Cobra Problems
Stock market indices had a mixed week. The Dow was down 2.33%, after a drop of over 600 points on Thursday. The S&P 500 was up marginally, while the Nasdaq rose 1.41%, driven by optimism after another big earnings report from Nvidia.
There have been times throughout history when governments have left economies alone to do their thing, and times when they have gotten involved in affecting a certain outcome. Either of those courses of action, or inaction, can work well or poorly, and each point in time often earns equal parts praise and ridicule. And there are often unintended consequences of both doing something, especially, and doing nothing.
One of the most famous examples of unintended consequences has come to be known as The Cobra Effect. As the story is told by the Foundation for Economic Education:
In colonial India, Delhi suffered a proliferation of cobras, which was a problem very clearly in need of a solution given the sorts of things that cobras bring, like death. To cut the number of cobras slithering through the city, the local government placed a bounty on them. This seemed like a perfectly reasonable solution. The bounty was generous enough that many people took up cobra hunting, which led exactly to the desired outcome: The cobra population decreased.
At this point in the story, all sounded good. A policy to decrease the cobra population was put in place, and the cobra population went down. But then:
As the cobra population fell and it became harder to find cobras in the wild, people became rather entrepreneurial. They started raising cobras in their homes, which they would then kill to collect the bounty as before. This led to a new problem: Local authorities realized that there were very few cobras evident in the city, but they nonetheless were still paying the bounty to the same degree as before. City officials did a reasonable thing: They canceled the bounty. In response, the people raising cobras in their homes also did a reasonable thing: They released all of their now-valueless cobras back into the streets. Who wants a house full of cobras?
In the end, Delhi had a bigger cobra problem after the bounty ended than it had before it began. The unintended consequence of the cobra eradication plan was an increase in the number of cobras in the streets. This case has become the exemplar of when an attempt to solve a problem ends up exacerbating the very problem that rule-makers intended to fix.
After the 2007–2008 financial crisis, rates were lowered and kept low for years and years and years, until they finally started to rise in 2022. After the pandemic began to shut down economies in 2020, money flowed from the government to the people to keep the people and businesses afloat, and occasionally to win votes during election years.
It’s happened in America, and it’s happened elsewhere. What will the consequences of it all be, if any?
We don’t know and are not sure anyone else does either, even if that kind of humility isn’t always shared by the leaders you see on T.V. Things often take a long time to play out in economics—until they suddenly happen very quickly. We’ve seen some effects, such as inflation, but we guess that much of the ending to this story still lies ahead.
“The consequences have consequences, and the consequences of the consequences have consequences, and so on. It gets very complicated. When I was a meteorologist, I found this stuff very irritating, and economics makes meteorology look like a tea party.” —Charlie Munger (“Academic Economics: Strengths and Faults after Considering Interdisciplinary Needs”)
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