by Mitch Kokai
Senior Political Analyst, John Locke Foundation
Regular readers in this forum are familiar with the law of unintended consequences. Those who would like to read more examples of the law in action can find them in Miami University economics professor Thomas Hall’s recent book, Aftermath.
Hall devotes full chapters to the unintended consequences of the federal income tax, cigarette taxes, government-mandated minimum wages, and alcohol prohibition. (The latter topic attracts the most attention. It takes up nearly half of the book’s 119 pages of content.)
Beyond the chapter-length discussions, Hall applies the law to cases such as government efforts to promote homeownership, a major factor precipitating the 2008 financial crisis.
The combination of falling house prices and falling stock prices resulted in a decline of $13 trillion in U.S. household wealth, which was a major factor in causing the U.S. economy to plunge into the 2007-2009 Great Recession. This economic debacle led to the loss of 8 million jobs and the ruin of several financial institutions, including Fannie Mae and Freddie Mac, which required massive federal bailouts to stay afloat. Not surprisingly, the U.S. homeownership rate dropped, and by 2011 was back to where it had been in the late 1990s. Thus, we are left with the irony of government policies designed to promote homeownership helping cause the worst economic recession since the 1930s’ Great Depression.
The 2000s’ housing boom and bust is an example of the law of unintended consequences. The term refers to situations in which government policies enacted to accomplish one set of goals end up causing another set of outcomes that were unanticipated. In the case of U.S. housing policies, the federal government was attempting to achieve the honorable goal of promoting homeownership but caused an economic catastrophe by doing so. The losses to society far outweighed the gains.
Hall doesn’t mention Henry Hazlitt (nor Hazlitt’s primary source, Frederic Bastiat), but readers of Economics in One Lesson are sure to note the usefulness of Hazlitt’s single lesson as they encounter Hall’s multiple examples of well-intentioned government policies falling short of their goals:
The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.