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ELEMENT 1.12
Too often long-term consequences, or the secondary effects, of an action are ignored.
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merely the effects on some special group but the effects on everyone.
(10)
Hazlitt believed that failure to apply this lesson was the most common source of
economic error. He had written extensively on the economy during the Great Depression of the
1930s, and he knew that, especially in politics, there is a tendency to stress the short-term
benefits of a policy while ignoring the longer-term, often unintended, consequences.
Economics On One Foot
Let’s consider three examples that illustrate the potential importance of secondary
effects. In an effort to reduce air pollution from vehicle emissions by reducing gasoline
consumption, the Georgian government designed a new excise tax targeting older automobiles
with bigger engines. Since Georgia is a low-income country, demand has always been high for
older used cars because they are cheaper (91% of the cars for sale in used car lots were
manufactured before 2006). The new tax, which came into effect in January 2017, was a
sliding scale. For example, the customs clearance plus excise tax on a 2002 car with a 1.5 liter
engine was GEL 3731, but for a car of the same year with a 2.5 liter engine it was GEL 6219,
and for a 3.5 liter engine, GEL 8706. Although the changes in the tax policy clearly
incentivized people to purchase cars with small engines, one has to ask, was this regulation a
sound policy? What was its full impact, including secondary effects?
Since the new Georgian excise tax policy has been in effect for only a short time, we
need to look at the experience of other countries with similar policies aimed at reducing fuel
consumption. Data reveals an increase in driving since the greater fuel efficiency of light
vehicles makes them cheaper to operate. This, in turn, increases congestion and results in a
smaller reduction in gasoline consumption than was intended by the regulation. Furthermore,
in the case of accidents, the lighter cars, induced by the need to meet standards, do not offer as
much protection for occupants as the heavier, bigger-engine cars they replace, so the result
may be an increase in highway deaths and injuries. Once the secondary effects are considered,
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fuel efficiency regulations may prove much less beneficial than they might first appear.
Similar unintended consequences were found after the introduction of laws requiring
the use of seatbelts. The British Department of Transportation found that in the 20 months after
a law came into effect requiring drivers and front seat passengers to wear seat belts, the
number of deaths among those traveling in the front seats was reduced by 656. The same time
period, however, saw an increase in deaths of pedestrians (77), bicyclists (63), and back seat
passengers (69),
(11)
apparently caused by drivers who felt safer when wearing seat belts and
subsequently drove more dangerously.
Trade restrictions between nations have important secondary effects as well. The
proponents of tariffs and import quotas on foreign goods almost always ignore the secondary
effects of their policies. Tariffs and quotas may initially protect the country’s workers who
make similar products at a higher cost, but there will be unintended secondary consequences.
Consider the Common Agriculture Policy (CAP) of the European Union, which uses
quotas and tariffs to restrict sales of foreign-produced agriproducts, and subsidizes member
countries’ agriculture directly from the E.U. budget. “The CAP was created so that people
could enjoy good food at affordable prices and farmers earn a fair living,” we read in the
document dedicated to the 50-year anniversary of the policy.
(12)
Overall, subsidies paid
through the CAP account for somewhat over a third of the total E.U. budget. Proponents of this
policy argue that the E.U. farm and food sectors would be approximately 8% smaller without
CAP,
(13)
and that it is thereby “saving” jobs and increasing employment. No doubt, the sector
is bigger than it otherwise would be, but what about secondary effects?
Expenditure on the CAP crowds out other possible uses within the E.U. budget and
prevents allocation of E.U. funds to other public goods activities. The subsidies cost each
European Union citizen more than €100 a year, according to the European Commission.
Moreover, tariffs and quotas maintain local prices at a higher level than competitive world
prices,
(14)
so E.U. consumers pay even more for agriproducts. Individual families are
essentially paying twice for their food: first, they pay higher prices due to protectionism of the
agricultural sector, which raises prices in the stores; second, they are taxed to pay for
agricultural subsidies. Also, tariffs and quotas indirectly affect other firms that produce food by
processing agriproducts. For example, in France for 2007 the CAP reduced the size of
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manufacturing by 1.5%, and the large services sector contributed a mere 0.1% of its labor and
capital to other sectors that benefited from the CAP. Releasing the CAP would decrease the
price of capital (land and equipment), which would benefit the farms that are not supported by
the CAP. In addition, the CAP reduces the size of forestry, which competes directly along with
other rural activities for agricultural land. (In France, the CAP reduces the area devoted to
forestry by about 3.6%.) Furthermore, because of tariffs and quotas, non-E.U. countries sell
less farm products in the E.U. market, reducing their ability to purchase E.U. exports, and
reducing employment in the sectors that lose these sales.
Once the secondary effects of trade restrictions like the CAP are taken into
consideration, there is no reason to expect E.U. employment and overall production to increase
as a result. There may be more jobs in favored industries, but there will be less employment in
others. Trade restrictions reshuffle employment rather than increase it. But those who fail to
consider the secondary effects will miss this point.
Secondary effects are not just a problem for political decision-making. They can also
lead to unanticipated outcomes for individuals. The recent experience of a first-grade teacher in
West Virginia illustrates this point. Her students were constantly losing their pencils, so she
reasoned that if she paid them 10 cents for the stub, they would respond to the incentive to
hang on to the pencil until it was completely used. To her dismay, the students soon formed
long lines at the pencil sharpener, creating stubs just as fast as she could pay for them. It pays
to be alert to unintended consequences!
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