When Government Acts, “Unintended Consequences” Follow

The following article was written by Sound Money Defense League Assistant Director Jp Cortez.  It was originally published at www.soundmoneydefense.org.




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 homeownership 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.

A Libertarian Perspective

Back in the days of my misspent youth, my ultra-libertarian friends and I would often argue the question, how much government do we really need.  If we could just get rid of excessive regulations, promote competition and take advantage of its self-regulating benefits, then we wouldn't need so much government.  There is some truth to that, though I confess that my friends put much more faith in power of the "invisible hand" than I did.  I tended to side with Friedrich Hayek who said that liberty requires a strong government, one that can defend the freedom of its citizens and provide them a level playing field for the pursuit of their aspirations.  It doesn't need to be perfect, but it needs to be predictable, and it needs to be fair.

Imagine a Super Bowl without referees.  Not happening.  We'll never see a Super Bowl without referees no matter how much the fans complain about them.  The refs got this offsides call wrong, or they blew that pass interference call, but at the end of each game, most agree that it was fair for both sides.  If the fans didn't think so, if everybody believed the games were fixed, hardly anybody would bother watching.  And then where would ticket prices be, and the ad revenue, and all the business that surrounds the games?

This notion of fair competition and its benefits is one of the things that drive libertarianism.  In almost all business circumstances there ought to be competition, and it ought to be fair.  Good things come from it, like better service and lower prices.  When companies compete for your business, things like that come about in the normal course of events.  It happens because people tend to do what they think is in their own best interest.  It is in a company's interest to provide customers with some advantage to using its products and services rather than its competitors.  All people, almost all the time, do what they think is in their own interests.  We might be wrong about what's best, and other people might disagree with what we think is best, but that doesn't stop us from striving for it.

I'm not sure everybody believes that.  As the story goes, F. Scott Fitzgerald said to Earnest Hemingway, "The rich are different from you and me," and Hemingway replied, "Yes, they have more money."  Must have been early in their careers, since neither one of them spent a lot of time being poor.  At any rate, I subscribe to the Hemingway viewpoint rather than the Fitzgerald.  People are much the same, although different circumstances can drive people to do different things.  In the end, everybody does what they think best, whatever that may be, and however ill advised it may seem to somebody else.

Those ideas played a large part in the design of America as set forth in the Constitution.  People are pretty much the same, and they tend to do what they think best, and that includes people who wield great power.  Our founding fathers did what they thought best by striving to design a government that would not easily be used to advance the interests of the officials in it.  That meant the power of government had to be limited, and the establishment of three competing branches, Executive, Legislative, and Judicial, was meant to keep it that way.  Power not explicitly given to the federal government was reserved for the states and for the people.  In general, government was supposed to play the impartial referee rather than the overlord.

My, haven't we come a long way.  Nowadays, there seems to be a widespread rejection of the notion that people are much the same.  Instead, a substantial number of Americans believe there is good, and there is evil, and that each is easily recognizable.  The good are compassionate, kind, and inclusive.  The evil are greedy and unfair, and they say hateful things.  Redemption is rare.  The good and compassionate among us believe that the evil and the greedy should not be allowed to say those hateful things, and they believe government has a role to play in this.  Unfortunately, the U.S. Constitution guarantees everybody the right of free speech, which includes the right to say unkind things.  And so the good, compassionate people sometimes go out and break windows, beat people up, and set fires in order to stop the evil, greedy ones from saying them.  If only we could change the government and make mean speech illegal.  Then, the good, compassionate, inclusive folks wouldn't have to break any more windows, or burn any more houses and cars.  But for now, desperate times call for desperate measures.

In the meantime, the good, compassionate Americans work for change, and there is a wonderful diversity of opinion as to what is the best way.  Someone named Sarah Silverman suggested that a military coup could save America.   SilvermanCoupTweet

Based on that I would say there are two kinds of people, those who get it, and those who don't.  Sarah doesn't.

Or maybe she does.  I know some people who would rather not publicly admit that they voted for Donald Trump last November.  They might lose friends, or their jobs might be threatened.  Maybe Sarah is in the opposite sort of a quandary.  It's true, she could just keep her mouth shut.  But maybe she's looking for work, and a good provocative tweet might make her noticeably attractive to like minded potential employers — like the Democrats.  In any event, with her tweet she did what she thought was in her interests.

