There’s a proverb that goes something like this–
For want of a nail, the shoe was lost.
For want of a shoe, the steed was lost.
For want of a steed, the rider was lost.
For want of a rider, the message was lost.
For want of the message, the battle was lost.
For want of a battle, the kingdom was lost.
And all for the want of a horseshoe nail.
Benjamin Franklin included a variation of this saying in Poor Richard’s Almanack. George
Herbert, however, had it as part of his work in 1640. This piece of wisdom has been with us for
ages.
At first glance, it reads as a lesson on the importance of attention to detail. Perhaps that is the
main lesson. My thinking on this has led me to the idea of 2nd order effects or unintended
consequences.
The Sweet Taste of Poor Planning
My first year at summer camp, we had to perform the swimming test shortly after arriving and unpacking. We had spent most of the day in the van driving up to camp, and I was hungry. Dinner was a couple of hours away, so I decided to hit the canteen and eat a giant candy bar.
Immediately I felt better. I was no longer hungry, and I was ready to take on the day. I changed into my swimming trunks and headed down to the lake.
As I arrived, I realized that every single camper had to do the swim test. Thus, there was going to be a long wait in the heat. My stomach started to gurgle as the sugar bomb I had ingested began to disagree with me.
I’ll spare you the details, but I didn’t do well on my swim test. The heat, the sugar crash, and the
frigid temperatures of the mountain lake won the day. I’d spend the whole week in the shallows with the other kids who didn’t pass the test that day.
The outcome was okay. I had a great week at camp, despite missing out on some kayaking and a pretty awesome rope swing in the middle of the lake. The shallow end had a basketball hoop, so my friends and I made it work.
The crazy part is that I was a pretty strong swimmer. Before that day, I didn’t even blink about facing a swim test. My mistake was thinking I was prepared and knew what would happen. I also didn’t expect my afternoon snack to upset my stomach. Unintended consequences won that day.
When Helping May Actually Hurt
Vice President Harris is currently proposing some economic policies that sound great, but in my opinion, they are teeming with 2nd order economic effects. Harris got herself into some hot water early in her campaign by stating she was going to ban price gouging as a way to lower grocery prices. Many of her critics heard “price controls,” which has historically been the siren song of socialism.
With the price-gouging talking point DOA, Harris has pivoted to discussing an “opportunity”
economy with agenda items like housing subsidies. She proposes a $25,000 downpayment
assistance subsidy, along with a $10,000 first time homebuyer tax credit. The details of each
program are still scarce, but let’s consider how they may play out if implemented.
The $25,000 downpayment assistance is targeted to help 1st generation homebuyers. The
campaign website doesn’t give details of who would qualify, but there was an article on ABC
stating that it would have some limits. This policy seems harmless, but let’s consider some 2nd
order effects:
● If a family is unable to save funds for a downpayment, how would they be able to deal
with all of the hidden costs of homeownership?
● What type of regulatory pressure would this create for lenders to accept and approve
these families for credit?
● What type of interest rate would this family get if they’ve never been able to purchase
property, and the government has to help them with a downpayment?
● What kind of negotiating power would these families have with sellers?
Could it be possible that some families would be ushered into a financial situation that is
untenable? I definitely think so.
The scenario that I feel is even worse is the $10,000 tax credit for 1st time homebuyers. Now,
before I dive into this, I highly suspect that the juicy details of this policy will only be revealed if
she’s elected. However, my expectation is that, like most tax credits, they will be phased out if
you make a certain amount of money.
For those who might qualify, the tax credit presents itself as “found money.” It increases their
purchasing power in the year of buying the home, but it won’t be present after the purchase.
Harris believes that the combination of the tax credit and the $25k subsidy could bring up to 1
million new buyers into the market.
This sounds like a good thing, right The problem with our housing market isn’t demand. It’s supply. We don’t have enough houses available for the current number of people wanting to buy a home. This is one reason why housing prices have continued to go up–especially in areas that are highly desirable.
Imagine introducing 1 million new buyers into this market. What would that do to housing prices?
Of course, bright minds have already pointed out this issue. The answer? Harris has proposed
subsidies for homebuilders. I’m not making this up.
In the spirit of fairness, Trump also has some policy proposals that make supporters of free
markets uncomfortable. For instance, he has repeatedly discussed the use of tariffs as leverage in trade negotiations with other countries. Many argue that this protectionism will isolate the US from longstanding trade relationships and end up costing Americans more money in the form of higher prices for imported goods.
In the debate between Harris and Trump, Vice President Harris attempted to label these tariffs
as a “Trump Tax.” The interesting thing, however, is that the Biden administration has
maintained the tariffs that Trump imposed during his previous term. Biden is even considering
expanding them.
What could happen if Trump wins? Would he make good on his promises to use tariffs as a
negotiating tool? Would these new taxes on imported goods be inflationary? Time will tell.
Ronald Reagan once said, “The nine most terrifying words in the English language are ‘I’m from the government and I’m here to help.” This is because the 2nd order effects are often worse than the initial problem the government tries to solve.
Our Debt Issues: A Larger Application
We are in the final stages of a presidential election cycle. This means that for the last six
months, Americans have been bombarded with messages about the potential direction of our
country. Both sides agree that the worst possible outcome would be for the other side to win.
One thing that has been conspicuously absent this cycle is the conversation on our national
debt. A glance at www.usdebtclock.org is a sobering reminder that things are not ok:
- National Debt > $35 Trillion
- Budget Deficit > $2 Trillion
- Interest on Debt > $ Trillion
Why isn’t anyone talking about this? Perhaps I’ve missed the discussion, but I highly doubt it.
Usually, when the deficit spending topic arises, each side blames the other. Don’t be fooled.
Spending is the one area where there is bipartisan agreement. Republicans and Democrats both love to spend. They simply want to spend on very different things.
If our debt and deficit spending are allowed to go unchecked, what might be some of the 2nd order effects?
Could taxes be forced to go up?
unsustainable. Tax cuts sound amazing during an election cycle, but what if taxes are
historically too low? What if they MUST increase?
What happens if our debt situation forces interest rates to rise?
Interest rates often indicate risk to the lender. What if the rest of the world sees the US
government as a high risk? Could we face a situation in the future where other countries will
These are not pretty scenarios to consider, but what could be the consequences of NOT considering them?
“The prudent see danger and take refuge, but the simple keep going and suffer for it.”
Proverbs 27:12.