Tracing consequences both seen and unseen.
Christine HarbinUnintended Negative Consequences of ‘Extreme Makeover’
Posted at 8:44 pm on April 6, 2010, by Christine Harbin

In an article published today, the Wall Street Journal describes some unintended negative consequences of the television show Extreme Home Makeover.

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Filed under: Unintended Consequences
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Christine Harbin“Homeowner” Bailouts and their Unintended Consequences
Posted at 10:16 pm on April 3, 2010, by Christine Harbin

In an op-ed published on Thursday, the editorial board at the Wall Street Journal criticizes Washington’s latest attempt to bail out homeowners. They argue that this intervention will be as ineffectual as the those that preceded it, and that homeowners would be better off if the government hadn’t intervened. From the editorial:

Here’s a heretical thought: What if Washington had simply let housing prices fall on their own to find their natural bottom? The pain would have been more severe more quickly for some owners who bought more expensive homes than they could afford. But the pain might also be over by now as housing markets cleared faster, and housing might be contributing to a healthier economic expansion.

The practice of bailing out homeowners has several unintended negative consequences. The following are among the most egregious, in my opinion.

(1) Bailouts discourage employment.

Just like any other type of unemployment benefit, payments to homeowners decrease an individual’s incentive to be employed. This contributes to a higher and longer-lasting unemployment rate.

(2) They penalize individuals who borrowed responsibly, and they encourage people to live outside of their means.

Why put 20% down for a cramped ranch-style when you could buy a McMansion and have the taxpayers pay for it?

(3) Many people bought houses that they couldn’t afford anyway, and they will foreclose on them in the future. For many people, a bailout is just delaying the inevitable.

As described in a relatively recent article in the New York Times:

As a result [of Obama’s Making Home Affordable program], desperate homeowners have sent payments to banks in often-futile efforts to keep their homes, which some see as wasting dollars they could have saved in preparation for moving to cheaper rental residences. Some borrowers have seen their credit tarnished while falsely assuming that loan modifications involved no negative reports to credit agencies.

(4) They cause housing prices to be artificially high.

Here is a Washington Post article on the subject. The latest proposal, like many of its predecessors, inflates home prices. Additionally, the $8000 homeowner tax credit allowed individuals to buy a more expensive house than they could otherwise afford.

(5) There is a moral hazard problem. If a person knows that they are likely to be bailed out, then they are more likely to assume risk.

I oppose bailing out people who bought houses that they couldn’t afford, and I disagree that the government should encourage homeownership. When a person invests her money, she assumes risk. Higher returns are supposed to be the payoff for accepting larger amounts of risk. Buying a house is just like any other investment outside of Treasury Bonds — there is a possibility that the individual will lose money. In some aspects, real estate is riskier than stocks because houses are not diversified (i.e., in the event of a natural disaster, a person’s entire investment is wiped out). A person should do thorough research before she makes what will be one of the largest financial decisions of her life.

I recommend the article “5 myths about home sweet homeownership” by Joseph Gyourko, chairman of the real estate department at the University of Pennsylvania, in the Washington Post. It repudiates the commonly-held idea that homeownership is a investment that has good returns and no risks. To me, the following is the most eye-opening statistic in the article:

Between 1975 and 2008, the price for houses of comparable quality and size appreciated an average of about 1 percent per year after inflation. You would have earned well over 2 percent per year after inflation had you invested in Treasury bills over the same period.

[Cross-posted at Amateur Philosophy.]


Filed under: Government Spending, Market Efficiency, Uncategorized, Unintended Consequences
Comments: None
 

Justin M. StoddardPop the Corn Bubble Burst
Posted at 7:45 pm on March 31, 2010, by Justin M. Stoddard

When first I saw the headline “Israeli MP plans ‘popcorn law’ for movie munchers’,” I was sure the corresponding article would have something to do with either taxing or banning popcorn at movie theaters because of supposed health concerns.

It turns out, the reason given was much less nuanced and rather refreshingly honest:

Carmel Shama, from the governing Likud party, plans to bring the “popcorn law” for a vote when parliament returns from its Passover break next week, the mass-selling Yediot Aharonot newspaper reported Wednesday.

“We have to put an end to this. The public should not have to mortgage their houses for a soft drink and a snack,” Shama told the paper.

A large box of popcorn usually sells for about five dollars (four euros) at theatre concession stands, more than double what it costs at a supermarket and 10 times more than it would cost to make at home.

When I say “refreshingly honest,” I mean that there are no hidden overtones here. Carmel Shama doesn’t appear to be overly concerned with health. This doesn’t appear to be a redistribution scheme, where the proceeds from taxed popcorn would go into some government coffer. This is pure, straight-up theft.

