of all commercial banks have grown to represent 56% of their total loans. For the 6,500 smaller banks, with assets under $1 billion, this ratio is a whopping 74%. This expansion of real estate risk could not have happened without deposit insurance.

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