And she might have been wrong about that.  She might be like millions of Americans who only know that the November election didn't give them what they wanted, and who now call for some drastic measure to fix the "broken" system so that it does — impeachment, coup, abolition of the electoral college, taking it to the streets.  The options are tossed around with little thought to what might come afterwards.  But what these particular Americans are asking for is that somebody should be given power, somebody should take control, so that they can have what this election didn't give them.

For over 200 years the Constitution has served as a limit, imperfect as that limit may be, on the power that the government may exercise over the people.  When we have taken the drastic step and ceded the necessary power for government to "fix" itself, will future officials exercise it in ways that serve our interests or their own?  If you think it will not be their own, then maybe you just don't get it.

It Begins

The obliteration of the Democratic Party, that is. The first hint that Donald Trump might cut the Democrats off at the knees came on the campaign trail when he asked African-American voters, "What have you got to lose?"  Yesterday, former National Football League superstars Jim Brown and Ray Lewis called on President-elect Donald Trump to find out.

Brown and Lewis praised the president-elect after the meeting at Trump Tower. They said they primarily spoke to Trump about Brown's Amer-I-Can philanthropy, which aims to keep kids away from gang violence.

"We couldn't have had a better meeting," Brown said.

"The graciousness, the intelligence, the reception we got was fantastic."

For decades the Democrats have been gatekeepers and toll collectors on the road to the American Dream, but it's these last eight years that have been most devastating to Americans hoping to travel that road — most particularly for inner city Americans.  Barack Obama has presided over a boom in taxes, regulation, and government corruption that has effectively blocked upward mobility for those in most need of it.

By partnering with talented people from a diversity of life experiences, Trump is about to change that.

Lewis, who played for the Baltimore Ravens, told reporters that Trump is committed to "helping us change what hasn't been changed." He praised the Amer-I-Can program and said he supports Trump's pick to lead the Department of Housing and Urban Development, Ben Carson.

"What we believe, with the Trump administration, is if we can combine these two powers of coming together, forget black and white. Black or white is irrelevant," he said.

"The bottom line is job creation and economic development in these urban areas to change the whole scheme of what our kids see."

What a nightmare for Democrats — an America where black or white is irrelevant.  What will they do?

Brent Budowski on Foundation Corruption

Among the Podesta emails released by WikiLeaks was a revealing message from Brent Budowski of LA Progressive.  In a March 21, 2015 email to John Podesta, Budowsky warned that the appearance of Clinton Foundation corruption could destroy Hillary's presidential aspirations and the Democratic Party. Budowski wrote:  

"It was not uplifting to learn in recent hours that problems with foreign donations to the Clinton Foundation continue, Hillary Clinton was still making paid speeches for hire this week, and Tony Rodham is hustling gold mining deals in Haiti…

If there is one thing that could well bring down a Hillary Clinton candidacy it is this cycle of money issues about which I am now feeling red alerts, loud bells, warning signals, and red flags and I am now seriously pissed off that there is a real chance that her candidacy and the Democratic Party could be destroyed by these self-created dangers that continue to proliferate the closer she gets to presumably announcing her candidacy.”

The message gets really interesting as Budowski concludes:

“If she is not hearing this from others, please feel free to forward this to her, I will play the bad guy here because I do not want her money and because she needs to hear this from her friends and she will sure as hell be attacked for this by her enemies, and it will be megaphoned throughout the media, and foreign donations and paid speeches and hustling gold mining deals by her brother are entirely legitimate issues that are self-created, and must self-corrected before it is too late….and I do not believe the Clintons fully understand the magnitude and immediacy of the danger in the current political and media climate…..Brent”

Leaping off the page at me are the words, “I will play the bad guy here because I DO NOT WANT HER MONEY…” Take a moment to consider the implications of that.  Budowski was not like those others — unwilling to speak their minds for fear of being cut off from Hillary's money.  And then he said, “I do not believe the Clintons fully understand…

On the contrary, I think the Clintons really do understand.  They know how to leverage their positions to raise huge amounts of money.  They know how to cultivate loyalty, and the money they raise plays a big part in that.  

