Before any policy is changed, the potential economic consequences that they can cause should be considered. The Community Reinvestment Act and other affordable housing regulations, for instance, were supposed to increase loan availability to under-served communities. Unintentionally, these regulations played an important role in creating the housing boom and bust experienced during the 2000s.i Minimum wage laws are another example. In 2009, the minimum wage was increased to $7.25. While the intended consequence was greater incomes for working families, the unintended consequences are increased unemployment and fewer economic opportunities.
Negative economic consequences also results when policies transform competitive markets into a monopoly. In a May 9th Forbes column, we examined the benefits created by competition among forestry certification programs. Forest certification programs establish responsible management practices and standards. If landowners meet the standards of the program, then the forests are certified by that program, which communicates to consumers and businesses that timber products purchased from this landowner were harvested responsibly.
In the case of forestry management, the definition of what is responsible can vary. And, balancing these conflicting interests is complex to say the least. Due to this complexity, multiple forestry certification programs have arisen. The existence of multiple programs allows forest owners and consumers to choose between the alternative costs and benefits based on their own values and constraints. This competitive process creates a more efficient balancing of the intended and unintended consequences than a monopolistic standard that imposes a standard before a better accounting of the full consequences can be ascertained.
Despite the benefits from competition, some environmental activists favor one program (the Forest Stewardship Council or FSC) and are encouraging that this program be granted monopolistic authority. A new EconoSTATS paper, authored by Brooks Mendell and Amanda Hamsley Lang (available here), illustrates the dangers from this proposal.
Mendell and Lang found that FSC certification overly restricts the amount of output that can be produced from the same amount of acreage compared to the other major certification programs the American Tree Farm System (ATFS) and the Sustainable Forestry Initiative (SFI). The reduced acreage available for timber harvests leads to smaller harvests of U.S-produced timber compared with the other certification programs. The reduced output leads to income losses that result in lost employment and lost tax revenues.
Direct jobs lost include foresters, loggers, millworkers, and forestry consultants and contractors. Indirect jobs lost include jobs that support the forest industry, such as motor freight transportation, machinery repair, and wholesale trade. Indirect job impacts also include induced jobs created by the spending of workers in the forest industry.
According to Mendell and Lang, these impacts could be quite large if an FSC monopoly were implemented. For instance, state-level implementation of FSC in Oregon could reduce direct and indirect forest industry employment by over 31,000 jobs and reduce annual severance taxes by over $6 million. State-level implementation of the FSC-Plantation standard in Arkansas could eliminate direct and indirect forest industry employment by up to 10,000 jobs and reduce annual severance taxes by over $600,000.
There are other economic consequences that, while harder to qualify, are just as significant. In both regions, the FSC standards reduce operational flexibility. The potential long-term economic consequences to the U.S. forest industry are exemplified by the fate of the American automobile manufacturers in the 1970s and 1980s. Reduced operational flexibility makes it more difficult for any industry to adapt to changing global circumstances or consumer demands.
There are more adverse unintended consequences possible than just those documented by Mendell and Lang. Restricting U.S. timber production does not diminish global timber demand. Should the unmet demand be filled by timber produced in countries with few or no management standards, a universal FSC standard in the U.S. would create economic damage here in the U.S. and, because more timber would be produced from countries with poor forest management standards, greater environmental damage globally.
Mendell and Langs work illustrates that, when it comes to optimal regulations, intentions are not all that matter. A good policy balances the policys intentions against its consequences. Allowing forestry certification programs to compete against one another meets these criteria; competitive programs creates a feedback mechanism that allows the standards to address regulatory shortcomings quicker and constantly incents the standards to address the needs of landowners, consumers and environmentalists.