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 didn't see any money during. Some of them went out drinking with their student loans, the rest still had rent to pay, and most of them accumulated 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 and already providing far better conditions and services than what has been mandated. These professionals often 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 on 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 catastrophe, 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! :)