Andrew McCarthy, former assistant U.S. attorney for the Southern District of New York, described one way the Clinton Foundation enriched itself and some of its donors. In an article in the National Review entitled “Clinton’s State Department: A RICO Enterprise”, McCarthy wrote:

“In a nutshell, in 2005, under the guise of addressing the incidence of HIV/AIDS in Kazakhstan (where the disease is nearly nonexistent), Bill Clinton helped his Canadian billionaire pal Frank Giustra to convince the ruling despot, Nursultan Nazarbayev (an infamous torturer and human-rights violator), to grant coveted uranium-mining rights to Giustra’s company, Ur-Asia Energy (notwithstanding that it had no background in the highly competitive uranium business). Uranium is a key component of nuclear power, from which the United States derives 20 percent of its total electrical power.

In the months that followed, Giustra gave an astonishing $31.3 million to the Clinton Foundation and pledged $100 million more. With the Kazakh rights secured, Ur-Asia was able to expand its holdings and attract new investors, like Ian Telfer, who also donated $2.35 million to the Clinton Foundation. Ur-Asia merged with Uranium One, a South African company, in a $3.5 billion deal — with Telfer becoming Uranium One’s chairman. The new company proceeded to buy up major uranium assets in the United States.”

Side note: The $3.5 billion Uranium One merger with Ur-Asia Energy would likely have been a huge payday for Giustra and Telfer. Pressing on with McCarthy's story:

“Meanwhile, as tends to happen in dictatorships, Nazarbayev (the Kazakh dictator) turned on the head of his state-controlled uranium agency (Kazatomprom), who was arrested for selling valuable mining rights to foreign entities like Ur-Asia/Uranium One. This was likely done at the urging of Putin, the neighborhood bully whose state-controlled atomic-energy company (Rosatom) was hoping to grab the Kazakh mines — whether by taking them outright or by taking over Uranium One. 

The arrest, which happened a few months after Obama took office, sent Uranium One stock into free fall, as investors fretted that the Kazakh mining rights would be lost. Uranium One turned to Secretary Clinton’s State Department for help. As State Department cables disclosed by WikiLeaks show, Uranium One officials wanted more than a U.S. statement to the media; they pressed for written confirmation that their mining licenses were valid. Secretary Clinton’s State Department leapt into action: An energy officer from the U.S. embassy immediately held meetings with the Kazakh regime. A few days later, it was announced that Russia’s Rosatom had purchased 17 percent of Uranium One. Problem solved.

Except it became a bigger problem when the Russian company sought to acquire a controlling interest in Uranium One. That would mean a takeover not only of the Kazakh mines but of the U.S. uranium assets as well. Such a foreign grab requires approval by the Committee on Foreign Investment in the United States, a powerful government tribunal that the secretary of state sits on and heavily influences. Though she had historically postured as a hawk against foreign acquisitions of American assets with critical national-security implications, Secretary Clinton approved the Russian takeover of Uranium One. During and right after the big-bucks Russian acquisition, Telfer contributed $1.35 million to the Clinton Foundation. Other people with ties to Uranium One appear to have ponied up as much as $5.6 million in donations.”

The acquisition of Uranium by Rosatom meant another big payday for Giustra and Telfer, and a another payday for Clinton Foundation as well.  And Russia, the enemy that Democrats accuse of meddling in the U.S. presidential election?  Russia gained control over 20% of U.S. uranium production, thanks to the Clinton Foundation and Hillary who greased the skids.   What a happy outcome.

The Clinton Foundation and the Democratic Party at the national level look a lot like criminal enterprises. Nobody connected with either organization seems to care that laws may have been broken, and I'd be willing to bet that laws were broken. Nobody connected with either organization seems to care that trust in government is cratering.  And certainly nobody would dare step up to suggest, “Hillary, for the good of the country…”  As long as there is a fig leaf of cover, the Democratic leadership will say that there's nothing to see here (they'll blame all the bad news on that vast right wing conspiracy).  They're sticking with the most corrupt and divisive candidate in our lifetimes. Why is that? The obvious answer is that, through Hillary, they see a clear path to the money.