The road to hell is paved with good intentions

There is little room for bleeding-hearts in policymaking

The United States (US) Government introduced the Smoot-Hawley Tariff Act in June 1930 in a bid to protect US workers during the Great Depression of the late 1920s/1930s. The Act imposed tariffs on ~20,000 imported goods. The logic was that by increasing the price of foreign products, products created by local workers would be cheaper, which would stimulate demand for local products, and therefore local workers. Big mistake.

The Smoot-Hawley Act is widely credited with exacerbating the Great Depression, pushing unemployment into the double digits. Countries affected by the US tariffs responded by imposing tariffs of their own. The tit-for-tat trade war reduced US trade by ~two-thirds. Ouch. Throughout the early 1930s, unemployment reached over 20%. So much for protecting workers.

The Smoot-Hawley Act demonstrates why economists and policymakers must know their history.

Well-meaning policy is not the same as effective policy

The critical benchmark for policy is whether it works. How you define whether it works is subjective, but in the Great Depression example above, it's pretty clear. The Smoot-Hawley Act aimed to protect jobs, and instead, it destroyed jobs.

Well-intentioned arguments suggesting 'we must protect this or that vulnerable population' or 'we must stop this or that bad thing' are basically a truism and not necessarily founded in evidence. History is full of examples of policy causing harm despite good intentions.

Below are a few well-known examples:

  • Trickle-down economics is supposed to support economic growth and investment through a reduction in taxes on the wealthy. A clear consequence of trickle-down has been increased inequality and stagnating real median incomes.

  • Alcohol prohibition sought to curb alcohol-related social problems. It also increased criminal activity as alcohol production and consumption became illegal and made criminals out of otherwise decent people.

  • The War on Drugs aimed to reduce the illegal trade in drugs in the US. However, it led to much higher incarceration rates for small crimes at massive cost, and an increase in criminal activity as the drug trade was pushed further underground.

  • Rent control reduces the cost of living for those in rent-controlled houses but can decrease the overall supply of rental housing if landlords pull homes from the market.

  • Economic protectionism with tariffs like Smoot-Hawley aims to protect local jobs and industries but can harm the economy as a whole with higher consumer prices. Retaliation from foreign competitors can reduce economic activity.

The above interventions no doubt benefit specific groups (e.g. those protected by a tariff), and by some measures would be considered successful. Usually, policy is measured by how it performs against key performance indicators that are closely related to the topic at hand (e.g. fewer people consuming alcohol in the case of prohibition). The problem with that is policies have wide-ranging implications, so the overall effect must be considered and policy needs to wary of unforeseen consequences that impede good outcomes.

Good intentions are limitless, resources are not

Some good ideas never stop being good ideas. The economy is full of this kind of open-ended problem. A country could spend half its GDP on health and still, people would miss out. There will always be some new hospital, medicine or device to spend money on. The same applies to education or infrastructure. It's really easy to make an argument for investing in these areas because there are always improvements that can be made - but that doesn't mean governments should always spend more on these things.

Prioritisation and budgets are so important because they help ensure organisations get value out of the money that is spent. Budgets put a limit on the areas of the economy where limitless spending is possible. Of course, how big the budget should be will always be up for debate.

People who claim that the nation can’t afford a new health intervention that saves lives, or who suggest that we can’t afford a new school for children, probably aren’t welcome in polite company. However, those are the people that stop governments from throwing money into a bottomless pit.

There is a kind of groupthink that occurs around ideas, policy or investments with good intent. People are likely to keep their mouths shut because they agree with the intent, even if they disagree with the direction.

Not all that glitters is gold

Self-interest may also masquerade as good intentions. Lobbying as a profession appears built on this. Think of property owners suggesting that their part of town needs more green spaces for environmental reasons when the goal really is to avoid greater density. It’s insidious, but also a form of self-affirmation bias - ‘I believe it, therefore, it must be right’. AKA believing your own bullshit.

In pursuit of a policy goal, there are options. Let's say the government wanted to increase employment. Ways to achieve this include:

  • Supporting training programmes and apprenticeships

  • Public works programmes (e.g. developing infrastructure)

  • Subsidies to small business

  • R&D incentives

Those are just the ones that are top of mind. Economists try to find the right option using the evidence and techniques available. It's not supposed to be glamorous.

Economics as a discipline can come across as pretty callous. The models. The calculus. The debates about numbers that ignore the real people beneath it all. All of it can seem technocratic and unfeeling.

Economics though is ultimately about improving wellbeing. That is the pinnacle of economics. Rarely will an economist thump their chest and make big speeches in pursuit of this goal. The point is to be evidence-based, rather than emotive. The models support that, though of course economists must know the limits of their modelling.

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A New Zealand based politics and economics blog

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