IPFS Brock Lorber

More About: Legislative Mischief

HR1207 and the Law of Unintended Consequences

Everyone is aware of the Law of Unintended Consequences. Most members of Congress understand that government actions can have unintended consequences, yet few quit voting for government "solutions" – always hoping there won't be any particular unintended consequences this time. They keep hoping there will be less harmful complications from the "solution" that they currently support. Economics teaches that for every government action to solve an economic problem, others are created.  - Ron Paul, September 9, 2006

After eleven terms in congress, Ron Paul finally has a bill before the House of Representatives that is popular with other congressmen as well as their constituencies.  As of this writing, HR1207, a bill to audit the Federal Reserve Board of Governors has 245 co-sponsors and a possibility of passing through the House.

But, of all congressmen, Ron Paul knows that each government "solution" comes saddled with unintended government problems.  HR1207 is one of those government actions that has unintended consequences even if never enacted into law, which it certainly never will be.  Dire unintended consequences have already hinted at themselves, and may well be irreversible now regardless of the fate of HR1207.

Unintended Consequences
The law of unintended consequences, often cited but rarely defined, is that actions of people—and especially of government—always have effects that are unanticipated or unintended. Economists and other social scientists have heeded its power for centuries; for just as long, politicians and popular opinion have largely ignored it. - Rob Norton, Concise Encyclopedia of Economics

The Law of Unintended Consequences recognizes that the unanticipated or unintended effects may create problems where before there were none, or that a "solution" may exacerbate the situation the action was intended to alleviate.

For example, in areas of hurricane evacuation and cleanup, price controls are often enacted so people can access the gasoline and plywood they need without "price gouging".  The result, every time, is shortages of gasoline and plywood, with no incentive for suppliers to rush in and replace stocks.

It is important to note that the unintended consequences are not caused by supporters of the government action; the consequences they create are intended.  The unintended consequences come from those who consciously, or even unwittingly, react to the new incentive matrix in unexpected ways.

Sarbanes-Oxley isn't such an overwhelming failure of legislation due to the companies that support and welcome it.  It's failure comes from companies who can't or don't afford the costs of compliance and take their business to stock exchanges in London and Asia.

The War on Poverty increased poverty because otherwise gainfully-employed persons found a benefit in quitting their employment and going on the dole.  Rent control left the Bronx literally scorched because building owners couldn't or didn't afford the upkeep on their buildings.  Prohibition fails abysmally at, well, prohibition because it puts massive amounts of money in the hands of people willing to defy it,  as well as prohibitionists and law enforcers.

Because they come from the opponents, the unintended consequences of legislation aren't simply a matter that can be overcome by writing the legislation differently.  You can't "play" the unintended consequences to your advantage as the author/proponent of the legislation.  An attempt to do so merely moves the incentive matrix around to create other unintended consequences.

The stated intention of HR1207 is to audit the operations of the Fed's Board of Governors.  An audit has a very specific purpose: to strengthen the operations of the audited agency by ensuring accuracy of information and compliance.

Anyone who has any management experience of an accounting office knows that an audit, and the sunshine it brings in, is indeed a powerful disinfectant.  While an audit may uncover malfeasance, more often it uncovers lax or inefficient operations and technical noncompliance.  In addressing the concerns highlighted in the audit report, the operation becomes stronger and more efficient.

But, Ron Paul knows that the Federal Reserve is a bad institution.  Why on earth would he, then, introduce a bill to make a bad institution stronger and more efficient?

The answer of course, by his own admission, is that he feels the concerns in the audit report will not be addressed by the Fed, thus not making it stronger and more efficient, but rather shaking public confidence in it.  The true intention of HR1207, then, at least for Ron Paul, is to diminish the power of the Federal Reserve by means of an audit process.

He's attempting to "play" the unintended consequences.

Newfound Support
Ron Paul has introduced this legislation into the House on previous occasions.  He has never marshaled more than a few co-sponsors.  By and large congress has never known what goes on with the Federal Reserve, nor have they wanted to know because there was no money in it.

This time, HR1207 gained initial support from congressmen who viewed it as low-threat legislation that would curry them some populist favor.  With the current economic problems, financial news programs were at least willing to talk about a Fed audit and Republican congressmen witnessed populist support at the tea party rallies, which translated into more House support (a bandwagon to get in front of).  As Ron Paul says, "who wants to go home and tell the voters they voted against auditing the Fed?"
Thanks to Daily Paul user 95687-for-rp for this graph
But, a big spike in both Democrat and Republican co-sponsors came in response to the Fed's announcement that they were hiring a lobbyist.

