Dodd-Frank Kills the Congo [ed.: Application of Law of Unintended Consequences]

Great Debates
1

There have been a lot of threads lately trying to figure out what conservatives and libertarians believe in. Let me describe one of the main beliefs of economic conservatives, and give you a case study in its application:

The Law of Unintended Consequences

The law of unintended consequences states that because economies are complex systems, attempts to control them from the top down will always have consequences that were not intended, and often contrary to the stated goal of the law. A classic example is rent control, which is intended to keep housing affordable but almost always results in housing shortages and ultimately an increase in the cost of housing or a decline in the quality of housing.

The latest gross example of this law comes from an obscure rule written into the Dodd-Frank finance bill: a requirement that businesses buying goods from the Congo take steps to ensure that they are not profiting the warlords there. This was undoubtedly added through the influence of some well-meaning NGO or activist group trying to save the Congo from the horrors the warlords have been wreaking on it. We can all agree that the sentiment is good.

But in practice, it’s all gone sideways. Read How Congress Devastated the Congo in the NY Times, and weep.

Essentially, this is what happened: Congress didn’t consider that companies in America really have no way of knowing the exact origin of the minerals they buy from the Congo. Some have warlord fingerprints, and some don’t. But companies don’t have spy agencies and embassies and informants, and can’t easily source this stuff. So rather than expose themselves to liability from Dodd-Frank, American companies have pulled out of the Congo completely.

This has devastated the legitimate miners in the country. They no longer have a market. Perversely (you might say, “unintendedly”), it has also helped the Warlords control the mining trade, as they have the means to move the minerals out of the country into Rwanda to sell them ‘legitimately’. In addition, this raises the price for such minerals for American companies, making them less competitive, and it is allowing the Chinese and other countries not bound by Dodd-Frank to buy up the minerals in the Congo at a discount, further undercutting American tech companies.

So with the stroke of a pen, an obscure provision in a grossly bloated law has done the following:

  • Damaged the U.S.'s reputation in the Congo
  • Damaged U.S. tech companies
  • Devastated the economy of the Congo
  • Helped the warlords
  • Given China and other countries a competitive advantage over the U.S.

This is the kind of nonsense that has added so much uncertainty to the U.S. economy and helped kill the recovery. Unintended consequences like this are not rare - they only become visible when they’re so bloody destructive that you can’t help but notice. What you don’t see is the thousands of smaller consequences that play havoc with business planning, distort industries, and destroy wealth. When a group of 535 people passes a 2,000 page bill like the health care plan that will grossly affect a 13 trillion dollar economy, it’s the height of arrogance to think that what they’ve done will not result in consequences they couldn’t foresee.

You want to help the economy recover? Advocate for the repeal of the new Health Care Act. It’s got more unintended consequences than you can imagine. It will cause entire industries to restructure. Companies that are healthy today will go out of business because of an accident of how they are structured. Companies that invested in automation will have an advantage over companies that hire more people and do the work manually. Employment will be damaged. And there will be other effects none of us can imagine until the law goes into effect.

Businessmen understand unintended consequences of legislation. They know there are time-bombs ticking in the 2,000 pages of the health care bill and the 2,000 pages of the finance bill, plus the thousands of pages of other new regulations Congress has been issuing willy-nilly. They’re not going to invest their money in a business environment built on quicksand.

This is not a new revelation. At a time when everyone is wringing their hands over the problem of job creation, the small businessmen of America (the ones who create most of the jobs) have been screaming about this for years. But no one will listen, because it’s not what they want to hear. They’d rather form blue-ribbon commissions made up of Fortune 500 CEOs who are already in bed with the government and who twist government regulation to their benefit. They can count on those cronies to come back with lots of ideas that scratch the government’s back while getting their own scratched in return. Win-Win for government and big business, while the burden of unintended consequences is carried by everyone else.

2

Unintended consequences cut both ways. Insofar as the so-called law of unintended consequences informs policy decisions, it merely recommends the status quo. While strictly speaking this may be conservatism, it doesn’t actually recommend what people ordinarily mean by politically conservative if the status quo is politically liberal.

The law of unintended consequences recommends against modifying Social Security, etc.

