Andrew Van Sickle editor@moneyweek.com
Would you drive more carefully without a seat belt? In the 1960s, the US federal government passed laws requiring seat belts, padded dashboards and various other safety features for cars in an attempt to improve safety. The result? Fewer deaths per accident, as intended. But the policy also led to an increase in the overall number of accidents, negating the benefit of the safety drive.
Enter two interlinked iron laws of economics and politics. Firstly, incentives matter. And secondly, watch out for unintended consequences. The cost of reckless driving fell when seat belts were brought in, which provided an incentive to indulge in more of it. Hence the unforeseen result of the policy.
Failing to learn from history
Economic history is full of examples of the law of unintended consequences. One early one that always springs to mind is the window tax, which prompted homeowners to brick windows up to reduce the levy. And right on cue, X informs me that the City of Toronto is contemplating a storm-water charge to temper the cost of rain potentially overwhelming the sewage systems when it is not absorbed into the ground.
The idea is reportedly that the more “hard surface area” you have on your property (roofs, driveways and so on) the more you would pay. This echoes the window tax in that it seems a thinly disguised way to squeeze money out of bigger properties. Expect church-style steep spires to be all the rage in roofs next year as residents try to avoid the rain tax.
For a more recent example of unintended consequences, consider Europe’s wealth taxes. In the 1990s, more than ten European countries had some form of wealth tax; now only three do. People made an effort to avoid them by leaving the country, or they worked less. One estimate suggested that the French wealth tax’s revenues comprised 50% of the outward flow of wealth.
Rent controls (notably in Berlin and Edinburgh) designed to make renting more affordable and widespread are a recurring example. Landlords’ incentive to rent out property is reduced, leading to less supply and putting upward pressure on rents. Securitisation, parcelling up loans as new investments, was to make the financial system safer by redistributing risk, but in 2008 it caused a global heart attack. Nobody knew where the bombs were hidden, so nobody wanted to lend, paralysing the economy – in the same way that poisoned mea
