July/August 2014

The Unforeseen Side of Good Intentions

Back in colonial India, the British government had a problem. There were too many venomous cobras in Delhi, officials said, and therefore they decided to offer a bounty for every snake that was killed. At first, the plan worked and large numbers of the dead reptiles were turned in. But eventually the more discerning hunters began breeding cobras to make their jobs easier. When British officials realized the error of their ways, they dropped the program — causing breeders to release the now worthless cobras and greatly escalating the initial problem.

This phenomenon, known as the “cobra effect,” has become one of the classic examples of perverse incentives. But as Thomas E. Hall, a professor of economics at Miami University in Ohio, demonstrates in his new book Aftermath: The Unintended Consequences of Public Policies, there is no shortage of examples closer to home. “Policies created for one set of purposes almost always create an additional set of results that were not part of the original plan,” he writes. “Very often these unintended consequences are seriously adverse.” Throughout the book, Hall focuses on four case studies of the law of unintended consequences as it applies to government policy.

The federal income tax was put into effect in 1913, with the goal of shifting the tax burden away from the working class and toward the upper class. That outcome was accomplished. But the major unintended consequences were reducing the incentive to earn income by those taxed at high rates and providing “a flood of tax revenue” — to the point that it allowed an unprecedented expansion of government. According to Hall, not even its creators expected this. “The income tax was instrumental in helping create the huge federal bureaucracy that many Americans complain about today,” he writes.

Cigarette taxes are collected by the federal government, along with all 50 states and the District of Columbia, as well as some counties and cities. They were originally imposed in the 1860s as a public revenue source, but since the 1960s they’ve relied on an additional justification: taxing cigarettes discourages smoking. Yet, the major unintended consequence has been the criminal activity this creates. With large differences in tax rates, criminals can purchase cigarettes where taxes are low and illegally transport them to high-tax areas. The fact that cigarettes are small, light, and durable makes them ideal for this “especially brisk retail trade,” and the smuggling that results has become a huge business, largely controlled by organized crime syndicates.

Minimum wage laws first appeared at the state level in the early 1900s, while the original federal law was put in place in 1933 as part of the New Deal. The purpose was to raise incomes of the working poor and to cause employers to replace female and child workers with adult males. Yet this policy has had mixed results. Perhaps those most affected by the law are teenagers and high school dropouts, who often lack the skills necessary to create $7.25 of value each hour. As such, “artificially raising wages elevates the incomes of some low-skilled workers — those employed at or slightly above the minimum — but lowers the incomes of those unable to find work, many of whom might be willing to work for less than the minimum,” Hall writes.

In 1919, when the nation took the bold step of adopting the Eighteenth Amendment and imposing national Prohibition, supporters were ecstatic about what was then referred to as “the noble experiment.” Unlike the first three case studies, however, the unintended consequences of alcohol Prohibition were so devastating that the policy was eventually abandoned. “Their intent was, in fact, noble: to reduce alcohol consumption and many of the social ills associated with it.” The reality was very different. Criminal gangs cropped up. Poisoned booze sickened and sometimes killed tens of thousands. Corruption soared. After experiencing these problems for several years, Americans finally said “enough” and ended Prohibition. In the end, the thread that ties these examples together is a warning of sorts. In every initiative mentioned, the supporters genuinely believed in their causes, arguing with conviction that the associated policies would leave the country better off than it was before. Often, the public followed suit. Yet, Hall warns with equal force that the world is more complicated than that. “Be careful what you wish for,” he concludes, “because those unintended consequences can undo a well-intentioned government policy.”