This does raise an interesting question, however. Why is popcorn so expensive at the movie theater?

Economist Steven Landsburg isn’t so sure that it is. In chapter 16 (aptly named, “Why Popcorn Costs More at Movies”) of his book, The Armchair Economist, Steven Landsburg goes through a number of explanations for why the price of popcorn is as expensive as it is. The reasons may surprise you.

Intuitively, we would guess that the price of popcorn is high because once we enter the theater, we are a captive audience. They have, in effect, a monopoly on popcorn, since most theaters won’t allow outside food onto their premises. But, as Mr. Landsburg points out, at that point, the theater has a monopoly on pretty much everything within the sphere of its influence. There are no other restrooms, for example, other than those provided. There are no other drinking fountains or front row seats, etc… And yet, all of these conveniences come gratis with the ticket price. The reason for this is easy enough. Any ancillary charges once inside the theater would make said theater less attractive to customers. In order not to lose those customers, the theater would have to charge less for the ticket price. In essence, it’s a wash.

And so it may be for popcorn, as well. We pay higher prices for popcorn in order to pay lower prices for our tickets. But, in order to make prices attractive to all (popcorn munchers and popcorn abstainers alike), a happy medium must be found. This may be a matter of one part of the theater subsidizing another. Not everyone, after all, partakes in popcorn. They are only paying for the ticket to the movie and are therefore taking advantage of those who buy popcorn at a higher price point so ticket prices can economically be lower.

Another theory put forth by Mr. Landsburg suggests that since most movie goers go to movies in groups, it follows that some of them will want popcorn and some won’t. If a theater offers low popcorn prices and high ticket prices, those that don’t eat popcorn may not want to go. The same follows, visa-versa. The trick is to get both the popcorn and the ticket prices to a level both groups can agree upon.

This is economic theory backed up by the very theater owners that would be affected by such a law:

Yaacov Cohen, the owner of one of Israel’s largest theatre complexes, said owners made virtually no profit from ticket sales and would be hard pressed to survive if food sales were limited.

“It would destroy the entire industry,” he told Yediot.

Also, as a parting shot, it bears remembrance that those who trade $5 for a medium popcorn value the popcorn more than they do the $5. Even if said bags of popcorn sold at $100 per, the same holds true. And although the New Paternalists may have something to say about that (waiting periods for high-cost items, etc…), it is still a voluntary exchange, of nobody’s business but the two parties involved.

One last unintended consequence. Carmel Shama may well succeed in making high popcorn prices illegal. If so, people will no longer have to worry about mortgaging “their houses for a soft drink and a snack”. They’ll be doing that just to buy a ticket. Either that, or a whole lot of movie theaters will be going under.

[Cross-posted at Shrubbloggers.]


Filed under: Economic Theory, Market Efficiency, Nanny State, Unintended Consequences
Comments: 3 Comments
 

Christine HarbinThe Lesson Applied to My Car Window
Posted at 9:22 am on March 26, 2010, by Christine Harbin

On Monday I experienced Bastiat’s parable of the broken window in the most literal sense: somebody smashed the front passenger window on my car while it was parked in the (gated!) lot at my apartment. I played in the role of the storekeeper whose window was broken, and I can attest that no wealth was created for myself or the Saint Louis community.

Ce qu'on voit!

In chapter 2 of Economics in One Lesson, Henry Hazlitt explains:

Instead of having a window and $250 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit.

When I went to bed that night, I had a passenger car window again, but I was about $500 poorer. In addition to the $250 that I spent on replacing the car window, I will have to pay to replace the items that were stolen too, including: a 16 GB ipod Touch ($250), a universal car phone charger ($18), ipod case ($15), the cost of gas for driving to auto glass changer, and lost productivity. Like the storekeeper, I have to be content with the window only.

If we think of him as a part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.

In my case, the Saint Louis community lost an Apple iPad that would otherwise have been bought. Ce qu’on ne voit pas. If I didn’t have to pay to replace that window, I would have used the money to buy one. Or, I could have saved the money in my bank account, where it would generate interest, and I would spend it at a later date. I cannot spend the money that I spend at the window repair shop in any other way.

Some people would argue that, had nobody broken my window, the window repairer would be out of a job. This is fallacious because it ignores the fact that the window repairer could develop skills or apply his existing skills to a different activity that would actually encourage productive economic growth. He could work at an Apple store, for example, and sell me an iPad.


