Disregard the Laws of Supply and Demand. The most powerful principal of
economics is the Law of Unintended Consequences, which states that any
purposeful action will always produce some inadvertent outcomes. As Harvard
economist Gregory Mankiw stated
last year, “Unintended consequences are the norm” for economic policy-making. This
is not just a recent thought.
Social scientists and political economists have long recognized the
importance of unintended consequences. John Locke argued in 1691 for
the defeat of a British Parliamentary bill designed to cut the maximum permissible
rate of interest from 6% to 4%. He believed that instead of benefiting
borrowers, as intended, it would hurt them. To the extent the law was obeyed,
Locke concluded, the chief results would be less available credit and a redistribution of income away from
“widows, orphans and all those who have their estates in money.” Sen. Bernie
Sanders and Hillary Clinton should take note of Locke’s Enlightenment Age concerns
about unintended consequences when they espouse reducing allowable interest
rates for student loans.
Another early example of unintended consequences is Adam Smith’s notion
of the “invisible hand,” discussed in his 1776 foundational treatise The Wealth of Nations. Smith declared a
person earning money by their own labor not only benefits themselves, but unknowingly,
also benefits society. This was expressed with his enduring, covert image, “By
directing that industry in such a manner as its produce may be of greatest
value, he intends only his own gain, and he is in this, as in many other cases,
led by an invisible hand to promote an end which was no part of his intention.”
Here are 4 modern examples of unintended consequences.
Ethanol. First, a current and timely example is US biofuel
policy. Timely because the geographic kernel of this 40-year old issue is where
corn farmers and other Iowans will decide their 2016 presidential preference in
a mere 7 days. Although we’ve been besieged seemingly forever by constant media
balderdash about the Feb 1 Iowa caucuses (see below), Iowa’s “Big Corn”
agricultural-industrial complex has played a keystone role in formulating our
national, subsidy-based biofuel policy long before corn ethanol was first mandated
by Congress in 1988. An ethanol-based supplement, MTBE, was added to gasoline
when lead was removed in the 1970s, until MTBE was found to harm the
environment. In 2011,
the US produced 13.9 billion gallons of ethanol fuel. By 2010 over 90% of all
gasoline sold in the US was blended with 10% corn-based ethanol.
Iowa corn farmers (and other mainly rectangular-states’ corn farmers)
love the Renewable Fuels Standard (RFS) that was established by Congress in
2005. It mandated that a minimum of 4 billion gallons of biofuels (principally
corn-based ethanol) be used in 2006, rising to 15 billion gallons by 2022. The
cumulative corn ethanol subsidies between 1995 and 2012 have been estimated to
be $15
billion.
Does the RFS make the environment as green as the fatter wallets of
corn farmers? No. Federal biofuel policy, mainly based on corn ethanol, has
been shown to actually harm the environment, increase CO2 emissions, raise the price of gasoline, increase corn’s price
and reduce the availability of other food grains. These harmful unintended
consequences are not limited to the US. In 2007, US government corn-ethanol
subsidies contributed to riots in Mexico due to the ensuing increased cost of
corn and tortillas. A World Bank report
stated that large increases in
biofuels production in the US and Europe were the main reason behind the steep
rise in global food prices.
Services. Second, over the past 4 decades the
composition of the US economy has steadily changed from producing goods to
providing services. This shift has produced unintended macro consequences. The
services sector accounts for 77.8%
of our GDP. This sector is more labor intensive than either the extractive
(mining, drilling and agriculture) or goods-producing sectors. Thus the share
of service jobs has steadily grown; from 76%
of all private-sector jobs in the mid-1990s to 86%
of our labor force in 2015. About 73%
of all new private businesses are service companies; it’s where our renowned entrepreneurial
spirit is most energetic. Think Airbnb, Google and Uber. However, almost 50%
of all low-wage workers in the US are employed in just 2 service industries,
retail and leisure/hospitality.
One of the foundations of sustained economic growth is improved productivity.
