Thought of the Day: Intentional and Unintentional Consequences

The law of unintended consequences is immutable. It happens most often when the desire to achieve a particular end is so focused it ignores the consequences of the means employed to reach that goal. In contrast, there are times when the policy of an entity – government or otherwise – knowingly sacrifices people or some moral principal, in order to achieve a desired conclusion.

The most outrageous examples of the latter were the mass killings that seemed endemic to the Twentieth Century (and into the Twenty-first Century) and which were undertaken by a number of governments, from Hitler’s Germany to Stalin’s Russia; from Mao Tse-tung’s China to Pol Pot’s Cambodian killing fields; and, most recently, from the ethnic cleansings in Yugoslavia to Assad’s murder of his own people in Syria. In all cases, the governments involved clearly understood the consequences of their actions.

A more recent, but far less horrifying, example (but no less unintentional) was the decision by the Obama Administration to deliberately violate contract law in putting the interests of creditors behind the pension and healthcare obligations owed unionized workers in the “saving” of General Motors. During that same “saving” of GM, the pension plans for 20,000 non-unionized employees at GM’s Delphi auto parts unit were sacrificed, while unionized workers were made whole on their pensions. Recognizing what he had done, and implicitly acknowledging that the end justified the means, Mr. Obama, in a chilling interview last Thursday, said he would like to repeat what he had done to GM across all industries.

It remains to be seen what the consequences will be of Mr. Romney’s choice for Vice President. In my opinion, Paul Ryan was a good and bold choice that could well elevate the debate over what type of country we want. Do we want to tackle the difficult questions today, or do we want to wait until such decisions are forced upon us, as is happening in California cities from San Diego to Sacramento? President Obama, thus far, has chosen to ignore the freight train bearing down upon us. Whether or not Democrats are prepared for such a discussion assumes, of course, that they will withdraw the ad that depicted Representative Paul Ryan tossing an old lady over a cliff.

That the selection upsets the Obama crowd was exemplified in a piece in Sunday’s New York Times by Nate Silver who characterized the choice as indicative that his [Romney’s] team “is losing.” I would argue that the opposite is true. Mr. Romney felt confident enough to choose policy over politics. The fact is that, unless entitlement reform is passed, both Medicare and Social Security will become bankrupt. Two years ago, Social Security began paying out more than it takes in. Even my grandchildren know that if they take out more from their piggy banks than is put in, the banks will, at some point, be empty. While Democrats may criticize Mr. Ryan’s policies, a $16 trillion federal debt means $53,000 for every man, woman and child in America. It is a debate that must be engaged. At any rate, in less than three months we will learn the consequences of Mitt Romney’s pick.

Thursday’s front page article in the New York Times, “Carbon Credits Gone Awry Raise Output of Harmful Gas” told the tale of the unintended consequences of bureaucracies usurping capital markets. The United Nations and the European Union both wanted to halt, or slow, climate change. As part of their plan, they established a system of credits based on what the Times refers to as a “scientific formula.” Carbon Dioxide, the most prevalent warming gas, “released by smokestacks and vehicles” (as well as all mammals, including humans), was given a value of one. All other gasses, based on their “warming effect,” were assigned values relative to that. The credits could then be sold in the market place, with the natural buyers being power plants that need to offset emissions that exceed European limits.

HCFC-22, the gas that is the subject of the Times article, is one of the world’s most environmentally destructive gasses and was assigned a value of 11,700, making the destruction of that particular gas very profitable. And, as the article points out, destroying the gas is both cheap and simple.

Third world entrepreneurs immediately saw the flaw, and therefore the opportunities, that these somewhat naïve plans offered. Since the destruction of the gas was both simple and cheap, the answer was simply to produce much more of it. David Doniger of the Natural Resources Defense Council was quoted in the article, “It turns out you get nearly 100 times more from credits than it costs to do it. It turned the economics of the business on its head.” The manufacturing of a widely used coolant gas proved to be the most efficient way of also producing HCFC-22, which then, as mentioned, could be simply and cheaply destroyed, providing saleable credits to the manufacturer. The fact that the coolant was destructive of the ozone layer was never a concern, for their business was to produce credits for sale. Since the program began about a decade ago, 46% of all credits have been awarded to nineteen coolant factories in Argentina, China, India, Mexico and South Korea.  The Times article notes that more than half the plants operated each year only until they had maxed out on the amount of gas eligible for the carbon credit subsidy. Even worse, the plants used inefficient manufacturing processes to generate as much waste gas as possible, spewing even more coolant gasses into the atmosphere.

The President has chosen a similar path in encouraging renewables in the production of energy, via the issuance of tax credits for wind and solar. Private markets develop and individuals and businesses adapt, as part of what economist Joseph Schumpeter called “Creative Destruction.” Energy is indispensible in the lives of all people, and cheap energy increases everyone’s standard of living, especially the poor. This is not the first time the world has had to change how it creates energy. In the past 200 years, the world has gone from wood to whale oil, to coal, oil and natural gas. More recently, it has adopted nuclear. There are advantages and disadvantages with all forms. The decision by the Bush Administration to push ethanol has done little to decrease our dependency on oil, but has done a great deal in raising food prices for people around the world. It stands as another example of the unintended consequences – no matter how honorable the intent – of a bad decision made by government, while ignoring markets.

As free market advocates have argued for years, incentives drive entrepreneurs, and markets tend to work most efficiently when they are left unhampered. The involvement of government in markets, whether it is producing Chevy Volts that only the wealthy can afford (at $39,000, the Volt is priced 30% above the average price of a new car) or the crony capitalism that went into a taxpayer investment in Solyndra solar panels, too often government involvement provides the wrong incentives. This is not to say that regulation is always bad, or that a wild-west atmosphere should drive capital markets. There must be rules, but people must be wary lest the desired goal of their government causes them to be blind to the unintended consequences of their actions.