Filed under: Economic Theory, Unintended Consequences
Comments: 1 Comment
 

Justin M. StoddardWe Are All Children, Now
Posted at 12:46 pm on March 24, 2010, by Justin M. Stoddard

Like I said yesterday, when everybody is responsible for everybody else, the logical outcome is, well, this:

Proposal to ban toys in unhealthy kids’ meals

“One in three kids are overweight or are obese, and we’re finding out more and more that if you’re obese as a child, you’re going to have health problems your entire life,” said Yeager.

In an effort to combat the nation’s epidemic of childhood obesity, Supervisor Yeager is proposing Santa Clara County create an ordinance regulating fast food restaurants’ ability to offer toys or other incentives with kids’ meals.

“Ten out of 12 meals that are associated with the promotional toys are the high-caloric, high-fat, high-sodium meals,” said Yeager.

No empirical scientific data is alluded to. We are to take it at face value that giving toys away with children’s fast food meals is…bad. According to Mr. Yeager, it’s bad because these meals are “high-caloric, high-fat, high-sodium meals.”

Here’s a list of proposed questions for Mr. Yeager:

-What scientific studies have been conducted proving a correlation between fast-food toys and childhood obesity?

-If no scientific studies have been conducted, are we just talking about a feel-good, anecdotal trope, here?

-What experience to you have, personally, with the science of nutrition and obesity?

-What other items that are ‘bad for you’ are you willing to ban?

-Do you feel you have a right in assisting me in determining the choices I make for my children?

-If yes, why?

-Do you lay awake at night, fists clenched, with the knowledge that somewhere, somebody is enjoying themselves beyond your scope of control? (My apologies to H.L. Mencken).

The article ends thusly:

Supervisor Yeager expects such a public health ordinance banning fast-food toy incentives could draw a challenge from the California Restaurant Association, but that it would legally fall under the health and safety codes.

If it is passed, this would be the first such legislation in the nation.

It will be the first, but it most assuredly will not be the last. We are all children, now.

[Cross-posted at Shrubbloggers.]


Filed under: Health Care, Nanny State, Unintended Consequences
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Justin M. StoddardUnintended Consequences II
Posted at 9:19 pm on March 23, 2010, by Justin M. Stoddard

I wrote earlier this evening about some possible unintended consequences of the newly signed health care legislation. While attending my daughter’s orchestral debut, I thought of a few more.

-An increase in the Nanny State.

I first heard this argument put forth in my Junior year at high school: “Seat belts should be mandatory because we pay for the uninsured drivers who would get hurt without wearing them.” Since then, this argument has taken on more manifestations than I care to acknowledge. We need to regulate trans-fats, salt, cigarettes, cigars, MSG, butter, alcohol, fast cars, ad infinitum…for the same reason.

It’s about to get a whole lot worse. ‘We’ not only pay for the uninsured, now, ‘we’ pay for everybody. Since ‘we’ pay for everybody, ‘we’re’ now responsible for everybody’s health.

This is in no way hyperbolic. It’s happening right now: Brooklyn Dem Felix Ortiz wants to ban use of salt in New York restaurants.

As absurd as this sounds (and we’ve all had our laugh), his reasoning is ominous:

Ortiz says his bill is designed to save lives, just like laws that ban the use of trans fats and require chain restaurants to post nutrition information.

“It’s time for us to take a giant step,” Ortiz said yesterday. “We need to talk about two ingredients of salt: health care costs and deaths.”

He claims billions of dollars and thousands of lives would be saved if salt was taken off the menu altogether.

On second thought, perhaps this consequence won’t be so unintended, after all.

-People are going to get sicker and more obese

There is good reason to believe that the fault of our country’s current “obesity crisis” can be placed directly at the feet of well-intentioned governmental interference based on incorrect science. If we can expect the government to have an ever increasing role in what we can and cannot put into our bodies (see above), it follows that people will be lead to the conclusion that the way to maintain a healthy diet is to decrease fatty foods (red meats, butter, natural fats, etc…) and increase the intake of complex carbohydrates in the form of grains (whole wheat breads, cereals, rice, oats). This is most certainly the exact wrong thing to do.

There is enough on that subject for a whole different post (one that I believe Eric will be undertaking, soon). For the purposes of this post, it will have to suffice to say that the current model (the government backed food pyramid) is based on wildly outdated and faulty science. But, even if you don’t believe that a low-carb, higher fat diet is the road to health, at least you had a choice in the matter. Doctors have slowly been coming around to the notion that low-carb lifestyles have terrific benefits. Can anyone doubt that obesity patients (and patients with Diabetes, blood sugar problems) will soon be robbed of those choices? If the government backed model is X, you can bet that when the government pays doctors who treat obese/diabetic patients that X will be the prescription. The result will be an inescapable negative feed-back loop.

