Unintended Consequences

This story in the Nation was a pretty classic example of intended consequences at work:  (via the Anti-Planner)

Thanks to an obscure tax provision, the United States government stands to pay out as much as $8 billion this year to the ten largest paper companies. And get this: even though the money comes from a transportation bill whose manifest intent was to reduce dependence on fossil fuel, paper mills are adding diesel fuel to a process that requires none in order to qualify for the tax credit. In other words, we are paying the industry--handsomely--to use more fossil fuel. "Which is," as a Goldman Sachs report archly noted, the "opposite of what lawmakers likely had in mind when the tax credit was established."

As I understand it, the paper companies had a process that has for decades been 100% biofuel powered, but if they now mix in some diesel fuel, they can get a tax credit under a provision that gives such credits for using a 50/50 diesel/biofuel mix.   Obviously, the indended consequence were to get 100% diesel fuel users to mix in some biofuel, but the law was not written in a way to preclude the opposite.

I found nothing particularly new or unique about this example, but I did find the author's reaction depressing.  Apparently, for Christopher Hayes, this is a failure of private enterprise, not of government:

I've come to expect that even nobly conceived laws will be manipulated and distorted for private ends. But once in a while I hear a story that gives me the queasy feeling that I'm nowhere near cynical enough...

the episode is a useful reminder of the persistently ingenious ways the private sector can exploit even well-intentioned legislation

First, the notion that the whole bio-diesel law was "nobly conceived" is a total hoot.  Basically this law was originally a politically-motivated subsidy of a powerful political lobby (farmers and agribusiness) that most science has demonstrated to have zero impact on its nominal target (CO2 production).  So all that is happening here is that one narrow business interest has hijacked the subsidy intended for a different narrow business interest.   Seriously, I probably should know who this author is, but can anyone who has covered Washington for, say, a week or more really attach  "noble" and "well-intentioned" as modifiers to "legislation" with a straight face?

Second, as a back-check on all the "well-intentioned" stuff, note that there has been no movement to change the original law now that this exploit is understood.  Why?  Because, Mr. Hayes says, the paper industry has a powerful political lobby.  I am having a hard time reconciling the picture of a group of folks in Congress failing to fix an expensive exploit in a law due to political pressure from 8-10 corporations with the view that these same guys passed the original law nobly and with the best of intentions.

Finally, there seems to be a general reaction, particularly on the left, that if Congress were just smarter then this would never happen.  But it HAS to happen.  It is a mathematic certainty.  No one, no matter how smart, can make changes to a single variable in a nearly infinitely large, chaotic, and multi-variate system like the economy and understand fully what the consequences will be.  It's absurd hubris to think otherwise.


  1. Bob Fargler:

    Well it's no surprise considering his political leanings which are neither Republican or Democrat. He is a fellow at the New America Institute and his wife is in the White House counsuls office. He is a progressive, a mindset that exists in both parties and is presently the invisible majority in our legislature. There are some quite noble parts to the progressive movement, but cutting down business for the sake of growing government is not one of them. I will pull out my broad brush as well and say that most progressives do not handle criticism very well. A common retort is that anyone that disagrees with the progressive position obviously doesn't care about people.

  2. Allen:

    I'm sad to see this happening. The only consolidation is I have an excellent example of government regulations at work for my friends who turn to regulations and laws as a tool to steer things to solve problems. The point I make to them is that when it comes to writing laws, the biggest influence is going to be those with the resources to lobby for their changes. We have bills put into place that are hundreds, thousands or even tens of thousands of pages long. If you have the resources, you can influence to get amendments in them that are unlikely to spotted. Or you can have the resources to actually have people comb through them to find things you'd like to have taken out. And once those rules are in place, they're much harder to get rid of then they were to be implemented. This is an excellent example of it.

  3. morganovich:

    there is a long history of things like this. another big one is a coal process called “spray and pray”. originally conceived to promote synfuels, it just turned out to be a huge grab bag of tax breaks.

    essentially, through IRS magic, spray anything at all on coal and it is now “chemically treated” and qualifies as synfuel. notably pine tar, diesel fuel, acid, and resins were used. none do anything useful. you get a huge tax credit. there were loads of companies in the 90’s that were losing money mining coal but a $400mm loss on coal would yield an $800mm+ tax credit. progress energy in NC was a notable participant in this.

    the problem is that a tax credit is useless to a company losing money. so what do you do? sell it to a profitable company. these credits are transferable. many were sold to hotel chains etc. buying $800mm in tax credits for $600mm is a nice little dodge.

    once more, inefficient activity is promoted and taxes are dodge by unrelated industries while the bill comes to unsuspecting taxpayers who think they are pushing alternative energy.

    in light of things like this, how anyone can believe that something as large and complex as carbon trading will be anything but a fiasco is beyond me.

  4. Retro:

    This whole discussion is dancing around principle:

    The use of force in human affairs is WRONG.
    The mere suggestion of force should be viewed with HORROR.
    Humans should be rational and force is reasons ENEMY.

    Your discussion of the unintended consequences demonstrates that force is IMPRACTICAL. That's all very interesting and I wish you joy in contemplating your impressive education, but if you think you are going to change the minds of your fellow academics...

    They disagree with you in matters of moral principles, and no amount of chaotic systems theory is going to help.

    All the best,

  5. markm:

    "In fact, the money to be gained from exploiting the tax credit so dwarfs the money to be made in making paper--IP lost $452 million in the fourth quarter of 2008 alone--that the ultimate result of the credit will likely be to push paper prices down as mills churn at full capacity in order to grab as much money from the IRS as it can."

    So actually it's a subsidy for bureaucracy!