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Monday, May 30, 2005

Upsetting The Balance of History

I am a big fan of those sci-fi movies where characters go back in time. Usually the idea is to go to the past and undo some error or kill someone evil to avoid a catastrophe of some kind. The main character will either kill Hitler to avoid Nazism, advise the Czar about the coming revolution to avoid Communism or break up the Bee Gees to avoid disco.

A small change appears insignificant but it can alter the chain of future events. Does the benefit outweigh the detriment that often results from the change? Or should we always fear upsetting the balance of history.

This relates to the economic law of unintended consequences. It is a law busy-bodies ignore all the time. Busy-bodies use government's coercive powers to tinker with the free market expecting marvelous results for the every man. Employees would have happier, more secure jobs. Industries would be able to employ more Americans. The rich can pay just a little bit more for luxuries and extra government revenues can assist the poor.

However, each of these changes to employment laws, trade relations and tax laws are impediments to the free market. They intrude on the voluntary decisions of consumers or coerce people to do that which they would prefer not doing. And the unintended consequences of their actions are often much worse than the problem or crisis being corrected.

While busy-bodies deserve to be ridiculed for their foolish decisions when the bad results are finally discovered, the irony is these know-it-alls usually double their efforts and then make things worse. Rather than cutting their losses, they say “we need more money to solve the problem” or use the MSM to confuse the public of the cause and effect of decisions.

In an insightful essay “In Defense of Employment-At-Will” by Arthur Foulkes, we learn that denying employers the right to fire employees “at will” has led to:

1. Increasing the cost of hiring resulting in “less hiring and therefore less overall employment.”
2. Employers chose temp" employees over full-time employees. The “’temp’ industry grew 5 times faster than other non-farm industries between 1979 and 1995.
3. The labor market became less flexible hurting job creation, economic growth and lowering wages.

I recall how Teddy Kennedy sought to stick it to the rich class by increasing “luxury taxes” on yachts and such. This obvious pandering to class envy probably bought him more votes in Massachusetts. However, the Cape Cod boatyards had to then lay-off workers because the rich were buying their fun boats outside of Massachusetts. After hearing the screams from his constituents who were losing business and jobs, the “Fat One That Lived” repealed the tax.

Today, we see the sugar tariff proponents looking to save jobs in Florida and Louisiana where the sugar beets are farmed. If CAFTA is not passed, all of us will continue to pay double what sugar from Central America would cost, This looks like small change when spread out among all consumers. However, let's remember how back in 1990 the Brachs Candy employees lost their jobs in Chicago. In “Does International Trade Kill American Jobs?” Douglas Irwin writes in The American Enterprise Magazine:

In 1990, Brachs Candy Company announced that due to the high domestic price of sugar it would close a factory in Chicago that employed 3,000 workers and expand production instead in Canada—which does not artificially inflate the price of sugar to protect its sugar producers. In 1988, the Department of Commerce estimated that the high price of domestic sugar due to U.S. protectionism cost almost 9,000 jobs in food manufacturing because of increased imports of cheaper sugar-containing products, and 3,000 jobs in the sugar-refining industry because of lower demand for sugar. At the time of this study, U.S. sugar-producing farms employed about 35,000 workers—but the sugar-processing and sugar-using sectors employed about 708,000 workers! A great many workers in the sugar-using industries were put at risk, in other words, to save the jobs of the few workers in the sugar-producing industry.

We do not need to go to sci-fi films to learn the economic lessons of unintended consequences anymore. Another ambitious German may have taken Hitler’s place to bring on Communism. The Czar may not have heeded additional warnings of the rebellion in his country. And, most important, something much more horrible could have hit the music world besides disco. Could we have handled rap’s onset 10 years earlier? Let’s not even consider that unintended consequence.


At 10:34 AM, Blogger drtaxsacto said...

Unintended consequences abound - politicians rarely even think about them and we have to live with the results. Your list is short but cogent. Thanks for a great post.

At 1:18 AM, Anonymous Anonymous said...

I have been thinking a lot lately of the different ways the U.S. government finances activities "off the books" My Two biggest ones are:
1. foreign aid for favored nations. Starting in 1945 w/ Bretton Woods we allowed Europe to have favorable exchange rates. in effect transferring 100's of billions of americans wealth to rebuild Europe through 1970. Unintended consequence - once we took them off the dole they became extremely anti american. Now we subsidize many other countries some for good reasons (China to prevent war) and some for reasons that I can't fathom (Venezuela?). Other unintended consequence we have debased our own curency so much that Americans are afraid to save money for their future.

2. Since 1965 we have financed medicare and social security by forcing insureds to subsidize the federally insured program. Unintended consequence we now have the most expensive health system in the world with an inflation rate in this one sector of the economy at over 10% forcing thousands out of private insurance every year. Meaning the inflation rate as fewer people are subsidizing more will increase exponentially in the next few years.

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