In 1850, French economist Frédéric Bastiat published an essay that is misunderstood, or more often, unread, titled, “That Which is Seen, and That Which is Not Seen.” Bastiat brilliantly introduced the idea of opportunity cost and, through the parable of the broken window, illustrated the destructive effects of unintended consequences.
Unfortunately, because of misplaced belief in government benevolence, even the most powerful and successful members of the American citizenry often miss the point.
According to Reuters, Ramin Arani, a co-portfolio manager of the $25 billion Fidelity Puritan fund, said while discussing his current bullish stance of gold, “In terms of unpredictability, there is a tail risk with this administration that did not exist with the prior…There is a small but present possibility that government action is going to lead to unintended consequences.”
Arani’s overall bullish stance on gold is sound. Given the political climate, gold is an attractive “insurance” for equity exposure. The problem doesn’t lie in his financial analysis, but rather in the seemingly innocuous comment that followed.
“There is a small but present possibility that government action is going to lead to unintended consequences.”
To suggest the chances of unintended consequences are merely “small” is extremely naïve.
Notwithstanding myriad examples of government action leading to unintended consequences, including, but certainly not limited to, minimum wage laws, rent control, social security, and the disastrous war on drugs, there are countless examples of unintended consequences brought on by government action that should resonate with a multi-billion-dollar portfolio manager. Yet they seem to have fallen on deaf ears.
Unintended Consequences of Gold Confiscation
In 1933, President Franklin Roosevelt signed Executive Order 6102 which called for the confiscation of gold. Robert Higgs’ writes for the Mises Institute:
Besides being theft, gold confiscation didn’t work. The price of gold was increased from $20.67 to $35.00 per ounce, a 69% increase, but the domestic price level increased only 7% between 1933 and 1934, and over rest of the decade it hardly increased at all. FDR’s devaluation provoked retaliation by other countries, further strangling international trade and throwing the world’s economies further into depression.”
Looking for government action that led to the unintended consequence of literally worsening the worst depression in world history? Check.
Unintended Consequences of the Community Reinvestment Act
In 1977, Congress passed of a piece of legislation called the Community Reinvestment Act. The evolution of this act played a significant role in establishing the lowered lending standards that caused the 2008 housing crisis. Combined with the Federal Reserve artificially lowering interest rates, Fannie Mae and Freddie Mac taking on the “philanthropic” effort of improving home ownership of low and middle class families, and many other factors, the unintended consequences of government action raised the rate of foreclosure by 225% from 2006 to 2009.
Looking for government action that led to the unintended consequence of close to a million American families losing their homes? Check.
Unintended Consequences of the Affordable Care Act
The first half of Arani’s statement speaks to rising unpredictability under the Trump administration relative to the Obama administration. It has been barely two weeks since President Trump was inaugurated, but one would be remiss to speak on the Obama administration as if it was the bastion of predictability.
Without examining the disparity between Obama’s foreign policy campaign rhetoric and his unpredictable drone-happy administration, there is a glaring example of an unintended but extremely foreseeable consequence stemming from his signature health care law.
In September 2013, President Obama said the following in a speech on the Affordable Care Act:
In the United States of America, health care is not a privilege for the fortunate few — it is a right. And I knew that if we didn’t do something about our unfair and inefficient health care system, it would keep driving up our deficits, it would keep burdening our businesses, it would keep hurting our families, and it would keep holding back economic growth.
The most predictable consequences of passing the Affordable Care Act came to the surface. A large spike in premiums, increase in taxes, millions of Americans losing their plans, and job losses, just to name a few.
Looking for government action that led to literally 100 unintended consequences throughout the health care system? Check.
Mr. Arani is correct: gold is an attractive investment. The importance of sound money in investments cannot be overstated and he should be credited for recognizing this when a lot of his financial market counterparts do not.
But to minimize the severity and predictability of unintended consequences brought on by government action as a “small but present possibility” is disingenuous.
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