-When everyone is forced to have health care insurance, only criminals won’t have health care insurance.

As snarky as that may sound, this legislation will make criminals out of a whole new class of people. It’s really rather simple. There are no provisions for those who want to opt out. If you’re a woman and you don’t want maternity coverage…tough. If you don’t want mental health coverage…tough. If you don’t want coverage at all, for reasons that, quite frankly, are none of anyone’s business…tough.

Oh, we’re assured (wink, wink) that nobody will actually end up in jail for not buying coverage, but don’t you believe them. The end result is always the same. It’s always force.

-We will see a sharp increase in mental health cases in this country.

Everyone must now be covered for mental health. This can be as innocuous as a couple of trips a year to your therapist or as serious as treatment for Schizophrenia or OCD or ADD. Psychotropic drugs (Prozac, etc…) will also be covered.

When something is universally offered at a price below market value, people are going to naturally take advantage of that something. I imagine we are going to see a rather steep incline in the number of people seen by mental health professionals. This, of course, leads to a whole separate Pandora’s Box of unintended consequences. How much more money will be funneled into mental health, thus creating another negative feed-back loop? More people see more mental health professionals, triggering more federal money pouring into the field of mental heath, triggering more people seeing mental health professionals, etc…

Also, will more people be forced to take psychotropic drugs either based on bad advice or against their will? That, too, may be a subject for a future post.

Unintended consequences are a powerful thing. I wish more people were able to think deeply about them before jumping on bandwagons, however well intentioned they may be.

[Cross-posted at Shrubbloggers.]


Filed under: Health Care, Unintended Consequences
Comments: 4 Comments
 

Justin M. StoddardUnintended Consequences
Posted at 5:14 pm on March 23, 2010, by Justin M. Stoddard

It seems appropriate to start my first entry on this blog with a quote from Henry Hazlitt, author of Economics in One Lesson, which is the inspiration for the name of this new adventure.

“The most frequent fallacy by far today, the fallacy that emerges again and again in nearly every conversation that touches on economic affairs, the error of a thousand political speeches, the central sophism of the new economics, is to concentrate on the short-run effects of policies on special groups and to ignore or belittle the long-run effects on the community as a whole.”

By far, the aspects of economics I pay attention to the most are those of Unintended Consequences and opportunity costs. When Hazlitt talks of “the short-run effects of policies on special groups and to ignore or belittle the long-run effects on the community as a whole”, Unintended Consequences and Opportunity Costs come into play

Several such consequences/costs come immediately to mind when thinking of the current Health Care bill recently passed by Congress and signed into law by President Obama.

-We can probably expect new innovations in medical science to stagnate.

We can never know what amazing technology will never be invented simply because the money or the incentive no longer exists to invent that technology. This points to Bastiat’s Broken Window Theory Fallacy, which simply states that though a broken window may unexpectedly enrich the window maker, it impoverishes the person who must now replace the window. His money could have been spent on something else, entirely.

-We can probably expect a new wave of crackdowns on immigration.

Though I have some problems with Milton Friedman, he had it exactly right when he said, “You cannot simultaneously have free immigration and a welfare state.” I understand that ‘illegal immigrants’ are not explicitly covered under this new legislation, and there is a good deal of economic proof that immigration is a net boon to the economy, but we must face some inconvenient truths. There is a strong movement in this country to give millions of immigrants ‘amnesty’, meaning they will not only be in the country legally, they will be on the first step to obtaining citizenship.

Do not misunderstand me, I applaud the efforts to make this happen as I agree with open borders/immigration. However, as the majority of elected Republicans are against this, if it is passed, it will be because of the Democrats. I do not mean to be cynical here, but the legalization and naturalization of millions of immigrants as a political movement coming from the Left has to be repaid somehow. Namely, there will be millions more in the Democratic party 10 years hence.

This will cause a huge, irrational backlash against immigration. An ‘unintended consequence”. Instead of attacking the welfare state, Republicans and others from the right will score points by fear-mongering and know-nothingness. We can assuredly expect the passage of a National ID bill sometime in the near future, and that’s not even mentioning the hundreds of millions of more dollars that will go towards “protecting the borders”.

It is going to be interesting to see how this plays out.

[Cross-posted at Shrubbloggers.]


Filed under: Health Care, Unintended Consequences
Comments: 3 Comments
 

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Henry Hazlitt"[T]he whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. 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."
Henry Hazlitt, Economics in One Lesson
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