Friday, October 26, 2012

Unintended Consequences

A few days ago my wife called to me about a news story on the Internet.  “In France, they’re raising the taxes on the rich to 75%, so guess what’s happening.”  I responded that some rich people were probably moving out of France.  “Yes, and the realtors are happy to get those huge houses on the market.”

It didn’t take a stroke of genius to guess correctly, merely some critical thinking.  Behavior has consequences, actions have reactions, and rich people have a lot more flexibility than the rest of us.  When taxes go up, they can move their investments or even move themselves.  In America it’s rare that they would leave the country, but the wealthy and the big corporations gravitate toward states where the tax and regulatory environment is more favorable.  If the rest of us had more flexibility, wouldn't we do the same?

The following day I read about a proposed bullet tax in Chicago.  The Cook County President proposed a tax of five cents per bullet and $25 per weapon sold in the county.  One objection to the proposal is that customers would just go to gun stores in neighboring counties or states to do business.  Actual tax revenues would be lower than expected, and gangs probably don’t buy their guns and ammo anyway.  It would not get the desired result.

There are many other government actions and programs that don’t always yield the anticipated benefits.  One that comes to mind is Unemployment Insurance.  Some government-funded research indicates that extensions can be counter-productive.  “For some UI recipients...these same payments can lead to a prolonging of their time in benefit status and higher aggregate unemployment. The UI Program can adversely affect the labor market in other ways, such as increasing the volume of unemployment occurrences caused by employers. The combined effects on unemployment duration and unemployment occurrences cause the overall unemployment rate to be higher than it would otherwise be.”

Another example is the college assistance program which, in some cases, rewards parents who spend on toys and vacations rather than saving for college.  I know of some cases where couples delayed marriage to avoid counting the fiancé’s income which would not make their children ineligible for aid.  Encouraging this behavior is clearly not the intent of the program.

I remember several years ago an ill-fated tax on luxury yachts intended hit the wealthy that resulted instead in lost jobs for workers at American ship building companies as rich buyers took their business overseas.

Finally, here is a recent example from Italy.  All seven members of the National Commission for the Forecast and Prevention of Major Risks were convicted and sentenced to six years in prison for not giving adequate warning of an earthquake that struck in 2010.  Earthquakes are extremely unpredictable.  Since then four other top government scientists have resigned, and I wouldn’t expect too many applicants for the vacant positions.  By this action they have undermined their own program as well as the integrity of international seismic research where open sharing of data is vital.

People change their behavior in response to rules and regulations in predictable ways.  The same thing often happens in corporations with poorly designed incentive systems.  Executives collect bonuses even when business results are poor.  Line workers game the system to meet goals without improving productivity or performance.  Taking a behavioral viewpoint and using a little critical thinking during the drafting or design stages could anticipate these consequences, making laws and programs more effective.  Unfortunately, it doesn’t happen enough.

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