Ramit had a strong email today talking about why people broke their diet and exercise routines. Here’s the highlight from the email (you can sign up for his newsletter here, I highly recommend!):
In short, people were trying to right their own ship by diet and exercise but suffered from the law of unintended consequences. In hindsight, it’s pretty obvious that if you go to bed two hours late, your day will be skewed but that wasn’t brought to the forefront of their minds. Instead, they believed they were failing because of binging on cookies at one o’clock in the morning.
The law of unintended consequences is an economic term that means every action has a reaction, sometimes those reactions are problems that couldn’t have been foreseen (or were purposefully neglected) before the action took place. This happens all the time in politics.
A politician implementing a tax on a product may inadvertently (or purposefully) raise the demand for a similar good that doesn’t have the tax. Similarly, a lower federal interest rate can cause loans to be given to people who otherwise shouldn’t be given a loan because of economic stimulus (quantitative easing).
People make choices every day that have a bevy of unintended consequences. The great thing about being human is you get the chance to make up for your bad behavior. If you have a Ramit in your life, somebody is there to tell you that what you need to fix is binge-watching Netflix until one in the morning.
The world economy doesn’t work in the same way. Unintended consequences in a globalized world create ripples throughout international monetary policies. We can’t have a Ramit overseer to our economic misdeeds. Instead, we have to shake out the unintended consequences through market means. This creates a boom and bust cycle.
Over the past 10-years, we’ve seen quantitative easing on a massive scale. The world economy is built on a massive ripple that’s been mostly trending upward. Eventually, the unintended consequences will have to catch up with us and lead to an issue of obesity (economic dysfunction).