3

Or in other words: The law of unintended consequences is useless, as it makes no predictions nor does it provide one with useful information. It is therefore stupid to pay any attention to it.

We hedge our bets, we try to make the most informed decisions, we try to live up to a set of values.

If things go tits up, we adjust.

4

Great post, Sam. The last paragraph is the best in my opinion.

Your post was about Unintended Consequences, but this last paragraph is important.

A lot of posters on this board confuse large, established businesses as champions of the “free market”. Or confuse Republicrats, or Demopublicans (I forgot which) as pro-business, or pro-free market. They aren’t. They are pro-whomever is paying them lobbying dollars at the moment to twist regulation to their advantage.

Trying to draw distinctions between the Republicans or Democrats on business or anti-business principles is like arguing whether Coke or Pepsi is worse for your teeth. Or arguing whether you should put the deck chairs on the port, or starboard, side of the Titanic.

Big businesses are just like unions, or the farm lobby, or anybody else who seeks rents and goes to D.C. to twist regulation to their advantage. They aren’t pro-free market. They are pro- “Anything that will protect them from competition”.

Large, established incumbent companies will always lobby the government to benefit themselves and create barriers to entry for small competitors. And as you rightly post above, those small competitors and small businesses is where the majority of job creation takes place in this company.

You want jobs? Take the Federal Register and burn it, and then start over without big business lobbying D.C. You will create jobs like crazy. If you throw in public-sector unions, the environmental movement and the farm lobby into the mix, you’ll have more jobs than you can imagine.

Armies of lobbyists from the healthcare industry and the banking industry descended on Washington to play a hand in the crafting of Obamacare and Dodd-Frank. There were numerous articles and blog posts of all types trumpeting the support that some of them had for the regulations. Supposedly that was evidence that the “free market” and “business” supported the regulations.

And why not? A lot of those regulations impose significant costs on their competitors, or tilt the playing field to their advantage. Of course they like the laws. They will do just fine, while hobbling any potential competition.

Great post.

5

You can adjust in the free market, when a customer decides not to buy something.

Try “adjusting” something in the Federal Register, once it becomes law.

Witness: The ethanol subsidies.

6

Yeah, and I’m sure the American oil embargo against Japan during WWII was devastating to Japanese merchant shipping.

I have a simple solution. If Congolese mining interests want to do business with the United States, then they can start by ensuring that their profits don’t go towards supporting murderous and rapacious thugs. And if they don’t like that, tough shit. The United States is under no obligation to solve the social ills of Congo.

Not to mention that op-ed is extremely short on supporting evidence. It says the law is benefiting some of the people it was meant to single out, yet names just one guy, a warlord who, not surprisingly, is profiting from Congo’s mining industry. It would seem that those who made the connection between Congo’s mines and the warlords weren’t pulling that connection out of their asses.

7

So, my question becomes, what does the law of unintended consequences say should be our response to conflict minerals?

8

First off, Sam, its an opinion piece. This fellow, David Aronson, may know what he’s talking about, or he may not. I have no idea, having never heard of him before. He is an expert in these matters? Can you offer us a reason to rely on his opinion?

Second, while you are at great pains to explicate Murphy’s Law, you seem to lean in one particular direction, you appear to think that it applies more to leftish concerns than rightish. But Murphy is strictly and unambiguously non-partisan. It is not merely what happens when fuzzy thinking do-gooders attempt to do good, it applies in all forms of human endeavor.

And then you get creative. You are not content with devestation in the Congo, you want to write this all in large type, and slip in your agenda unnoticed. “DEVESTATION IN THE CONGO, and the liberals are to blame! If we listen to the liberals, the USA will be devestated, just like they did in the Congo!” I don’t know if the problem is you are too sneaky, or not sneaky enough.

To witless: the nimble leap from the Congo to American health care…

Are we still on the opinion piece? This Aronson fellow is an expert on UHC as well. Oh, wait, he doesn’t even mention it? So this is your extrapolation, flinging yourself wildly into speculation? Based on what?

And the expert opinion being cited here is the justly famed Sam Stone? You are connecting one poorly established "fact’ with another that hasn’t been established at all.

