The Wall Street Journal on Saturday interviewed the CEO of Spirit Airlines, the notorious low-fare charge you for everything airline. Spirit is known for charging for just about everything: boarding passes, checked baggage, carry-on baggage, to use the Internet to book tickets, and the CEO even joked about charging for armrests.
The Interesting unintended consequence that emerged from the interview was the revelation that Spirit airplanes burn less fuel than their competitors because passengers riding on Spirit bring fewer bags as a result of the high fees. This observation brings to mind many other user fees that should probably be imposed because of their unintended consequences: kids could be charged a dollar per hour for watching TV ( with the expected unintended consequence that they would watch less television), smokers could be charged a fee to cover their additional medical care ( with the expected unintended consequence that they would smoke less), and consumers of high calorie carbonated beverages could be charged a per bottle fee ( with the expected unintended consequence of reduced obesity).
The problem with most of the fees suggested above Is that they would be imposed by the government which in and of itself would create other unintended consequences. The point of the observation though is that people respond to price signals and they can be used to redirect behavior. Notice there is a difference between banning smoking of cigarettes and charging users for the costs they impose.
Living in a big city as many of us do we sometimes walk out to get our car and either find it booted or towed away. There are probably few jobs in our society less loved than the traffic enforcement-department tow truck driver. I'm surprised that there are neither TV shows or movies ( other than Repo Man) about this occupation.
This weekend reading the book review section in The New York Times I read a wonderful review by Kevin Baker on the book Enemies written by Tim Weiner. In it I learned about an unintended consequence of traffic enforcement tow truck drivers. Baker says that in 1973 the Iraqis planned to kill Golda Meir, the Prime Minister of Israel, on her state visit to New York City. The plot involved two cars packed with explosives that were parked near her route. The unintended consequence of the assassin's mistake of parking the two vehicles in a no parking zone was that before Mrs. Meir arrived the two cars were towed away by city employees.
The fight against terror is normally conducted by James Bondesq agents, high level military planners, and special forces troops. Sometimes the most effective anti-terror actions are taken by tow truck drivers.
Most people remember the inconstant behavior of the pigs in George Orwell's Animal Farm. As they gain control over the farm they soon take on characteristics and behaviors of the humans whom they expelled. According to Dominic Holden in his New York Times editorial today “Smokeless in Seattle,” legal medical marijuana merchants in the State of Washington have worked to check the full marijuana legalization movement which is on the November ballot. How odd that this unintended consequence should arise between current sellers and prospective sellers of marijuana in Washington.
This unintended consequence is similar to the mutation that took place on the farm in Orwell's book. Power and profit lead to greed and suppression of opposition. Like the pigs in the book, purveyors of medical marijuana in Washington perceive full legalization as a threat to their economic well-being. To protect those profits they have worked diligently to persuade the public to vote against the full legalization proposal. Economic interests create strange bedfellows. In Washington State, they have induced medical marijuana advocates to align themselves with more reactionary interests.
Unintended consequences are a powerful force that surface everywhere affecting everyone. The most damaging unintended consequences are those involving government or legislative decisions since those affect the most people. But decisions made by people and companies also have unintended consequences. Everything you do today may lead to something that you don't expect - that would be an unintended consequence.
Yesterday Janet Yellen vice chairwoman of the Federal Reserve spoke about the need to maintain a near zero interest rate policy until 2015. Her comments belie the fact that the economy has not responded to years of a low interest rate environment with a massive increase in spending as she and other Fed officials probably wished. There has not been a great rush to buy cars or technology or houses or anything normally associated with borrowing. The only thing which has been affected by the low interest rates are the amount of money devoted to speculation. The scenario for speculators is simple: borrow money at 20 basis points and then take on speculative risk earning them 500 to 700 basis points. The real side of the economy has responded to rising exports driven by the low value of the dollar partly caused by the low interest rates. Many Americans are looking for a job and this policy is not helping. Yet the Federal Reserve persists in believing in its policies as opposed to a policy of lower tax rates and other incentives proven to create new companies and new jobs during a crisis or a liquidiy trap.
The unintended consequence of their hubris will probably show up in three or four years in a massive burst of inflation. Not unlike the European Central Bank which is lending money to private banks so that they can buy "bad" Eurropean government debt, our Federal Reserve seems to be overly focused on near-term problems at the expense of longer-term issues. The low interest rates are likely to create another wave of bankruptcies down the road amongst companies obtaining financing in the junk bond market despite their lack of credit standing. The situation is not dissimilar to the Fed's encouragement of the housing bubble a decade ago or the Internet stock bubble. Economies don't do well going from boom to bust. That is the problem with unintended consequences: they don't show up immediately and so people/businesses/government make bad choices. This may be another one.
Our society is plagued by a variety of ills which many believe are related to our overuse of chemicals and our disregard of keeping those toxins away from children, pregnant women, and other highly at risk individuals. One would have thought that with a Democrat in the White House who has claimed to have an environmental agenda that the Environmental Protection Agency would have been cracking down on this type of abuse. Yet this week the EPA rejected a claim by the Natural Resources Defense Council that 2,4-D a highly potent herbicide was not dangerous. This startling claim took the EPA nearly 4 years to render despite the fact that numerous scientist have indicated that the compound has the potential to cause a multitude of human ills including cancer.
Every week reports surface of how the rate of certain illnesses amongst Americans are increasing at startling rates. Rates for illnesses such as certain cancers and autism, appear to be out-of-control One hypothesis is that we are poisoning ourselves with chemicals such as 2,4-D.
