The Unintended Consequences
of The Safety Net
We say that every [citizen] shall have the right to buy whatever he wants, wherever he chooses, at his own good pleasure without restriction or discouragement from the state. There came last year into [our country] from every land and people under the sun millions worth of merchandise ... Why did it come? Was it to crush us, or to conquer us, or to starve us, or was it to nourish and enrich our country? All that vast catalogue of commodities came to our shores because some [citizen] desired it, paid for it and meant to turn it to his comfort or profit.
- Winston Churchill, 1904, as he was changing from one political party to another to avoid abandoning the principle of free trade
Introduction
The following are just a few examples of well meaning, well intentioned legislation that has gone awry. Although few people are aware of it, government actions often have a perverse effect that the cure is sometimes worse than the disease. I found these examples interesting because they were generally counterintuitive, that is, unless you were aware of all the forces at work. The first few are all in the category of public health, where one would think that you would get more bang for the buck, government wise.Childproof Safety Caps
You would think these would be a good idea. Consumer surveys showed that customers wanted them. We know that poisoning from various household products has been found to be a leading cause of illness and death among preschoolers. Therefore, surely it made sense to have a government imposed requirement for the use of childproof safety caps for hazardous products.According to the book Rational Risk Policy by Harvard professor Kip Viscusi, the facts don’t bear it out. From the data, it appears that there has been no significant change in poisonings from the products that are now required to have safety caps.
However, there has been a significant increase in poisonings among still unregulated products. It seems that parents relaxed their vigilance after the government rules went into effect. Riskier behavior is a familiar and reliable consequence of providing a safety net. And it leads us down a dangerous path, as I suspect that even in the face of the data that these measures are ineffective, many would probably react by suggesting that we haven’t gone far enough, that the government should just regulate more products, because that is the cult of belief that we live in. If people want to pay for the safety caps, that's cool. However, if they are to be required by law, the government should be able to prove their effectiveness, or take the law off the books.
Head Start
A couple of good studies have been done on this preschool program for disadvantaged children, one in 1985 by the Department of Health and Human Services, and one in 1997 by the General Accounting Office. There is some evidence from the first study that this program helps kids in the short run. However, the problem is that if you come back a year or two later, you cannot distinguish a kid who has been through the program from a kid who has not. In other words, there is no long term benefit - it is as if they didn't go through any program. And if there is no long term benefit after 35 years of running the program, why are we continuing to do it?D.A.R.E.
DARE is a popular anti-drug education program. The problem is that it doesn't seem to do any good. The program, like Head Start, is no more effective than no program at all, and we've been paying for it for 20 years. In some cases, it has been shown that DARE graduates actually use more drugs than those who don't go through the program. Specifically, graduates of DARE show more interest in hallucinogens. It would seem that the attempts to educate children about drugs may in some cases actually increase their curiosity and experimentation. Not that I consider that necessarily a bad thing, but I'm pretty sure that wasn't the intention!Seat Belt Legislation
It would seem that seat belt laws would be among the most sane and reasonable of the laws enacted in the spirit of public health. Indeed, we know that the percentage of driver and front seat passenger fatalities has been reduced.In 1991 the General Motors Research Laboratory undertook a survey of the global evidence to date. After ruling out studies with small use rate increases and small populations, and after considering all the pertinent factors, overall life savings benefits have been shown to be negligible, or worse.
In order to determine the true effects of seat belts, what you really need is driving-related accident data for a nice big random sample of non-seat belts users that are then all suddenly required to use belts, over a substantial amount of time before and after the enactment of the law. Unfortunately, that data is pretty hard to come by on several levels. Regarding "use rates," seat belts laws are often enacted with the existing rates of seat belt use quite high, so that changes in belt use are not very large.
Also, it is difficult to distinguish the various influences on behavior. For example, when drunk driving legislation is enacted at about the same time as a seat belt law, you must account for the resulting lower accident rates, although no one seems to do that. There is also an effect because of the differences between the population of drivers who used seat belts before the law versus the remainder, or the general population.
But perhaps the most important factor is this "safety net factor," which is sometimes referred to as "risk compensation" or "offsetting behavior." When we are provided with an extra margin of safety, we tend to take more chances - we engage in riskier behavior. In the case of seat belts, there is no real doubt that they save the lives of the people inside the car. However, in what is considered to be the highest precision data available on the subject, a study in the UK, it has been found that the risk has been transferred to those outside the vehicles, i.e. pedestrians. People feel safer driving with seat belts, so they take more chances, and they hit more pedestrians.
Do I wear a seatbelt? Of course. Would I force everyone to wear one? No.