Its not that I’m suspicious, we radical hippies are widely known for our Pollyannish viewpoints. Its just that I take this path through the forest every day, as I’m off to gather nuts and berries, and today I see, right in the middle of the path, an accumulation of leaves spread out in a roughly circular pattern. Rather like someone covering over a hole. Smells like back bacon and bad beer.

“It’s a trap!”

  • Admiral Akbar
9

This is pretty silly. There are unintended and potentially harmful consequences to almost any policy you could imagine including deregulation and tax cuts.

The financial collapse of 2008 is an unintended consequence of financial deregulation pursued in earlier decades. I am sure no one intended that deregulation and financial “innovations” like CDO’s and CDS’s would lead to a housing bubble, a massive increase in leverage, the collapse of Lehman and AIG, the near-collapse of the entire financial system, the worst recession since the Great Depression, aftershocks in Europe which threaten their currency and financial system and who knows what else.

For that matter there are often unintended consequences to government policies which are enormously beneficial. I am sure the government funded scientists at ARPA, NPL and CERN working on packet-switching and the web didn’t think their research would create one of the greatest leaps in the history of technology but it did.

This does appear to be a bad policy which needs to be corrected but there is no “law of unintended consequences”, that is just a piece of libertarian rhetoric.

10

There are two issues here - for old legislation that the economy has already adjusted to, you’re right to a degree - modifying the legislation or removing it will also have unintended consequences, because you can’t know how the economy will restructure itself. So the argument against new regulation is more powerful than the argument for modifying or removing old regulation, when considering only unintended consequences.

However, it’s not true that the lack of regulation itself leads to unintended consequences. This is because the nature of market forces is completely different than the nature of central command. Markets adapt, governments do not. Or not easily or quickly, anyway. Markets also have more information than governments do, and transmit it quickly and efficiently.

Left to their own devices, well-functioning markets are self-regulating, operating through a process of negative feedback and testing many paths. Markets try many things, and the results of those tries are communicated back through the price system and inefficient paths are abandoned.

Government, on the other hand, chooses a path and enforces it by edict. Alternative paths are not tried. Market information is destroyed. Alternatives not only are disallowed, but they are prevented from even being discovered.

Or to put it another way - an economy is like a web of trillions of random walks, the results of which are then fed back into the system and used to determine which walks were ‘bad’ and which ones were good. Over time and many iterations, it finds the efficient paths and the most productive uses of resources. The government, on the other hand, tries to employ smart people from on high to determine the most efficient path, then forces everyone onto it even though it can’t possibly determine all the consequences taking that path will cause. That’s why unintended consequences are caused by governments.

Now, getting back to removing or modifying old legislation: You’re right that this can cause unintended consequnces as the economy re-adjusts. But that might be a price worth paying in order to restore market forces to an area of the economy that has been choked by regulation. You can see these examples in the deregulation of trucking, the airlines, and the railroads. No one could predict the exact outcome of airline deregulation, and the process wound up killing Pan-Am after it lost its monopoly on international flights and proved itself unable to adapt. But in the end, allowing market forces rather than government edict to control aviation resulted in improved safety and lower costs. The same thing happened in trucking and railroads - after a period of dislocation, those industries bounced back and became ultimately much healthier and much more efficient.

That pattern repeats all around the world when formerly regulated industries are de-regulated. Look what happened to farming in New Zealand after the government stopped manipulating it to make it ‘better’, for example.

If you’re worried about the dislocations caused when bad legislation is removed or altered, that should make you even more adamant that new regulations only be passed as measures of last resort.

And to IdahoMaulMan’s point: The main opponents of airline deregulation were the major airlines themselves - which had featherbedded themselves a lovely profitable existence, forced by government, at the expense of the traveling public.

11

Dodd-Frank was legislation to (re)regulate Wall Street and provide protection to consumers, yet I’m supposed to believe it was actually meant to benefit big business and for that I should be against it? I don’t understand that at all.

Is today Opposite Day or something?

12

How would market forces have corrected conflict mining in the Congo? Why had they failed to do so for so long?

13

The market may not reflect your values. Why is conflict mining in the Congo more worthy of ‘correction’ than buying oil from despots in the middle east, or doing business with communist countries?

