My favorite law in the whole world is the Law of Unintended Consequences. I suspect I’m so fond of it because it’s intrinsically perverse, it smotes the smartest people (maybe especially the smartest people), it’s of universal applicability, and it shouldn’t be that hard to avoid–but it’s everywhere you look.
A week or so ago The New York Times published “Trade Wars Can Be a Game of Chicken,” which they placed in the business section but it should have run on the comics and horoscope pages (except the Times has no such section, never has and it’s safe to venture never will).
Now, as regular readers know, Adam Smith, Esq. goes nowhere near political or partisan issues, so we will not be debating the wisdom or unwisdom of those subscribing to the view that trade wars are handy nation-building exercises and easy to win. But the article supplies a virtual Greatest Hits, or rogues’ gallery if you prefer, of self-defeating missteps which industry after industry has inflicted on itself.
What all these stories have in common is, as the article puts it, that “protectionism is porous [and] can be gamed,” I would generalize that to posit a more generalized Adam Smith, Esq. Law of Unintended Consequences, which holds that,
“If you create rules to drive people away from outcomes they favor, or towards outcomes they disfavor, the subsequent new equilibrium will be even further from your desired endpoint than the status quo before you imposed the rules.”
How does this improbable (or we could say “unintended”) result come about?
Fundamentally, the rule-decreers fall into a category error in their logic when they design the rule. They assume, as lawyers are especially prone to do, that a rule will be obeyed, more or less literally as written and intended. They do not go the next step of imagining how people will exercise their ingenuity and cunning to wriggle out of the unhappy box you’re trying to force them into. The general form of this logical error is “static not dynamic analysis.”
Here are a few of my favorites from the Times article.
- Over 15 years ago President George W. Bush imposed steel tariffs of 8–30% on a wide variety of steel imports from many countries. Imports from the affected countries fell–what a surprise–but imports of types of steel exempt from the tariffs, and all steel from exempted countries, “surged” so much that overall steel imports to the US actually rose 3% in the first year, while American employment in steel kept falling. Meanwhile, more expensive steel cost 200,000 jobs in industries that consumed steel as an input–more jobs by far than in the entire domestic steel industry to begin with.
- President Obama threw tariffs on Chinese tires (despite the fact that at that time China only manufactured very low-grade tires, which American tire manufacturers had long since ceased manufacturing). Result: Economists estimated that consumer were forced to spend an additional $1.1 billion on tires while the tariff was in effect, or about $900,000 per tire job saved. (The average annual wage of a tire industry worker was then about $45,000, so the same amount of money could have simply been sent out as an annual $45,000 check for 20 years, or longer if it was invested at some nominal rate of return greater than zero.)
- Almost 50 years ago, in the early 1960’s, Europe imposed tariffs on imports of American chicken, to protect their native poultry industry. Predictably, the US retaliated with tariffs on, among other things, French brandy and a whopping 25% levy on Germany’s VW bus (car imports get away with merely a 2.5% charge). But the way the VW tariff was crafted, it applied to all “light trucks”–and it has never been repealed. Is it then sheer coincidence that 82% of the vehicles produced by GM, Ford, and Chrysler are light trucks?
- That’s not all: When Ford imported its popular urban delivery vehicle, the Transit Connect van, it attached rear seats and windows for the benefit of US customs inspectors–which duly labeled it a passenger vehicle and not a commercial van, paying a 2.5% and not a 25% tariff–they ripped out the seats and windows and sent them to recycling.
- But my very favorite is the saga of the sugar industry. Through a series of stringent import quotas in the 1980s the price of sugar in the US rose to 500% of the world average, so what do you suppose happened next? First, Canadian firms started exporting in bulk high-sugar-content cake mixes to the US, where the sugar was extracted and the “mix” discarded. Second, utterly innocent bystanders were caught in the crossfire, including Korean noodles with 0.002% sugar content and kosher pizza from Israel. But last and most fittingly, Apocalypse Now for sugar as Coke and Pepsi replaced sugar with high-fructose corn syrup, which they use to this day. From 1980 to 1987 sugar’s share of the sweetener market in America dropped from 65% to 47%.
All very entertaining and amusing, you’re saying about now, but what has this to do with Law Land? Simply: Do not expect people to submissively bow to your “rules.” Because they won’t view your rules as the last word; they will consider what their next move on the chessboard is going to be.
If you’re considering, for example, your compensation plan, here are some ways you can go wrong: