All Commentary
Thursday, August 1, 1996

Why Laws Backfire

Laws Have Numerous Unintended Consequences

Ms. Manley is president of Commercial Tenant Real Estate Representation Ltd., Manhattan. Her articles have appeared in Harvard Business Review, Inc., and the Wall Street Journal.

For thousands of years, laws everywhere have backfired.

In ancient Babylon, Sumeria, Egypt, China, Greece, and Rome, for instance, price controls promoted not fairness but famine. During the twentieth century, central banks were supposed to help safeguard economies, but they brought on the worst inflations and depressions. Alcohol and drug prohibition, intended to enforce moral behavior, contributed to escalating violence.

Why do laws tend to have consequences that are the opposite of what was intended?

First, many laws discourage socially useful behavior.

Although everyone needs housing—and politicians bemoan the lack of affordable housing—land use restrictions discourage entrepreneurs from trying to build it.

It is estimated that land use restrictions add $40,000 to the price of a new house in California. This pushes the median price of a home above $200,000, drives people out of the market, and discourages builders.

Or consider this. Before the 1942 imposition of rent control, New York City had a housing market one planner called the “envy of the world.” Responding to market demand, developers produced more than 90,000 new units a year. Today, after five decades of rent control, there is little construction of new housing. The city owns 6,645 buildings and an estimated 76,000 dwellings have been abandoned because the owners found this more profitable than paying costs imposed by the city.

As Barron’s reported, next to bombing, land use restrictions are the most effective way to destroy cities.

Second, laws often backfire by leading people to adopt all kinds of destructive behavior.

In recent years, New York City’s policy of providing shelter for all who call themselves “homeless” has induced people to abandon the effort to support themselves, to give up their association with relatives, and to seek handouts. Reportedly, some 70 percent of people applying for shelter come directly from the homes of friends or relatives. City-provided shelter isn’t very good, of course, but it’s free, so there is a seemingly endless demand for it.

Welfare laws are supposed to help the poor, yet as Charles Murray and others have documented, welfare establishes powerful, perverse incentives for families to break up, since mothers lose government money if a father is present. The poverty rate among families with a single head of household is 600 percent higher than families with two heads of household. Infant mortality is much higher among single-head-of-household families, too.

Third, laws backfire by spreading problems to innocent people.

Consider compulsory school-attendance laws, for instance. They fill government schools with children who don’t want to be there. Some students are violent, attacking—and even killing—teachers and other students. Teachers must lock their classrooms to keep hoodlums at bay in the hallways. Thus, compulsory attendance laws, alleged to promote education, can make it almost impossible.

Private and parochial schools seldom experience violence even though they do not rely on metal detectors and security guards. As Rutgers University criminologist Jackson Toby remarked, “What makes a school safe is youngsters coming to school because they want to learn what teachers want to teach.”

Banking laws backfire, too. The savings and loan crisis developed because in the early 1980s Washington increased deposit insurance to $100,000 at no cost to individual savers. This encouraged them to put their money wherever it would earn the highest interest, regardless of how unsound a bank’s lending policies might be. The result, of course, was the debacle whose costs soared into the hundreds of billions of dollars. Such costs should have been borne by those who chose to take the risks. Instead they were imposed on innocent taxpayers who never put any money in an S&L.

One effort to deal with this government-induced crisis led to a second crisis. The 1989 Financial Institutions Reform and Recovery Act forced S&Ls to dump their junk bond portfolios. This law backfired because it triggered panic selling of junk bonds, and caused formerly profitable S&Ls to go bankrupt. The junk bond market has since come back, but innocent people who never put their money in an S&L are now stuck with higher burdens than ever.

Fourth, laws backfire by driving away talent and capital.

During the 1950s, the Euromarket got its start because many investors were worried about arbitrary IRS policies. They established bank accounts in London. In the 1960s, Washington enacted laws intended to prevent dollars from flowing out of the United States; but these laws backfired by increasing the demand for dollars already outside the country—and the Euromarket took off like a shot. Today the Euromarket handles some $500 billion of new debt annually.

Because tax laws are confiscatory in many countries, perhaps half the world’s money is believed to be deposited in or passes through offshore tax havens. More than 23,500 companies and trusts are registered in the Cayman Islands alone.

New York City’s government relentlessly multiplies the obstacles to enterprise, as if business people had no choice but to stay there. The result, of course, has been to drive away business and jobs. Since 1963, the number of major headquarters located in New York City plunged from 170 to 45—a 74 percent drop.

Similarly, the most oppressive regimes worldwide have experienced the greatest brain drain. There are now an estimated 40 million refugees from violent socialist regimes. This represents a dead loss to these regimes and a benefit for countries like Australia, Canada, and the United States. Refugees, like other immigrants, have a phenomenal record of creating jobs and contributing to economic growth.

Fifth, laws backfire by providing incentives for corruption.

Corruption didn’t start when a New York City Housing official allegedly spent $337,000 redecorating her office.

Since time immemorial, governments have claimed moral superiority. Yet they use laws to loot the productive wealth of working people and build palaces, pyramids, religious monuments, military forces, and other symbols of their power.

The Soviet Union supposedly established a Marxist-Leninist society of equals, but as the British novelist George Orwell put it long ago, some were more equal than others. Party members could get luxuries officially denied to ordinary people, like caviar, prime beef, access to Black Sea spas, and better education for their children.

Sixth, laws backfire by provoking hatred and violence.

In the United States, affirmative action laws are encouraging an ever-increasing number of officially recognized minorities to escalate their demands for preferential treatment. But displaced groups resent being victims of these laws. Anecdotal evidence suggests that racial hostility is increasing.

The situation is much worse in other countries where government has even more power over people’s lives. Laws determine specifically what is taught in schools, which religion is tolerated, which language is favored, how people can use property, where people can travel, who gets the jobs, and much more.

Consequently, control of government becomes a life-and-death issue, resulting in unending violence. In Northern Ireland, terrorists kill innocent women and children. In India, Hindus slaughter Moslems and Sikhs (each of these, in turn, slaughter Hindus). The former Soviet Union is aboil as Ukrainians, Poles, Rumanians, Georgians, Ossetians, Armenians, Uzbeks, and Russians fight to assert political control over others or escape political control. And of course, the former Yugoslavia has become a graveyard of murdered Serbs, Croats, Slovenes, Albanians, and others.

This violence has no counterpart in the marketplace. People who might not like each other still do business together because it’s in their self-interest. Thus, despite mutual resentments, Jews have done business with Christians, Chinese with Malays, Poles with Germans, Hindus with Moslems, and so on.

Seventh, the problems brought about by laws often lead to popular pressure for more laws—and worse problems.

In recent years, the United States has increased its border restrictions. As people seeking better lives for their families continue to evade the tougher barriers, bureaucrats and labor unions clamor for more brutal enforcement.

  • Drug prohibition agents have broken into private homes and destroyed private property without compensation.
  • U.S. Department of Agriculture officials have destroyed the property of California citrus growers.
  • Despite a chronic housing shortage, New York City bureaucrats have ordered the destruction of safe and clean apartments that run afoul of zoning regulations.

In “The Torrent of Laws” (The Freeman, January 1979), Henry Hazlitt made the point cogently: “The mere multiplication and proliferation of laws is itself a major evil. Every unnecessary law is itself bound to be pernicious. And almost all laws that interfere with the functioning of the free market tend to delay or prevent necessary readjustments in the balance of production and consumption and to have other consequences opposite to those that the framers intended.”

So, enough talk about making laws better. It’s past time that we focus single-mindedly on repealing laws.