Unintended Consequences Congress Never Saw Coming - Part 1
Congress always wants to accomplish something. They think that they have to have something on their resume to get re-elected. They need something to point to so they can say, “Hey, I did that for you, vote for me again and I’ll do more nice things.” Well, most of the time these things don’t really get thought through all the way, and much of the time we would prefer they just stay out of the way. Give the Defense Department some money to protect us, build a few roads, and stay the heck out of my life.
Unfortunately, that isn’t the way it works. At least not anymore. They always have to do “something” to help the voters. The following is a list of 3 things that have unintended consequences that are either effecting us now, or will effect us in the future if and when they are passed.
Three words. Community Reinvestment Act. It sounded like a great idea. Let’s give everybody they opportunity to own their own home. Ok banks, you go lend money to those people who don’t qualify for loans. Fannie Mae and Freddie Mac, you have to lower your standards so that you can take these loans. Good, now everyone can have house. Isn’t life great? Thank you Congress for having this wonderful idea.
Look, the demand for houses just tripled. Housing prices are now going through the roof. This is great for everybody, right? Right? Well, not exactly. Now these people who the banks didn’t think could pay back their loans, aren’t paying back their loans. Imagine that.
This means foreclosures are going to be much higher. This causes banks to lose a lot of money. This also means that those communities are going to have their housing values drop. If there are 5 foreclosures near your house, those are going to sell cheap. That means you have to lower your price if you want to sell yours. This drove housing prices back down after their steep run up.
Does anything in that chart look slightly out of place? That is what we call an “unintended consequence” of Congress messing with the free-market. If loaning money to these people was a good idea, the banks would have been doing it already.
Ethanol is another thing that sounds like a good idea. You mean we can just grow fuel? Sounds good to me. Unfortunately, corn is a terribly inefficient fuel. It only produces slightly more energy than it takes to make. The government has to create artificial markets and subsidize the farmers for people to use corn for ethanol. The U.S. government currently gives out around $5 billion in subsidies for it. Climatebiz says this about the government created market:
…Energy Policy Act of 2005 that really kick-started the ethanol industry as we know it today. That act launched the Renewable Fuels Mandate, forcing state governments to blend billions of gallons of renewable fuel with gasoline by 2012 and giving ethanol producers a market for their product.
So not only does the government subsidize the farmers, they created an artificial market for it. This has made corn prices skyrocket. This is the unintended consequence that Congress and the Bush administration didn’t see when they passed the Energy Policy Act.
Corn is used in many different foods, but unfortunately it doesn’t just stop at raising the price of corn. With the increased price, many farmers are now growing corn for ethanol instead of other crops. This raises the price of those foods as well. Another side effect that you might not see is that corn is used in feed for many animals. Dairy cows are one example of this. The price of milk has gone up 200% since 2004.
Unfortunately Congress doesn’t always look before they leap. This increase in food prices effects everybody in the country. The benefits of ethanol are not nearly as widespread.
The WSJ highlights another bright idea Congress recently had.
Back in 2005, Congress passed a highway bill. In its wisdom, it created a subsidy that gave some entities a 50-cents-a-gallon tax credit for blending “alternative” fuels with traditional fossil fuels. The law restricted which businesses could apply and limited the credit to use of fuel in motor vehicles.
Not long after, some members of Congress got to wondering if they couldn’t tweak this credit in a way that would benefit specific home-state industries. In 2007, Congress expanded the types of alternative fuels that counted for the credit, while also allowing “non-mobile” entities to apply. This meant that Alaskan fish-processing facilities, for instance, which run their boilers off fish oil, might now also claim the credit.
What Congress apparently didn’t consider was every other industry that might qualify. Turns out the paper industry has long used something called the “kraft” process to make paper. One byproduct is a sludge called “black liquor,” which the industry has used for decades to fuel its plants. Black liquor is cost-effective, makes plants nearly self-sufficient, and, most importantly (at least for this story), definitely falls under Congress’s definition of an “alternative fuel.”
Ah the wisdom of pork spending. Let’s help the industry in our state by giving a tax credit to anyone using alternative fuels. Somehow they enacted this without researching who might actually qualify for it. Congress initially estimated that this tax credit would cost $333 million for a 15 month period. They have since revised that number to $3 billion. Wall Street thinks it will be $6 billion. Oops.
Now Congress is upset with losing billions of dollars because they did something stupid, so in response they are trying to find a way to keep the paper industry from getting the subsidy. Really? You make up a ridiculous policy, then you ban certain people from getting the benefits just because they are getting more than you expected? You fail to do your homework and then just arbitrarily try to take money away from some and give it to others? This is really just laughable at this point.
When will the government realize that most things work better when they stay out of it? When will the voters stand up and tell the government to stay out of our way? Spend money on defense. Build some roads and bridges. Then just stop getting in the way. Reagan said the 9 scariest words in the English language were, “We’re from the government, and we’re here to help.” Please, you can stop helping now.
Update: Part 2 is here. In it I discuss some of the current things being discussed by Congress and the unintended consequences they either don’t see or are choosing to ignore.