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Department of Unintended Consequences – Part I January 10, 2007

Posted by federalist in Government Spending, Regulation.

Why does government have such a chronic inability to anticipate the consequences of its schemes to tax, spend, and regulate?

  • Subsidizing tuition with low-interest loans, grants, and tax breaks — intended to make college more affordable — instead makes college more expensive in absolute terms.  (Oops … guess we need to work on increasing the supply of the service instead of the supply of its consumers!)
  • Regulating public capital markets — intended to increase the efficiency, liquidity, or safety of the markets — just squeezes capital into less regulated areas, like private and foreign capital markets.
  • Increasing taxes — intended to raise government revenue — actually increases incentives to evade taxes and avoid taxable activities (typically, productive ones), often causing revenue to actually decline.
  • Criminalizing goods or services — intended to discourage vices — generally produces or shores up a black-market for that behavior, along with all the negative accoutrements and externalities of black markets.
  • And as David Henderson notes today in his essay on “Terminatorcare”:

Why doesn’t increased government power tend to solve the problem of the uninsured? There are two main reasons. First, when government provides health insurance, many people who take advantage of it drop their own privately provided health insurance. In a 1996 article in the Quarterly Journal of Economics, Harvard economists David M. Cutler and Jonathan Gruber found a 50% “crowding-out effect.” As the federal Medicaid program expanded, for every two people who gained insurance through Medicaid, one dropped private health insurance. Although this is a net addition of one, the costs to taxpayers are much higher than expected because now half of the newly covered, instead of paying their own way as they previously did, become wards of the state.

This is such a frequent theme I’ll just start cataloging examples under this title.



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