Americans with Disabilities Act
You can argue all you want that this was an essential and necessary law. The undeniable fact is that after ADA passed, employment of the disabled decreased. What happened was the cost of employing the disabled went up in the form of requiring various accomodations for the disabled, thus employers were unable to hire as many disabled people. By extension, these additional costs raised the total cost of employment in the workplace and affected overall employment as well.Specifically, comparing the 5 years prior to ADA to the 5 years after, employment of the disabled fell 10.9% while overall employment fell 3.1%.
TV Ratings
The concern over things like sex, violence, and bad language led to the current TV rating system. I think it’s fair to say that the purpose was mainly to provide parents with some guidelines for what their kids should watch, with the idea being to cut down on the amount of bad stuff being watched.It's not a bad idea, but frankly, I'm not convinced that many parents actually understand what all those letters mean, and I imagine even fewer actually use them. The parents that are actually monitoring what their kids are watching don't need guidelines. I guarantee you that many older kids use the system as a guide to actually seek out more exciting programs.
But that’s beside the point. I guess the interesting thing to me was that in first two years after the ratings system began, the offensive content increased by 31%. Once again, the same principle is at work - the safety net encourages riskier behavior. In this case, networks gambled that they could get away with more offensive material because the ratings would provide "protection," a way for parents to steer around the new, more offensive content.
Tradeoffs
All these examples reflect simple economic principles. People's responses to various incentives and disincentives in the marketplace. The main thing to remember is that there are always tradeoffs. Generally, few benefit from a given policy, and the rest of the country pays for it. There ain’t no such thing as a free lunch.Politics has come to seem like religion to me, and not a very good one. It seems to be a series of largely unfounded beliefs designed around things that people simply wish to be true.
We don’t seem to pay much attention to whether things actually work. I find myself wondering why we couldn’t treat it more like science. Test out some theories on a smaller scale, maybe in some test communities. Be absolutely willing to reject our hypothesis, and throw out programs that are not effective. It seems like a reasonable thing to do before implementing them at full scale, at a national level, permanently. And if we don’t know what works, maybe we should just leave it be.
Some Additional Rants:
Sarbanes-Oxley
This is a prime example of a "knee-jerk reaction" law, quickly packaged and rushed into existence to assuage the fears of the public. The reaction in this case was to the downfall of companies like Enron and Worldcom, happening in conjunction with a recession and one of the biggest stock market selloffs in a generation. The law requires large companies to go through a lot more accounting than before. Basically we're "super" enforcing generally accepted accounting principles (GAAP), that were already, um, enforced.But what we're talking about is people committing fraud. And if someone is committing fraud, giving these very accountants and auditors false numbers, how exactly does that help? We didn't really need a new law for this kind of thing, because fraud is already illegal. We didn't need new accounting principles. And there's not much you can do if a company is headed into bankruptcy. And based on the fall in stock prices of Enron and Worldcom, investors were clearly aware that something was up long before the scandals came to light.
But let's say we did need this for some reason. What's the downside? The downside is that we have greatly increased the cost of doing business as a large company, and we all have to pay this cost. Sarbanes-Oxley requires some things like independent directors, which sound good in theory, but realistically, what good does it do to have a bunch of directors that know absolutely nothing about the business? Additionally, Sarbanes-Oxley creates an oversight board which simply duplicates what the SEC already does, but requires that its members have no expertise in accounting. Yeah, that sounds really smart.
We are concentrating now more on the mechanics of accounting, but this hardly tells someone the whole picture about a company. Since Sarbanes-Oxley, lots of things have been happening. Already, more companies are choosing to remain private, to headquarter overseas, and to de-list from the NYSE. Foreign companies are increasingly locating in other countries, and choose not to list on the NYSE. We're scaring away business, and the jobs that come with it. Additionally, the incentive is for companies to become timid, spending less on R&D, for example. CEO's may resign in favor of safer positions. The incentive for potential CEO's may be to avoid these positions entirely. CEO salaries will have to rise to compensate for this. The cost of insuring CEO and directors have already doubled since Sarbanes-Oxley passed. All of these are costs that the American public must pay. The estimated $6 billion to pay for mere compliance will be a drop in the bucket compared to the loss of productivity in the economy.
In my view, the biggest reaction stems from the retirement situation for some of the employees who worked at these companies. In many cases the companies created an unconscionable incentive for their employees to invest their entire retirement accounts in the stock of their own company. But ultimately it's reckless to put all of your net worth into a single company. In particular, workers should be able to use pre-tax dollars to invest in any retirement program whether company run or not.
[Years after writing this, I notice many people are coming out against Sarbanes-Oxley, even those that had once been champions of the law, such as Alan Greenspan. Having a $75M company pay $4M to comply is simply not a logical benefit/cost. Indeed, some estimates have the cost of Sarbanes-Oxley at 8-9% of GDP. That sounds a bit far-fetched, but even 1% of GDP is too much to pay for this.]
