5 Times The Government Cure Was Worse Than The Disease
Politicians and bureaucrats are constantly pushing well-intentioned policy solutions, but those solutions too often make matters worse. As the ancient Roman poet Virgil stated, “Aegrescit medendo,” or “The remedy is worse than the disease.”
Here are just five examples of unintended consequences from well-meaning “solutions” offered by governments.
1. The Cobra Effect – According to Economist Hörst Siebert’s book Der Kobra Effekt, the British governor of Delhi, concerned by the presence of cobras, concocted a scheme to rid Dehli of the snakes. The government offered a bounty on the head of each cobra.
This actually was successful in the short-run based on the large amounts of cobra’s being brought in. It wasn’t long before enterprising locals found they could keep the cash coming by breeding more cobras themselves.
The administration eventually caught on and immediately ceased accepting cobra bounties, destroying the market for cobras overnight. It wasn’t long before the farmers released their now-worthless cobra stockpile into the city.
2. Contraband Cigarettes – In an effort to reduce smoking and increase tax revenue New York City has among the highest excise tax on cigarettes and tobacco. With an average cost of about $12.50 in New York, and as little as $6 per pack in Virginia, there is no doubt people are capitalizing on these margins.
In February, a Staten Island man was apprehended for selling over 22,000 cartons of smuggled cigarettes, or the equivalent of $1.2 million in tax revenue alone. The black market for cigarettes cost New York $525 Million in just 2011.
According to a 2009 Department of Justice study, contraband market shows no sign of abating; “the incentive to profit by evading payment of taxes rises with each tax-rate hike imposed by federal, state, and local governments” Interestingly, a Dutch study found that smokers actually save the health care system money because they die earlier.
3. Federal Aid Increases College Tuition – A question I frequently hear thrown around campus is why tuition has become so expensive. The answers I usually hear vary widely. In reality the truth has much more to do with increased demand than greedy profiteers or inflation.
According to a paper published by the National Bureau of Economic Research, the driving force behind the demand is the increased availability of federal aid. In simple terms, as the amount that students can borrow from the government rises, colleges take that into account and adjust their prices accordingly.
A Federal Reserve study from 2015 found that “institutions more exposed to changes in the subsidized federal loan program increased their tuition disproportionately around these policy changes.” The White House reported that 27 percent of student loans go unpaid – probably due to additional debt from the inflated price. By artificially increasing the costs and demand for college, the government is effectively making our degrees worth less.
4. Gun Buy Backs Misfire – Democrats in congress proposed a federal gun buy back last December and its not surprising that they haven’t learned from previous buy backs in D.C. and across California.–these programs just don’t work. When Oakland police offered $250 for any firearm, the prize money quickly ran out. Despite their lack of funds they continued to accept guns and offered IOU’s in lieu of cash.
According to empirical evidence these buybacks are ineffectual because they attract mainly non-offenders looking to make a buck or criminals with worn out guns. In turn, the money they receive is used to purchase higher quality firearms. Like the aforementioned cobra story, the ironic result is more guns.
5. The Sub-Prime Mortgage Crisis – Perhaps the mother of all governmental faux pas was the policies that preceded the sub-prime mortgage crisis of 2008. In the past couple decades we saw a huge increase in the amount of borrowing. Specifically, the Federal Reserve decreasing interest rates in an attempt to increase home ownership precipitated this explosion of borrowing.
The caveat here is that the Fed cannot exclusively lower the interest rate on home loans, it lowers nearly all interest rates by buying and selling bonds. This means that all other consumer credit became cheaper i.e. student loans, consumer credit, auto loans etc.
The problem here is not only that people were encouraged to buy houses and other durables by the low interest rates, but also that huge swaths of the economy became dependent on it such as the financial or home development sectors.
To make matters worse, the bi-partisan Community Reinvestment Act allowed banks to loan much more of their reserves than previously allowed. Not to mention that many of these borrowers would not otherwise qualify.
Over time people came to realize they couldn’t afford their seemingly cheap debt and simply stopped paying. With a huge surplus of labor and little demand wages and employment fell.
In the end, this misguided policy distorted price signals which otherwise could have prevented people from taking on more debt than they could handle.