The great French economist from the 1800s, Frederic Bastiat, famously explained that good economists are aware that government policies have indirect effects (the “unseen”).
Bad economists, by contrast, only consider direct effects (the “seen”).
In modern terms, sensible economists realize that government policies often have indirect effects. These are sometimes called unintended consequences.
Here are a few examples of interventions that have backfired, often hurting intended beneficiaries. Here are a few examples:
By the way, I began every example with “(supposedly)” because our friends on the left tend to have two reasons for pursuing bad policy.
Reason #1, depicted by the cartoon, is a naive do-gooder mentality. They see something that they think is unfair and they reflexively want the government to address the alleged problem. And since they don’t have any (good) economic training, they don’t consider the possibility that their preferred policies will make things worse.
Reason #2 is “public choice,” which is a term that describes how politician, bureaucrats, and voters put self interest above the national interest. Instead of being naive do-gooders, these are people who probably recognize that certain policies will backfire, but they simply don’t care because a policy has certain advantages, such as political popularity.
I didn’t intend to write such a lengthy introduction to today’s column, but you’ll understand my motivation when you read these excerpts from a Washington Poststory by Tony Romm.
The government (supposedly) wants to help bank consumers by limiting overdraft fees.
The U.S. government on Wednesday proposed to limit bank overdraft fees, which companies can charge customers who spend more money than they have available in their accounts… The new draft rules, unveiled by the Consumer Financial Protection Bureau, could cap some of the charges as low as $3… Generally, overdraft payment programs function as a kind of loan: If a customer spends more money than they have, they can elect for the bank to process the transaction anyway. If they do, consumers must pay back the remainder they owe, plus a fee, which averages about $26 per overage nationally… Under the agency’s new draft proposal, banks would be subject to tough credit card-like regulations on their overdraft programs, unless they agree to lower fees on customers.
Reading this story, I don’t doubt that banks want to squeeze as much out of customers as possible (and the same is true for grocery stores, barber shops, and every other kind of business).
But there’s something else I don’t doubt, which is that this policy will backfire in some unintended way.
Why do I think that?
For the simple reason that we’ve seen this happen over and over again. When governments impose costs on the private sector, something bad happens. With lower-income people generally losing the most.
Here are just three examples from the financial services industry.
Dan Mitchell is co-founder of the Center for Freedom and Prosperity and Chairman of the Board. He is an expert in international tax competition and supply-side tax policy.
