Have you ever been birdwatching? If not, how well do you think you would recognize the birds around you the first time you tried? Even if you were specifically looking for a species present in your area, you might fail to recognize it. The reason is simple. Without additional training, there are many ways to identify birds you are unaware of — you often would not know what to look at or listen for, or where or when to look. An experienced birder might well see what you missed.
Applying economics to public policy is akin to birdwatching in this way, except for the fact that few untrained birdwatchers presume they have the expertise to “educate” others to their views, while almost everyone seems to assume they have sufficient expertise in economics to pontificate on public policies. This leads to ignorance of the predictable, even if unintended, adverse side effects that can turn seemingly helpful economic policies into harmful ones, because people don’t know where or how to look to recognize them, and massive overconfidence in government’s ability to effectively solve societal problems.
At its core, economic analysis reduces to the proposition that “incentives matter.” Changes in the relevant costs or benefits facing decision-makers will alter people’s choices in predictable directions. Higher expected benefits induce people to do more of something, and higher expected costs induce them to do less. And, importantly, there are almost always more areas in which peoples’ incentives, and thus choices, are changed than those not “expert” in a field realize, resulting in responses to market incentives that are surprisingly (to central planners, if not to economists) large.
The altered choices of one group will also alter the costs and benefits of choices facing others, causing changes in their behavior that illustrate the impossibility of changing just one incentive story via changing policy. Those changes will, in turn, alter others’ incentives and behaviors, in a widening series of effects.
Economists are trained to “look” for all the important incentive changes that will face the affected individuals, and the predictable effects that will result, when analyzing policy changes — effects which untrained policy watchers often miss. If they are well-trained, they should also have learned enough humility about the complexity of social processes to admit that there can be margins of choice they might have overlooked as well, leading to drastic limitations on anyone’s ability to confidently issue authoritative pronouncements that some new government intervention into our lives will improve them.
This principle seems self-evident. However, the many choices for which incentives can be changed by any policy makes it far more difficult to correctly apply the principle than it is to recognize it in the abstract. As a result, adequate analysis takes both knowledge of the details (where the devil of unrecognized incentive changes lurk) and alertness to the vast number of ways they can alter behavior. But neither condition is always, or even typically, met for government “innovations.”
Decision-makers therefore commonly ignore crucial aspects of policies in their too-narrowly-focused search for policy answers. This frequently triggers the law of unintended consequences, my favorite version of which is: “Government policies always have unintended adverse consequences, and this fact always comes as a surprise to them.”
The law of unintended consequences is so prevalent that a complete, compact discussion is impossible. But perhaps it can be best illustrated by something apparently so simple it could not work other than as intended. One good example was the imposition of the national 55 mph speed limit in the 1970s.
It was promoted as a way to save lives. Given that “speed kills,” what could be more obvious? Slowing everyone down would mean not only more reaction time for driver “surprises” and reduced impacts when people hit stationary things. However, that ignored several other predictable consequences which increased road risk, to the point where some analysts have concluded that it increased roadway deaths rather than decreasing them.
Lowering the speed limit also increased the differences, or variance, in speeds between freeway flyers (who didn’t change their speeds much) and more law-abiding drivers (who slowed their speeds much more). That meant drivers approached one another at a higher speed differential, reducing the time drivers had to react, and increased such accidents. It also meant greater impact speeds between vehicles in such accidents. Both effects increased traffic deaths.
The law change also made long trips longer. That meant there would be more sleepy, much higher risk, hours on the roads at the end of trips, which would also lead to more accidents. If trips were all short, that would make little difference. But where trips are generally longer, like in much of the west, those effects would be far larger, as the results bore out.
The law also shifted traffic from safer to less safe routes. The main reason is that time is often far more important than distance to drivers. Before the law, 65 mph was the speed limit on California freeways, which meant that staying on the freeway would often get you where you were going faster, even if it was somewhat longer than alternatives, which were frequently two-lane 55 mph roads, with lots of curves and truck traffic. The speed limit differential kept more vehicles on the safer route. But changing the law slowed down speeds on freeways, while leaving speed limits on surface roads unchanged, which shifted traffic from safer freeways to more dangerous surface roads (including more than one nicknamed “blood alley” near where I have lived). That increased highway risks. It also explained why the policy’s promoters only wanted to look at freeway deaths (whatever good effects would tend to be on the freeway), while it took opponents to focus attention on all road deaths (because proponents did not want to “discover” the adverse effects on non-freeway roads).
The route-shifting effect was also reinforced by the need to shift highway enforcement resources. Imposing limits further below drivers’ desired speeds required more freeway enforcement than before. Because freeways are designed to be safer at speed than other roads, the added freeway enforcement might save some lives, but the required shift of such resources away from more dangerous roads and other forms of policing with more robust effects on safety could very well lose more lives elsewhere than saved on the freeways.
The 55 mph speed limit example is far from the only example of the law of unintended consequences to government policy. But it offers a clear illustration of the many margins at which unanticipated, unintended consequences played out, surprising government planners with their results. And it does so in a case apparently so simple that planners could not possibly get things wrong.
That warning is increasingly important as government intervention invades more areas of life and in more complex ways. For good results, both good theory and carefully examined details are necessary. The latter are why it is so important to be a good economic birdwatcher. Lacking that skill, the consequences will all too commonly harm Americans by supposedly helping them. And our country does not need still more illustrations of what Ronald Reagan called the nine scariest words in the English language: “I’m from the government, and I’m here to help.”