Surely an organization as big as the Fed, whose Chairman testifies regularly before both the House and Senate, already has a small army of legislative liaisons.  A lobbyist is something much different; lobbyists come armed with checkbooks.

When an organization that can conjure trillions of dollars out of thin air suddenly sends an emissary to capitol hill with their checkbook, it is wholly unsurprising that a bunch of politicians would suddenly discover their interest in the operations of the Federal Reserve.  And, what better way to say, "I would like a big check, please," than by announcing your – for now – support of an audit?

Is it too cynical to suggest that at least a sizable chunk of the HR1207 support comes not from a desire to audit the Fed, but rather a desire to receive lobbyist money for withdrawing support or, the same, voting for the bill under suspension?  And, if that supposition is not unthinkable, wouldn't the willingness of politicians to receive lobbyist money in return for voting as the Fed wishes represent an increase of the Fed's power over capitol hill? 

If so, that would be confirmation of the Law of Unintended Consequences and the related Law of Opposites as articulated by Ron Paul.

Newfound Opposition
As enabling as the Fed has been to congress since its inception, the last year has proven just how big an ally the central bank can be to the unitary executive.  The Fed's ability to reward the powerful and politically-connected has dwarfed the little power congress has been allowed to vote on with TARP, so the vast majority of the benefits of being king have accrued to the executive branch.

Should HR1207 be struck by lightning, zapping it through the House and Senate to arrive on the President's desk for signing, there is a zero percent chance that Barack Obama would sign it into law.  He cannot, with one hand, give broad regulatory powers to the Fed as an independent institution and, with the other hand, make the Fed less independent by subjecting it to an audit.

Rather, one could hypothesize that Barack Obama, and his czarist revolution of the operations of the executive branch, has proposed handing the regulatory power to the Fed to immunize it from attacks on its independence (independence from congress, that is).  As new regulatory power would strengthen the Fed, it would also necessarily tie it closer to the executive branch.

As there is little chance of HR1207 or its companion, S604, reaching the President's desk, it is unlikely that its populist support factored significantly in Obama's decision to seek more Fed power.  However, to the extent that it did, it contributed to two more examples of unintended consequences: increased Federal Reserve power and, by extension, increased power of the unitary executive.
Making Lemonade
Now, I am fully cognizant that the things I have described here are currently in the works, and thus may turn out differently than I anticipate.  But, they will be different only in description; there will be unintended and, most likely, opposite consequences to the true intention of HR1207, I just may not possess the imagination to predict them accurately.

Much more important than my surety of unintended consequences is Ron Paul's surety of them.  While he's never shied from standing up to the big dogs, the relative popularity of HR1207 is going to make this one turn around and bite.  When it does, I hope he acknowledges it and uses it as a learning tool for those with faith in politics.

That is, I hope he uses it to reinforce another of his beliefs, that there is no Washington solution to Washington.

3 Comments in Response to

Comment by Brock Lorber
Entered on:

Thank you Ms. Christine.

P Micheal:  Thank you.  There's an obvious correlation between the Fed announcement of a lobbyist (June 9) and the spike in co-sponsors.  Causality, of course, is speculation.

I'm assuming by "different suggestion" you mean alternative means to cut the Fed off at the knees.  That's the easy part; quit using their money.  That may seem impossible, but don't underestimate yourself and your trading network.

0) Produce in accordance with your comparative advantage. 

1) Use cash.  This is a passive technique that seems innoquous.  But think about the "liquidity trap" the Fed so fears; in essence it is ordinary people holding and using too much cash.  Cash held and used outside of the banking system is not under the direct day-to-day control of the Fed and, thus, makes them very nervous.

2) Do business, to the extent possible, with persons and companies run by persons who share your beliefs and values.

3) Do business, to the extent possible, with persons and companies in private currencies.

4) Stipulate, to the extent possible, private arbitration in all business dealings for dispute resolution.

In other words, vote every day with your life and your wallet vs. casting a ballot that may or may not be counted every four years.

Comment by Christine -
Entered on:

 Very interesting observation of potential scenario.  Thank you.

Comment by Trouser Chili
Entered on:

Nice writeup.  I'm sure there will be some plot twists along the way,  but your possible chain of events seems quite plausible.  I wonder if you had a different suggestion.

With so many supporters for HR1207, I can't fathom how there can be any support in congress for giving the Fed more power.  I wonder how many congressmen are playing both sides already?

The positive to HR1207 is the same as for Ron Paul's campaign - it's waking more and more people up.