Element 1.9: Beware of Unintended Consequences

“When making choices, or setting policies about the economy, education or medicine, society is best served by electing people who are particularly hardworking, intelligent and interested in long-term thinking.”

In 1946, Henry Hazlitt, a famous economic journalist, wrote a book titled Economics in One Lesson. This economics primer, which builds on an 1850 essay by Frédéric Bastiat, a French economist and member of the French parliament, is perhaps the all-time best-selling treatise on economics.

The book starts with the story of a young boy whose thrown ball breaks the window of a shopkeeper. As a result, the shopkeeper hires a glazer to fix it. Some observers, noting the highly visible employment of the glazier, argue that the broken window is a good thing. It created a job for the glazier. As Hazlitt stresses, however, this is shortsighted because it ignores secondary effects.

If the shopkeeper had not spent the funds fixing the window, he would have spent them on other things, perhaps a pair of shoes, new clothes, or similar items. If the window had not been broken, employment in these other areas of production would have been larger. The community would have had both the window and the items purchased by the shopkeeper. Once the secondary effects are considered, it is clear that destructive actions, such as the broken window or those resulting from floods, hurricanes, and counterproductive policies, harm a society. They reduce the availability of goods and fail to expand net employment: Jobs gained in one place are lost in other areas. The view that destructive acts create employment and are good for the economy is now known as the “broken-window fallacy,” which we discuss in more detail in section 1-11.

Hazlitt’s one lesson was that when analyzing an economic proposal, a person

“. . . must trace not merely the immediate results but the results in the long run, not merely the primary consequences but the secondary consequences, and not merely the effects on some special group but the effects on everyone.”⁽¹⁰⁾

Hazlitt contended that failure to consider the future effects of today’s policies is the most common error in public economic decision-making. He wrote extensively on the economy during the Great Depression of the 1930s. He highlighted, especially in politics, the tendency to stress the short-term benefits of a policy while ignoring the longer-term, often unintended consequences.

Let’s consider a couple of examples that illustrate the potential importance of secondary effects. In an effort to reduce gasoline consumption, different governments mandate that automobiles be more fuel-efficient, by imposing a higher excise tax for the vehicles with higher weight and bigger engines. Is this regulation a sound policy? It may be, but the secondary effects must be considered when evaluating the overall impact of the policy.

In order to achieve the mandated fuel efficiency, auto manufacturers reduced the size and weight of cars, making them less crash-worthy. As a result, there are more highway deaths than would otherwise have occurred. Furthermore, because the higher mileage standards for cars and light trucks make driving cheaper, people tend to drive more than they otherwise would. This increases congestion and results in a smaller reduction in gasoline consumption than initially projected. Once you consider the secondary effects, the fuel efficiency regulations are less beneficial than the projections of their proponents. They may even be counterproductive.

Proponents of trade restrictions, such as tariffs and import quotas, often argue that they increase employment. This may be true in the industries protected from international competition. But consideration of the secondary effects on consumer behavior and other industries should cause one to seriously question the view that the restrictions increase overall employment.

The Common Agricultural Policy (CAP) of the European Union, launched in 1962, restricts the sales of foreign-produced agri-products through imposed quotas and tariffs. Among its aims, the CAP policy seeks to support farmers, enhance agricultural productivity, and ensure a stable supply of affordable food. Undoubtedly, the sector ends up being larger than it would otherwise be. What about the secondary effects, however? Shouldn’t they also be considered?

The budgetary expenditure on the CAP, amounting to €386.6 billion from the EU budget (2021-2027) has ramifications beyond the agricultural sector. It crowds out potential allocations for other European public goods activities, hindering the diverse use of EU funds. Simultaneously, border protection maintains local prices higher than the competitive price. Proponents argue that the CAP contributes to maintaining the EU farm and food sectors up to 8% larger than if the CAP did not exist. Consequently, EU consumers pay more for agricultural products. Individual families find themselves paying twice for their food. They pay higher prices due to the protectionist approach in the agricultural sector, which raises prices in stores. Additionally, they contribute through taxes to subsidies supporting the agricultural sector. Moreover, the CAP indirectly affects other firms involved in producing food by processing agri-products. Because foreigners sell fewer agri-products in the EU market, they have less purchasing power to buy EU exports. This, in turn, reduces EU employment.

When the secondary effects of trade restrictions, like the EU’s Common Agriculture Policy, are taken into consideration, there is no reason to expect net EU employment to increase. There may be more jobs in favored industries, but there will be less employment in others. Trade restrictions reshuffle employment rather than increase it. Clearly, when evaluating policies, informed consideration of secondary effects is an important ingredient of the economic way of thinking.

Secondary effects are not just a problem with political decision-making. They can also lead to unanticipated outcomes for individuals. The experience of a first-grade teacher in West Virginia illustrates this point. Her students constantly lost their pencils, so she reasoned that paying them 10 cents per stub would incentivize them to hang on to their pencils until all was used up. To her dismay, the students soon formed long lines at the pencil sharpener, creating stubs just as fast as she could pay for them. In one famous experiment, two economists studied what happened when a day care center in Israel decided to start charging parents for being late for picking up their children. Once it was clear there was only a small money price rather than shaming for such tardiness, the share of parent being late increased significantly. Despite this evidence, in early 2024 a school in Colorado announced that parents between 1 and 5 minutes late would pay a fine of $10, but those minutes late would pay $35. It shouldn’t take an economic genius to predict what will happen to traffic accidents in that neighborhood! It always makes sense to be alert for unintended consequences!