The answer is that the market will correct for that if enough people that comprise the market feel that it’s worth paying for. That’s the democracy of the marketplace. There is a market for ‘fair trade’ goods that reflects the values of the consumers of those goods.

This is the ultimate debate - what do you do when the forces of the marketplace lead to outcomes to which you are morally opposed, or which result in economic hardship to you? This is why there is always pressure on governments to regulate markets. This does not mean the market has failed - it just means you don’t like the choices the market has made, so you seek a mechanism to thwart it.

There are true market failures - where prices break down, externality costs are passed on to unwitting people, information necessary to efficient transactions is not available, or external forces or structures limit competition. For those true failures, we need government regulation. But don’t confuse ‘market failure’ with ‘the marketplace has chosen a path I don’t like.’

14

Furthermore, let’s assume that sometimes there should be regulation to protect the people of Congo or for some other serious goal. I would argue that this is a case where less is more - if you’re going to have regulation, you need to focus like a laser beam on the regulations that are the most important, to make sure that they are done right. But when the government starts spitting out multi-thousand page omnibus regulatory bills, you can bet that due diligence was not taken.

That one throwaway reg in Dodd-Frank probably warranted its own hearings and debate, input from all the industries that would be affected by it, and enough visibility and time for people with other information to have their voices heard. That might at least minimize some of these unintended consequences. Instead, it was probably added at the last minute under pressure from a special interest that had the ear of a legislator, added as a compromise in some backroom deal, and signed into law by people who hadn’t even read the bloody bill.

A Congress that tries to do too much is a congress that won’t do much of anything particularly well.

15

Today is **Sam Stone **Day. Today, **Sam Stone **writes the laws. Well, just one, let him get his feet wet, get a little experience before we make him Maximum Leader. So, for warm ups: write us the law that will directly affect the Congo problem, without any of these unintended consequences you get when the wrong people write laws.

Need a minute?

16

That sounds exactly like the Congo, where outright warfare has caused the market to break down.

It’s always cheaper to buy goods from slaves, but that doesn’t mean I want my government (or the companies in my country) allowing it. If the Chinese are OK with it, then that’s on their heads.

As to your second post, I don’t disagree that well-targeted regulations are preferred. I’m not even saying the regulations re: Congo in Dodd-Frank were the correct ones. And sure, more debate and discussion is almost always a good thing. But unintended consequences is not an argument against regulation - it’s an argument against bad regulation.

I found a few other articles about this issue, and even the Congolese that were interviewed approved of the Dodd-Frank regulations intentions - they just want the regulations modified to remove the Congo-imposed embargo (which seemed to have been left out of your OP).

As a tangential question - are you then opposed to all trade embargoes whatsoever? Surely there are some “moral outcomes”, as you put it, that justify restrictions on free trade.

17

If you believe that Dodd-Frank was legistation to regulate Wall Street and protect consumers, I have a bridge in Brooklyn that I’d like to sell you.

Oh sure…that’s how it was sold to the public. But like Obamacare, it’s a method for aggregating power and control in Washington, who will then dispense aribitrary favors and create a system of crony capitalism.

Obamacare was supposed to save us from…something or other. And help the poor and defenseless. But over 1,000 waivers have already been granted by the government, to everyone from unions to McDonalds. So apparently it wasn’t that great for those guys, after all.

That’s crony capitalism. The government has issued an edict, but now grants waivers to those who petition it for redress, who would like the playing field distorted in their favor. And it wouldn’t hurt to bring some campaign cash along with you. Not unlike the Pope in the Middle Ages.

Dodd-Frank is exactly the same. There are still thousands of unwritten rules that are still to be determined by various bureaucracies. Watch the big banks - JP Morgan, Goldman Sachs, B of A, etc. descend on D.C. with “helpful suggestions”. The little guys can’t afford to that, and will be snuffed out.

18

So…no regulation is the answer, unless it’s perfect?

19

Since you are apparently well-informed on the issue of Obamacare, could you please describe what the waivers are for and how long they will last? Thanks.

20

Do nothing.

Don’t buy stuff from the Congo.

See? That only took 10 seconds.