One of the most fundamental things about economics which most people who are passionate about politics do not understand is that the economy is not just like a chess board where you can move one piece with deterministic and predictable consequences. On the contrary, an economy is an intricate fabric of interrelated institutions and actors all of whom act relative to one another. Any one move creates a cascade of domino effects. If the price of milk changes dramatically then orange juice sales might be affected - you just never know.
The role of a good economist is to be able to follow the threads of consequences liable to result from a policy so that the short-sightedness of policy-makers (and would-be policy makers) seeking some immediate and favourable end does not result in a multitude of negative unintended consequences into the bargain. (Clearly this goes to the very heart of why I called this blog Seeing the Unseen.)
Many policies can end up having the opposite effect from what is intended.
For example, supposing some of the fancy hair salons are getting irked because cheap salons are popping up everywhere and giving people poor quality haircuts. They're giving the whole industry a bad name. So a coalition goes to the government to pass standards and licensing laws in the hairdressing industry (in some places you currently need a license to braid hair.) That's going to improve the quality of haircut going around, right?
Not necessarily. Now all the hair salons have to send their employees to college for two years to get a license, and when they graduate they are expecting much higher pay because they just sunk two years into an education which they saw no money during. They went out drinking with their student loans, paid rent, and accrued debts. What's more the salons need to consult special accountants or lawyers to make sure they can prove that they are adhering to the new regulations - even the ones who are way ahead of the law already providing far better conditions and services than the existing standards. Such professionals can charge upwards of $100 an hour. Many independent salons simply can't afford the increase in costs and have to close down entirely; others have to jack prices up to pay for the extra costs of compliance and staff. In some areas only one salon is left standing and since people have less choice they can afford to let standards slip.
With the price of haircuts going up lots of people decide to go without. They cut their friends hair at home, badly. Or they get pretty good at it and don't have to go to the hairdressers any more but take longer to prepare for going out and miss out of the chat and gossip. What's more everyone who does still go for a professional haircut has less left over to spend on a manicure or something else nice, so other industries also suffer. You can add to that the marginal increase in taxes to pay the civil servants in the new public body which acts as a regulator for the hairdressing industry. Now those people are involved in busy work instead of making commodities and providing services that improve people’s living standards in real terms and rather than paying into the public purse they are a net drain on it.
I choose a relatively trivial example (no disrespect ladies) because it's perfectly illustrative of how a seemingly simple and innocuous policy suggestion - mandatory hairdressing licenses - can generate more than its fair share of consequences. An alternative is for a series of private watchdogs to certify only hairdressers that meet their standards and give the ones who do an official number and sticker to put in their window; because they are competing they have to keep the costs of certification to a minimum (no $100 an hour fees), and people who are not fussed to pay extra for a certified cut can take a risk on somewhere cheaper or go by word of mouth.
Occupational licensing makes for an interesting case because it is almost ubiquitously considered in the public interest and even necessary to prevent catastophe, and yet there is actually zero evidence that it leads to a higher quality of service provision. Zilch!
Usually all it means is that instead of taking budget options people with fewer means have to go without any services at all! This is a topic to which we will have to return to in more detail, check back! :)