But the shift to being a service economy is one factor that has unexpectedly reduced
our prospects for historic-level economic growth. Our average real GDP growth from
2010 through 2014 increased a meager 2% per year, less than half the rate
between 1974 and 2014. A leading reason for this significant reduction in GDP growth
is that productivity in the services sector has dawdled compared with other
sectors. The Brookings Institution determined
that the growth of multifactor productivity (MFP), which measures the changes
in output per unit of combined inputs (not just labor, but also capital, energy
and materials), was only 20% as high for services as MFP for manufacturing
between 1987 and 1997. I found that from 1997 to 2013 (the latest available
year) the services’ sector multifactor productivity growth “deficit” was 8.2%,
compared with MFP for manufacturing.
How can our macroeconomic growth increase as much as it used to, given
the predominance of services? No one knows how to reinstate such higher growth
rates for an $18.1 trillion economy like ours. Or maybe Nobel-laureate Prof.
Robert Gordon may be correct in the thesis of his new book, The Rise and Fall of American Growth.
His thesis is the internet revolution has been hyped and the “golden age” of American
growth may be over. Nevertheless, that hasn’t stopped Republican candidates from
fecklessly promising
to restore 4% growth if they are elected. However it might happen, this
unintended consequence won’t be easy, quick or inexpensive to remedy.
Election polls. Third, the media has become more poll-focused
during our incessantly-covered presidential election season. This focus has
unpredictably produced more inconsistent (and probably unreliable) poll results.
Have you received a call from some pollster? If not, consider yourself lucky.
A recent count showed
that during the last 30 days, there were 11 pre-election polls in the 3-million
strong Hawkeye state and 10 polls in the 1.3 million person Granite state, as
well as 9 national polls. All this attention for the 30th and 42nd most
populous states? Amazing. The polling firms are circling like moths ever-closer
around the media spotlights. Because the attention given to the first 2
primaries is no surprise, such firms have been more than happy to call corn
farmers and Yankees virtually 24/7 to satisfy the media’s interest in “real
information.” But the polls rarely offer meaningful, consistent evidence about
actual voters’ preferences and intentions.
On January 24 Real Clear
Politics listed 16 polls’ results for Iowa and New Hampshire conducted
during the past 4 days! The results for Iowa included margins of +11 points, +1
pt, +14 pts and +15 pts that Donald Trump will allegedly beat Ted Cruz. On the
Democratic side, margins for Hillary Clinton beating Bernie Sanders include +9
pts, +29 pts, and +9 pts, and one poll has Bernie Sanders beating Hillary
Clinton by +18 pts. The bywords seem to be “pick a number you like, almost any
number, and you’ll likely find a poll that has it.”
The increased dependence on polls comes despite a very mixed
performance record. Polls of the 2014 congressional and gubernatorial elections
miscalculated the margins in assorted races. Most prominently, the Real Clear
Politics average of polls predicting the Kentucky governor’s election had the
Democrat winning by 5 points. He lost by almost 9. Oops. One unspoken key fact
about any of these poll results is that most voters have not yet decided who
they’ll vote for. For example, in a New Hampshire poll conducted last week only one-third of Republicans stated
they have chosen a candidate to definitely vote for. In other words,
notwithstanding the fancy graphics and earnest words declared by talking heads
at CNN, NBC, Fox, or in the New York
Times or the Wall Street Journal,
poll results are likely just imaginary numbers.
Kudzu. A final example involves a
natural item with widespread unintended consequences – Japanese arrowroot, aka
kudzu. This plant was imported to the US from its native eastern Asia via the
Philadelphia Continental Exposition in 1876 as an ornamental shrub. By the
1940s Southern farmers had been paid by the US Soil Conservation Service to
plant more than one million acres with this invasive vine to control erosion. Kudzu
was all too happy to inhibit soil erosion and
overwhelm many native plant species as it spread throughout (and beyond) the
South. It is reputed to grow one foot
per day. Recently it was estimated to have spread to
7.4 million acres. In 1997 kudzu was placed on the Agriculture Department’s
“Federal Noxious Weed List.” Take that, kudzu!
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