Unintended consequences always undo policy objectives

Rodney Hide explains in the NBR:

Too often we evaluate government policy by what politicians say they are trying to achieve.?That?s what gets reported.?That saves having to think.

But good intentions are not enough.?It?s actual results that matter.?And politicians may mean well but still prove a disaster.

To rely on what politicians promise is to be continually misled and let down.?We need to see what their policies will actually deliver.?That requires we think and apply a little bit of economics.

In 1999, the Labour Party won votes saying it wanted to reduce the burden of student debt.?The intention was lauded.?The policy was to drop the interest charge on students to zero.

But free loans created the incentive to borrow more, not less.?Students who didn?t need a loan could make $3000 while completing their degree simply by reinvesting their free money back with the government.?The incentive for students is now to borrow whether they need the money or not.

Officials advised the new Labour-led government that free loans would add an extra $600 million to student debt within two years.?The effect was as predicted.

Within the year the proportion of eligible students who borrowed jumped 10% and the amount the borrowed jumped on average per student 23%.

The loan scheme?s administrators concluded, ?The increase in borrowing in 2000 can be attributed to the change in the interest rate write-off policy, which reduces the cost of the borrowing.?

The free-loans-to-students policy produced the opposite result to what politicians promised: student debt went up and the debt burden on students increased.

The intention was good.?The outcome was lousy.?Students are now more indebted than ever.

But it helped to get Labour re-elected in 2005 when they changed the policy yet again. It as one of the biggest bribes ever…one we will all have to pay for.

The analysis of the free-loans-to-students policy shows how economics is done.?We analysed how the policy changed incentives on individuals, theorised how that would change behaviour and examined the actual result.?That?s what good economics is all about.

The premise that drives economics is that changes in incentives change human behaviour in predictable ways.?If the personal benefits of an option increase, people will more probably choose it.

Conversely, if the personal cost increases, they will be less likely to choose.?That?s it.?That?s economics.

We use economics every day both to predict and explain people?s behaviour.

It was bleeding obvious but the politicians knew best. Watch Labour campaign at the next election against the debt burden of students and try and blame National for a land mine they laid.

The effect of any policy is produced not by what politicians say they want to achieve but by how the changes they make to laws, to taxes, and government spending, affects individual behaviour.

That?s what economics enables us to understand.?It means taking the trouble to understand the change in incentives and to trace out their likely effect.

Economics is at once simple and hard.?It?s simple because the underpinning premise is obvious.?It?s hard because it requires thought and effort to think through and apply logic to understand the actual effect of policies.

It?s easy to be lost and bewildered by the political propaganda of politicians, interest groups and competing claim and counterclaim.

But economics arms us to cut through the propaganda to see the actual effects of policies.?That?s its power.

The words of a wise man, who should still be in parliament.