When politics meet economics, always ask, "Then what?"

(MoneyWatch) 

COMMENTARY After reading my recommendation of Economics in One Lesson, a poster recommended Applied Economics by Thomas Sowell. I am glad I took him up on the suggestion, because in my opinion it's one of the best books on economic policy and what Sowell calls "thinking beyond stage one" -- the unintended consequences that often result from politically motivated decisions and/or decisions designed to favor one group over another.

The chapters on the economics of labor, health care and housing alone should be required reading for all elected officials. And the chapters on immigration, discrimination, economic development and what Sowell calls "risky business," all provide important insights into how policies impact our economy.

Sowell is at his best when he provides real world examples of policies that led to paradoxical results because of the failure to think beyond stage one -- the failure to ask the important question: And then what? He shows clearly how the failure to consider the chain of events policies set in motion often leads to bad outcomes and unintended consequences. 

Sowell points out that not only is the top priority of politicians to get elected, but their time horizon seldom extends beyond the next election. The result is that policies that produce good results before the next election may be preferred even if they can be expected to produce bad results afterwards. Sowell provides example after example of how the end results are often directly counter to the original intent. His examples on rent controls (the cities with them often have the highest rents) and open space laws are particularly compelling, as is the discussion on minimum wage laws. 

A great example of a politician making a decision based solely on stage-one thinking is former President Richard Nixon's decision to impose wage and price controls to combat inflation in 1971. The decision was made despite the advice of his economic advisors such as Milton Friedman and Nixon's own knowledge of the consequences of such a policy. While the policy initially held down prices sufficiently to get Nixon re-elected in 1972, price controls had the follow consequences, all of which were predicted by "stage two" economic theory:

-- Price controls led to a reduction in the amount of goods supplied.
-- Suppressed prices led to increased demand.
-- Shortages inevitably developed -- shortages that were seldom blamed on Nixon.

Sowell points out that thinking beyond stage one is especially important when considering policies whose consequences unfold over the long term. If the short-term consequences are good and the bad consequences come later (as in the case of rent control), then it's always tempting for politicians to adopt such policies. The same points that can be made about rent control can also be made about health care, or any good or service. When you artificially control prices, you lower the supply provided and you increase the demand, which in turn creates shortages (and rationing). And you lessen the quality of the product or service.

As one example, Sowell notes that in Ontario, Canada, patients awaiting hip replacements wait 11 months. In Britain, the waiting list is one year. While the direct costs may be lower than they are in the U.S., direct costs don't measure the pain and suffering patients endure while they wait, nor do they measure these patients' lost economic productivity. (Note Sowell doesn't make any judgments. He only provides the analysis, the logic and the consequences of decisions.)

Economics has been called "the dismal science." Sowell provides the explanation for why this is the case: "It dealt with inescapable constraints and painful trade-offs, instead of rhetoric, which many find so attractive in politics and in the media. Moreover, economics follows the unfolding consequences of decisions over time, not just what happens in stage one, which may indeed seem to fulfill the hopes that inspired the decisions."

I recommend this highly readable book (no economics degree needed) to everyone.