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.

Learning from Australia

The wise learn not only from their own errors, but also from the experience of others.  Back in December I suggested learning from Italy, where the citizens became so accustomed to what were described as “lavish social benefits” that they took their outrageously generous government programs for granted, never stopping to be grateful or to wonder where the money was coming from.  The same could be said for several other European countries.  Now the day of reckoning has arrived and they find themselves facing painful consequences.

Continuing with the theme of perspective from last time but looking west, we find a new law in Australia regulating welfare payments.  Rather than sending checks or ordinary debit cards to recipients, the new program offers a special, restricted card that can be used only for priority items such as food, housing, clothing, education and healthcare, and only at approved businesses.  It cannot be used for alcohol, tobacco, gambling or other discretionary expenditures.  This has sparked protests, people marching in the streets objecting to what they perceive as restrictive, paternalistic and embarrassing treatment.

There are two important lessons here for Americans represented by two citizens interviewed for the article.   The first portrays herself as a victim.  It’s not her fault that she must rely on government payments and she resents any interference with how she spends the money.  But if we give up responsibility, in this case the responsibility to provide for ourselves and our families, we may be required to give up the freedom to decide how and where to spend that money.  The second citizen seems grateful for the help.   She recognizes that this is not her money and not something to be expected.  She has not slipped into the faulty assumption of turning a helping hand into an entitlement.  She has the perspective to appreciate the help and not complain about reasonable conditions.

Fortunately, the way their system is set up, it’s possible to get back that lost freedom.  As one government representative puts it, "Welfare should not be a destination or a way of life. The government is committed to progressively reforming the welfare system to foster individual responsibility.”  We all know that change comes only in response to some level of discomfort.

I wonder what the reaction would be to such a program in the US.  Are we long on victimhood and short on gratitude, or vice versa?  The first represents low levels of responsibility; the second, strong perspective.  We can learn from others the importance of gratitude and that responsibility neglected means freedom lost.  We can see living examples of how behavior has consequences.  If we don’t understand these basic facts, we may soon face consequences similar to those challenging other countries around the world today.

Learning from Italy

The wise avoid problems by learning from the mistakes of others.  I pick Italy as the teaching point, although it could be Greece or any of several other counties.  Italy is on the verge of bankruptcy; their country is going out of business, so to speak.  Our country is facing a similar problem, but we are not as deeply in trouble as some of those in Europe.

When we look at Italy we find from one article that it “has financed years of lavish social benefits by borrowing and borrowing.”  From another we learn “that 93 percent of Italians consider cutting the country's huge public debt a top priority but few are willing to make personal sacrifices to do so.”  (Isn’t it refreshing that magic-money-tree thinking is not confined to the US?)  It may be easy to scoff and say that they dug themselves into this hole and are now unwilling to pitch in to dig themselves out, but I’m sure most of them were unaware of the development of the problem or didn’t see it as serious.  They enjoyed their social benefits, which soon became expectations, and that only now, in hindsight are described by outsiders as lavish.  They felt that they had earned, worked for or fought for those perks.

Later in the second article it states that although “there is some hopefulness about the future of the economy -- 55 percent anticipate a better situation five years from now -- the longer-term picture is gloomier: Only 35 percent of Italians think children born today will be better off 20 years from now, while 43 percent anticipate a harder life for the next generation.”  This should not be surprising.  As disinterested observers we can easily see that the lifestyle they were enjoying was not, after all, worked for or fought for or earned.  It was borrowed, supported by debt that their children must someday repay.

Perspective and Economic Understanding are crucial to our success.  America is not yet in the position of Italy, but every day we are moving closer, borrowing from our children to support our lifestyle that we have become so accustomed to that few would be willing to describe it as lavish.  Nonetheless, if lavish means you couldn’t really afford it in the first place, that’s exactly what it is.  When the time comes for all to sacrifice, I hope we are wise enough to learn from Italy and others, and to understand that the pain will be less if we begin sooner.