Bad Ideas Never Die

Good economic intentions often lead to bad unforeseen consequences.

Bastiat

In 1850, the French economist Frédéric Bastiat wrote an essay: “That which is seen, and that which is unseen”. He said this:
“…it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, – at the risk of a small present evil.”

Much of our governing classes of the countries of the world, including ours, have not learned from Bastiat, or even from Econ 101.

Here are a few examples.
1)
When Hugo Chavez, an anti-American socialist, was elected in Venezuela in 1999, he was going to help the poor with all sorts of programs and subsidies. Venezuela was a top oil exporter, and so it seemed he could do it – just divert much of the oil profits to help the poor.
And yet in 2016, the Wall Street Journal reports:
Rosalba Castellano, 74 years old, spent hours this week in what has become a desperate routine for millions: waiting in long lines to buy whatever food is available. She walked away with just two liters of cooking oil.
“I hoped to buy toilet paper, rice, pasta,” she said. “But you can’t find them.” Her only choice will be to hunt for the goods at marked-up prices on the black market. The government, she said, “is putting us through savage suffering.”
2)
In this country, in 2010, Obama signed a law federalizing the student loan program, claiming that the banks were needless middlemen and that the government could just lend the money directly and save truckloads of money.
Makes sense, right? No middleman means less expenses.
And yet, an Investors Business Daily editorial claims that “In less than five years, President Obama turned a relatively small, privately run, guaranteed student-loan program into a massive government-run disaster….The latest figures on the government-run loan program should be worrisome to anyone who cares about fiscal sanity and economic growth. Delinquency rates on the feds’ $1.2 trillion of student loans are sky high — worse than mortgage loans during the housing crisis.”
3)
The immediate benefits can be seen with National Health Care, (such as universal coverage) but the costs are unseen. (Donald Trump was impressed with the government-run health care he saw in Scotland, and wants to bring it here). Almost all Western countries other than the U.S. have national health care, but: “when you compare the outcomes for specific diseases, the United States clearly outperforms the rest of the world. Whether the disease is cancer, pneumonia, heart disease, or AIDS, the chances of a patient surviving are far higher in the United States than in other countries.”. As the lone holdout, (until Obamacare) we demonstrated that national health care was not as good as private health care – at least in some important respects.
4)
During the depression, our sugar growers were facing competition from the Caribbean and South America, so the government saved the day by putting a tariff on foreign sugar. Unseen consequences included at least one candy company (Lifesavers) moving to Canada, so they could get access to cheap sugar In fact, according to a 2006 study by the U.S. Department of Commerce, “For each one sugar growing and harvesting job saved through high U.S. sugar prices, nearly three confectionery manufacturing jobs are lost.” (NAFTA ended tariffs on sugar from Mexico in 1994, 54 years later, but not from other countries. This may not last since two leading candidates for president – Bernie Sanders on the left and Donald Trump on the right, do not like NAFTA and do like tariffs.)
5)
To make drugs cheap for the masses, our government mandates that a drug company has to make its patented formula available to be copied within a certain number of years of discovery. At that point other companies can produce ‘generics’ with the same formula. This has the unforeseen consequence of forcing the drug company to charge more for its product in the narrow window of time that it has to make a profit and partly explains our high drug prices, which in turn lead reformers to decry the “greedy” drug companies.
6)
When the economy is stuttering, it may make sense to lower interest rates. After the dot-com collapse, We adopted a policy of low interest rates Supposedly low interest rates encourage borrowing by our own companies, who can then employ people and invest and take risks.
Unfortunately, one downside of low interest rates is that they lead to ‘bubbles’. Low interest rates were one of the factors that led to the housing bubble, which did serious damage to our economy. Some desperate countries in Europe are trying negative-interest rates now – in those countries you have to pay the bank to hold your money, rather than the reverse. Obviously there is an incentive not to save, but instead to put money in stocks, or real-estate – whether value exists to warrant the money or not.
7)

Mark Levin

Mark Levin

If workers at the bottom rungs of the job ladder are not making enough to live on, then it may seem obvious that we should raise the minimum wage. It seems so obvious that the Federal government itself has raised the minimum wage twenty-two times since its inception. But there is no free lunch, and in one example provided by Mark Levin “When asked whether they appreciated the increase in the minimum wage, a hotel employee replied, “I lost my 401k, health insurance, paid holiday and vacation.” In his book, “Plunder and Deceit” Mark Levin presents evidence that the minimum-wage is a job-killer, and explains why. It should be obvious that if you own a small business that has a small profit margin, that when your well-meaning elites tell you that you have to pay each employee several dollars more per hour, that something has to give.

So what is the pattern we see above? We see that the economy is like a balloon – if you push it in one area, it bulges out another area. There is no free lunch. And the price of promises that cannot be kept – to the old, to the poor, to the sick is that ultimately they face economic collapse and a worse fate than if their tax-money had been left with them. And it hurts the young people who seek jobs. The Congressional Budget Office notes that the enormous amount of government securities required to finance debt crowd out investments in manufacturing, research, infrastructure and business opportunities. When these investments dry up, so do the available jobs. Eventually, if something can not go on forever, then at some point it doesn’t.

Sources:
http://www.wsj.com/articles/venezuelas-collapse-brings-savage-suffering-1455323300
http://www.inves tors.com/politics/editorials/obama-student-loan-program-is-falling-apart/
http://bastiat.org/en/twisatwins.html
http://object.cato.org/sites/cato.org/files/pubs/pdf/pa-613.pdf
http://www.heritage.org/research/reports/2012/04/us-sugar-program-bad-for-consumers-agriculture-and-america
Plunder and Deceit – Mark Levin (2015)

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