Universal Health Care
Does Universal Health Care (UHC) work? Sure, if you are measuring some kind of non-existent average person, it absolutely works in the short run, and for this mythical average person it may even work in the long run if you have a free market system such as the US somewhere in the world to do the heavy lifting of advancing new technology and providing overflow services for the rest of the world. But no, if you are focusing on what the system was "designed" to do.The system was designed to help people who do not have good access to health care. Like many government programs, this refers to the poor, with sizable subgroups among the elderly and minorities. The logical question is, how well are existing UHC systems doing in that regard?
England started UHC around 1950. After 30 years, around 1980, they conducted a major study of their health care system and determined that the poor had worse access to health care than when the program started. Undaunted, they redoubled their efforts, resolved to improve the system and make it work. After another 10 years, they did another major study and found that things had gotten yet even worse than before.
This is probably hard for a lot of people to swallow, but based on economic principles, this is exactly what you would expect. UHC takes away the free market incentives for buyers to spend their money wisely and for sellers to provide desired services at a fair price. With UHC you are essentially giving away something for free, so people tend to use more of it. People who would ordinarily overlook something minor rather than pay for a doctor's visit start coming in. Demand increases. The result is that some combination of quantity and quality must suffer. In practice, waiting times to see a doctor go up, time spent per patient goes down, and the availability of expensive treatments goes down. As to the actual cost of UHC, Canada and other countries have some figures on that which look good, but beware government statistics. If you dig into it, it turns out that Canada really isn't even sure exactly how much it spends on health care. Ya think it may be a wee bit more than they're reporting?
UHC works on the mythical average person because if you take a system where 50% of the money is spent on about 5% of the cases, you can absolutely improve overall results by not spending so much on that 5%, but rather by spreading it around to others. The result is more health on average, but the bottom line is that more people from that 5% category die. If you live in one of the UHC countries, like England, France, Germany, or Italy, and you get breast cancer or prostate cancer, you have about a 50% chance that you will die of that cancer. In the United States, if you get one of those cancers, your chance of dying of that cancer is about 20%. Under UHC, these patients die while waiting for treatment, or in the case of diseases which require costly equipment, they die because there is no treatment available, period. You can see this, to pick one example, in the statistics on use of dialysis by people with kidney disease. In socialist countries, a much smaller percent of people have access to this life-saving equipment. Although the socialistic intent is to help, in practice it tosses these people aside in favor of the already healthy. Nice.
In England (a few years ago), the average wait to get a heart bypass is (was) two years. If you think about it, most people who need a bypass don't have two years to live - that's why they need the bypass! In my experience in the US, cardiac problems are treated quickly and seriously. The wait for a bypass is somewhat better in Canada, but there is a reason. The Canadian system has an important safety valve - the US. It's pretty easy for rich Canadians to go outside the system and hop on over to the US for their treatment. But if the US goes to UHC, that will go away.
A couple of stories.
My mother was on a bicycle trip in Italy and had an accident, going over the handlebars, fracturing some bones in her face and knocking a couple of teeth out. Now sure, they did the emergency work and stopped the bleeding, but there was a lot of work to be done besides that, and my toothless mother waited, and waited, and waited. Besides dental work, there was some plastic surgery had to be done within about 10 days, otherwise the scars wouldn't heal properly. After waiting about 5 days the Italians had finally lined up a surgeon, but they couldn't get an anesthesiologist and wouldn't have another opportunity to even look for one for another couple of days. My parents finally decided to just come back to the US. They made some quick arrangements, arrived in the US one evening and the very next morning my mother met with a dentist and then immediately after with a plastic surgeon.
The father of an old friend of mine was a doctor up in Canada. When he ran blood tests on himself, he sent them to the US for processing so he could get the results in a few days instead of a few weeks.
Now, I do meet a lot of healthy, young, well-educated Canadians, Brits and Europeans who are quite satisfied with their system. But think about it - these are exactly the people who don't typically need much in the way of health care, and this is the segment that UHC benefits the most.
What about the poor, you know, those people we were trying to help? Well, in UHC, money doesn't matter. But what does matter is connections to get to the top of the line, know-how to get through the system, and flex time during the day to wait long hours to see a doctor. The poor have none of this. And under UHC there are no other options - there is nowhere to go but "the system." Additionally, while it's nice in theory to have free health care, you can't really force people to actually use it, at least not if you want to call yourself a free society.
Similar to the retirement situation related above in the Sarbanes-Oxley discussion, workers should be allowed to spend pre-tax dollars on any health care plan, regardless of whether it is company provided or not. Again, the government feels otherwise.