Examples abound for spillover effects caused by failures of government policies.
Here is one that describes the impacts of interventions in financial markets that helped set the stage for the current economic malaise:
Artificially-low interest rates reduce the low-risk option of holding saving deposits that induce households to move to shares & other riskier assets that helps set the stage for asset-price bubbles.
For example, bailing out equity markets in the wake of the crash of 1987 triggered a boom that led to the Tequila crisis when the market for Mexican government debt collapsed. In response to this bust, the US Treasury financed a bailout that led to a bubble in emerging market debt that ended with an Asian currency crisis & default by the Russian & Argentine governments.
And then rescuing counterparties of Long-Term Capital Management helped set in motion the Internet bubble that popped inducing another rescue that set the stage for the housing bubble. Citing deflationary concerns in the wake of yet another collapsed bubble set up conditions for a sovereign-debt bubble that may soon burst as evident in Greece & Spain or Hungary or California.
Government interventions that aim to direct or limit human interactions often have unintended & unexpected consequences. While perhaps motivated by good intentions, the end results can make matters worse either for the intended target or by creating some spillover effects.
These failures of policy arise from the fact that government interventions inevitably create distortions that may arise from a new set of incentives or by creating disequilibrium conditions.
These distortions set into train responses by special interest groups that either form to protect some advantages (or deflect costs) or that already exist & seek to do same. Either way, the end result is a clamor for yet another round of government intervention in the form of a subsidy or a regulation or restrictions on completion.
I use the term “Lingle’s Law” in my university lectures to describe these effects as depicted in the logic laid out in the following schematic:
Government intervention-> Distortion (disequilibrium)-> Impact on special interest groups -> demand for government intervention-> Distortion (disequilibrium)-> Impact on special interest groups -> demand for government intervention -> Distortion (disequilibrium)->Ad infinitum /ad nauseum ….
Examples of the operation of Lingle’s Law:
Agricultural policy (e.g., subsidies or price supports) -> increased production -> surpluses -> distortion of world prices -> undermines agricultural base of under-developed economies (or those that receive donated food) -> demand for foreign aid by “poor” countries -> increased taxes & higher prices for inputs to agricultural sector in developed economies -> decreased ability for small farms to compete (while also undermining natural environment from increased use of chemical fertilizers & reduced habitat)
Nobody, not least government officials, know what is happening to the true costs of living. As it is, governments & central banks play games with measures they euphemistically call “inflation”.
It turns out that conventional references to inflation are a corruption of the original definition that was an excessive expansion of the money supply.
Defining inflation as an inflated money supply once made it clear that rising prices were a result of poor public policy choices. The current (mis)specification involves a subterfuge that deflects blame away from government officials while allowing access to more power & more revenues at the expense of private citizens.
There are various incentives that encourage public-sector authorities to understate “inflation” as an indicator of rising living costs. For example, lower CPI measures lead to higher reported real GDP & real income as well as productivity gains. Such under-reporting allows spending to be diverted from mandated increases in inflation-indexed obligations like Social Security payments to other more vote-catching programs.
According to Shadow Government Statistics, if the pre-1980 method were used to calculate the Consumer Price Index it would exceed 9%, instead of the official statistic of about 2%. And the official data also underweights the components in the official basket of goods used to measure the cost of living that may have the biggest impact on real life. As it is, health care costs are 1/6 of GDP in the US but are only 1/16 of the price index.
Another ruse is to report “core inflation” that excludes fuel & food costs that are the largest components of many household budgets.
Meanwhile, a low reported CPI is used by the central bank to justify continuing with artificially-low interest rates that take away the low-risk option of savings deposits. As households move to shares & other riskier assets, the stage is set for asset-price bubbles.
In the end, inflating the money supply is an economic “Trojan Horse” that creates distortions that cause large losses in efficiency & income. It is almost impossible to imagine that central bankers & profligate politicians will sort out their policies to avoid massive increases in the cost of living.
Human progress is the outcome of decentralized, spontaneously-ordered actions whereby gains occur from exploiting other-wise dispersed “collective knowledge” through voluntary exchanges.
These trades may or may not involve material goods or immaterial services, but the voluntary nature of the transfers insure that all those engaged directly in the transactions gain from them.