Monday, October 15, 2012

Unintended Consequences

The law of unintended consequences has long been a force to be reckoned with. Economists, for centuries, have understood that actions might have noble intentions, but often times have bad outcomes. For this reason, carefully examining the potential economic impact of a piece of legislation is one of the most important (and, unfortunately, rarely performed) functions before passing that piece of legislation.

This is especially well illustrated in the example of welfare programs. Many welfare programs are designed with the intention of helping someone currently out of work by providing for them while they search for work.  This is certainly a noble intention, especially considering that many children out there depend on a parent to provide for them in the first place. Without welfare, providing for a family of 5 could be an incredible challenge to an unemployed worker.

The unintended consequence is that people don't go back to work. They stay on welfare for as long as they can. Take, for example, Denmark. Denmark's unemployment benefits lasted for 5 years. After 5 years, employment for people who were on unemployment benefits spiked then dropped off sharply afterwards. When Denmark reduced unemployment benefits to 4 years, the exact same thing happened; When unemployment benefits were about to run out people went back to work.

If the goal of unemployment benefits is to get people employed, it doesn't work. Why? Because people can make money easier on welfare than they can by working; Their incentives to work are greatly reduced while they have the option of welfare open to them. Once you're using these benefits and spending the day how you please working a job just doesn't seem as attractive, especially if those benefits outweigh the compensation you would receive for working.

Essentially, everyone policy that the government institutes will have consequences, and the ones that are not immediately seen on the surface of the policy can potentially be negative, as in the example of welfare. These consequences are, more often than not, negative. Unfortunately, because of how the American government is designed, politicians are more inclined to develop laws and policies that will have great looking intended consequences but terrible unintended consequences.

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