Watch for unintended consequences

“The law of unintended consequences is that actions of people—and especially of government—always have effects that are unanticipated or unintended. Economists have heeded its power for centuries; for just as long, politicians have largely ignored it.” That’s from Rob Norton, previously the economics editor of Fortune magazine.

The examples are boundless. The Four Pests Campaign of Mao Zedong targeted the elimination of rats, flies, mosquitoes, and sparrows, the latter because birds eat rice. Sparrows were pushed to near extinction in China, but rice yields declined because birds also eat plant-devouring insects. The Chinese government eventually had to import 250,000 sparrows from the Soviet Union.

One European nation decided that the personal income tax rate should be 104 percent of all income above a certain level. Private sector surgeons stopped working because they were actually paying to perform delicate operations. One notable author demanded that his publisher stop selling his books because he was losing money on every copy sold.

When situations like that occur, the government response is that they are shocked and surprised that anything they planned could possibly turn out in a way they never expected. Not all unintended consequences are unexpected. Aspirin—acetylsalicylic acid—is used to reduce pain. Some people have the side effect—unintended consequence—of an upset stomach. However, aspirin is also used as part of the treatment of those who have had a heart attack, as it is a blood thinner. Unintended.

The other problem when we discover that a government policy worked differently than was “intended,” maybe it was not a surprise. The magician knew that the rabbit might escape from the hat unexpectedly. Maybe that was all part of the act.

Turkey seems to bounce from crisis to crisis about every six months. Last week, the Turkish Central Bank hiked interest rates by 200 basis points. This allowed President Tayyip Erdogan to fire the Turkish central bank governor, on the job just over 3 months. This is the country’s fourth central bank governor in the last two years. The Turkish lira collapsed, but the president assured the country that “Erdoganomics,” with low interest rates, is the key to solving Turkey’s 15 percent inflation problem. If things get too bad, there can always be an “unintended” coup attempt as in 2016.

Biofuel using ethanol is great for the environment, or so they say. The US 2005 Energy Policy Act mandated blending biofuel with gasoline. Environmentalists loved the idea. So did corn farmers when the price went from $2 to $7.50. Not happy were producers who use corn for animal feeds, or consumers who saw beef prices go up from $2.50 to $5.

US President Biden’s green fuel policy using edible oils as fuel has pushed worldwide vegetable oil prices up, more than 70 percent in less than a year. “There’s been a new factor that has come after the election of President Biden that has projected higher demand for soy oil, which is 100 percent biodiesel,” leading edible oils analyst Dorab Mistry said. “Four refineries have already said that they will terminate refining fossil fuel [and] instead start producing vegetable oil-based fuel.” Strong Biden supporters love that idea.

“Soaring food prices are bound to cause social instabilities in EM countries as some people can no longer afford cooking oil to prepare their food,” says SocGen’s Albert Edwards. No worries. Just an unintended consequence.

The Arab Spring protests in 2010-2012 spread across much of the Arab world as a “response to oppressive regimes,” corruption, police brutality, and high-income inequality. All true. But then again, in 2011 as the protests went critical, the price of bread—the absolute foundation of the diet in the region—was increasing by as much as 85 percent.

E-mail me at Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis provided by AAA Southeast Equities Inc.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Related Posts