Why then would the EPA issue this unexpected finding? I suspect the answer is unintended consequences. With the election just seven months away and with the two prospective candidates very close in the polls, I wonder if pressures were exerted by the current administration on the EPA to make this decision. Perhaps I've just become too cynical - what are a few more illnesses compared to getting reelected. The unintended consequence of a tight presidential race may be the abandonment of simple principles of being cautious when crossing the street, when climbing the mountain, and when deciding whether a potentially dangerous chemical should be used on lawns and farms and make its way into our lives.
This post was previously published on the blog American Thinker at http://www.americanthinker.com/.
The budget crisis in California affects many aspects of life there. Students attending Santa Monica college suffer from a lack of class offerings. Consequently, some students are unable to graduate or complete certain programs.
Then somebody in California actually considered how to solve a problem rather than giving up or begging for state support which would not be forthcoming. The solution was simple. Offer additional sections of the class in short supply but rather than charge the approved $36 per credit hourly rate actually asked students to pay the full cost of the class, about $180 per credit. Naturally, all hell broke loose. After enduring student protests for nearly a week, the Chancellor of the California community college system forced officials at Santa Monica college to fold - that is, they could not offer the extra sections. The unintended consequence of this weak action is that students not permitted to pay the extra amounts to take a required or necessary class will not get jobs or will not graduate. No doubt those protesting were not the ones who wanted to take the class. They were just the ones imposing unintended consequences on their peers.
It is surprising and unfortunate how the market model is often rejected as a solution to a resource shortage problem. I hope you have read the chapter in my book, Unintended Consequences, on the impact of government decisions to not permit market rents or market prices to exist. If you are as old as I am you may remember the gasoline lines that all Americans suffered through because bureaucrats refused to allow the price of gasoline to go to its market clearing level. Better that we all suffer than permit the market to work.
I make the point in my book, Unintended Consequnces, that predicting unintended consequences is very difficult. With that said I will go out on a limb and predict that the JOBS Act which became law yesterday is bound to have many costly unintended consequences. Basically the law says that companies with less than $1 billion in revenue need not have their outside auditors evaluate the company's internal controls on an annual basis.
After living through the experience of companies like Enron, legislation was enacted commonly referred to as the Sarbanes-Oxley (SOX) act. It has been alleged that SOX imposes significant costs on smaller companies hence the $1 billion demarcation. Having had experience on many corporate boards I can attest to the greater cost and complexity of audits post SOX, but also believe that the dollars are well spent. Post SOX investors have greater confidence in the financial reports published by companies. The unintended consequence of JOBS is that for smaller companies this confidence may no longer be justified. Investors may then shy away from investing in small cap stocks. Not exactly what Congress and the President intended!
JOBS itself is an unintended consequence of the recent financial crisis in that oppsing views were stifled by the advocates contention that the law would help create jobs. I guess that we are all lucky that these same legislators did not propose getting rid of stop-and-go street signs so that the extra accidents would create more jobs when people replaced their damaged vehicles with new ones.
There is a large section in my book Unintended Consequences about government efforts to regulate human behavior: drugs, number of children in a family, alcohol, apartment rents, etc. In all cases, unintended consequences occur. I just came upon some data that is remarkable. The U.S. prohibits the sale, distribution and consumption of marijuana. In contrast, the Dutch permit it in certain places provided that minors are excluded and that hard drugs are not present. Obviously then there must be more drug users in Holland. Actually not. Approximately 14% of Americans are marijuana users while only 5% of people in Holland use the drug.
The unintended consequence of outlawing something and allowing a mystique to arise around the controlled item is that the government actually encourages its use. While this is not always the case - bank robbery is one example where no one becomes a robber in order to be part of a "cool" cult - in the case of something that brings no harm to anyone else and which actually brings some joy to the user, prohibition is not a good way to control usage. The Dutch example is very informative but is something which many politicians in the U.S. are likely to ignore.
In fact, the Federal government is now going to extremes in Oakland, California to shut down "legal" drug dispensaries. They have begun to threaten landlords with the loss of their property if they allow drug dispensaries to be tenants. Did Enron's landlord loose his/her real estate? Or would Hertz car rental be fined if a person rented a car from Hertz and then robbed a bank? This strategy seems arbitrary and poorly designed. It brings back memories of Robin Hood and the Sheriff of Nottingham.
Monetary policy is not universally accepted as a paleative for all economic ills. One key issue is whether low interest rates, say 0.5%, encourage people to buy capital goods when the economy is in recession. At such times, many people are working to pay down their debts and reduce their monthly expenses. In contrast, during economic boom periods low interest rates undoubtedly encourage incremental spending.
The conundrum facing the Federal Reserve System is when to put its foot on the gas and when to take it off. Last week Chairman Bernacke indicated his feelings that without a longer period of low interest rates that he felt that the U.S. economy was not likely to create a sufficient number of new jobs. Hence, Bernacke plans to maintain the low interest rate environment going into late 2014.
The unintended consequence of previous low interest rate periods have been a number of asset bubbles. These arise because the Fed is uncertain when to relax its expansionary monetary policies and as a result keeps them on too long. Arguably the housing bubble that ended in 2007 and the Internet stock bubble that ended in 2001 arose, at least in part, as an unintended consequence of Federal Reserve low interest rate policies.
The rush to risk being experienced on the stock market in the past 6 months can be explained as the persistence of a belief that the Fed will overstimulate the economy. In other words, people are expecting further unintended consequences. This hypothesis is consistent with the rational expecations view of the word that says that after being fooled once people revise their beliefs and expecations to avoid getting fooled again.