Archive for January, 2010

China’s One-Child Policy and Unintended Consequences

Wednesday, January 27th, 2010

In 1978 Chinese authorities limited couples to one child each in order to slow the growth of the country’s massive population. And like most serious government interventions in citizens’ lives, this policy threatens to unleash far-reaching societal changes far beyond the scope of the original plans.  We call such effects unintended consequences.

More than most social scientists, economists believe it crucial to consider the likely unintended consequences of government actions.  Often this is a lot easier than it sounds. With a little common sense, people can predict some ways a population might react to certain policies. For example, if a company raised overtime wages from 150% to triple the normal wage, many employees would undoubtedly try to work more slowly to scoop up more of this lucrative overtime pay. It’s human nature. If the government mandated a “living wage” of $50K per year, many low paid workers would be fired. And businesses unable to raise prices enough to cover higher salaries would suffer financially, with some going under.

The impacts of China’s policy are mentioned in today’s Washington Times article.  Anyone who understands China’s culture knows that parents value boys far more than girls.  They should have realized millions of people would abort pregnancies when they found their only baby would be female.  Now China has a severe female shortage.  There are not enough potential brides for Chinese men.  This has also spurred a thriving sex slave business.

Because the Chinese succeeded in dramatically slowing the birth rate, they created a demographic time bomb:  a rapidly graying population that will be difficult to support by a much smaller group of working young people.  Contrary to popular belief, China is essentially a 3rd world country.  It’s an economic powerhouse solely due to the size of its population.  Its 2008 GDP per person ranked roughly 100th in the world at less than $3300/person.  The average Chinese citizen would need to see his production rise 20% to catch up with his counterpart in Ecuador. The government has massive currency reserves, but they wouldn’t go very far if they had to support hundreds of millions of gray panthers (or pandas).

It isn’t just totalitarian regimes that ignore unintended consequences. Politicians in western democratic nations see no reason to restrain their proposals by considering long-term consequences. They just want to tout the goodies they’re giving their favored constituencies, and hope most of us don’t realize the potential unintended consequences of their schemes. This pattern is unlikely to change until voters embrace a “use your brain” movement that demands politicians consider the implications of their policies.

CFTC Poised to Reign in Oil Speculators

Thursday, January 14th, 2010

According to this Businessweek article, the Commodity Futures Trading Commission (CFTC), the regulatory body for US futures exchanges, is discussing whether to limit the number of contracts traded by speculative investors on the New York Mercantile Exchange.  The stated purpose is to reduce the impact speculators have on energy prices.

As I’ve discussed before, speculators cannot have a sustained impact on prices without leaving a paper trail.  Such a trail was absent at the price peak in 2008, and it’s not there now.

In a rare display of bureaucratic straight talk, CFTC commissioner Bart Chilton admits his ignorance:  “Even if I’m not sure that these new speculators are contorting markets, if there’s the hypothetical possibility, we’re obligated to do something about it,” Chilton said. “To do nothing would be irresponsible.”

Just brilliant.  He’s essentially saying “I don’t know what I’m doing, but I’m a regulator and I’m paid to regulate.”  Using the “government knows best” mindset, Chilton doesn’t consider that perhaps doing SOMETHING would be irresponsible.

When government intervenes in markets, there are always unintended consequences.  Regulatory and legislative fingerprints are all over the mortgage meltdown.  I point you to Thomas Sowell’s book “The Housing Boom and Bust” for an excellent and easy-to-understand recap of that mess.

Perhaps before acting out of ignorance Mr. Chilton should consult someone with a bit of expertise and try to determine whether his cure might prove to be worse than the disease.