Economist sees unintended consequences

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Next time a proposed regulation sounds good – give it a litmus test before supporting it.

“If you want to support legislation, make a list of all the ways people will think to bypass it – legally and illegally – and then, if the benefits outweigh the consequences, then go ahead,” said Dr. Elliot Eisenberg, senior economist for the National Association of Home Builders.

Eisenberg was the keynote speaker at the Housing & Building Association’s reception at Stargazer’s Theatre and Event Center April 28.

As things get more complicated and interconnected, the ability of regulatory “solutions” being able to fix the problem is reduced, Eisenberg said.

Microeconomics is the study of behavioral changes – including the relationship between changes in price and changes in behavior.

Regulatory changes create price changes.

“Forty years ago, Los Angeles, Seattle and Washington D.C. were not expensive places to live,” he said. But now they are because “these cities have been aggressive in imposing regulatory and legislative ‘solutions.’ And every time a new law is passed, it increases house prices.”

Artificial supply restrictions, including zoning, taxes or government regulation are to blame for those cities with higher home prices, Eisenberg said.

“The proposed solution to the latest housing problem is … um … more government regulation,” Eisenberg said.

Why?

Well, politicians know the problem is serious, and politically, a solution is needed; therefore, we all follow the law (goes the reasoning) and regulations “must” work, and regulations of this type are “free and easy.”

And, voila – regulations are mandated, politicians are relieved and look heroic, and – the unintended consequences begin.

“We economists actually think about the unintended consequences – but we are regrettably not consulted,” he said, smiling. “Seemingly good ideas can have bad consequences.”

To read more about Eisenberg and unintended consequences, check out the print edition of CSBJ’s Banking & Finance column from May 1.