The Long Arm of the Law

Some people think that economics involves principles akin to physical laws – if you try to violate the laws of economics, bad things happen, just as if you had violated the laws of physics. But it has beomce fashionable for some folks to take a different view. Using empirical data, they can show, for example, that raising the minimum wage has not always resulted in increased unemployment. The problem, of course, is timeframe. How long does it take the laws of economics to show visible consequences.

Consider our current banking crisis. Everyone knows that the cause of the crisis was that banks took imprudent risks. Did bankers suddenly become more stupid or more greedy? Doubtful. This article argues that the greater risk taking happened because of political pressure and interference from government. That’s easy to believe. But how was it done? It was done a little at a time over the course of years. No one has found a “tipping point”, but the origins go back over 30 years with laws requiring banks to make high risk loans. This was a well intentioned scheme to increase minority home ownership. When no damage was immediately apparent, Congress threw more straws on the camel’s back.

The moral of the story is this: economic laws can have long term and far reaching effects. The consequences are inevitable, even if no damage is immediately apparent.

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