You’re walking down your street and you notice a neighbor’s home on fire. You see him standing outside and rush over to him. “Hey, are you ok?” you ask. “Yes. I’m just getting some gasoline to throw on the fire to put it out.” You stare at him. “Why would you do that?” you ask. “It’ll only make it worse!” “But I have to do something!” he replies.
The above scenario is pretty silly. No one in their right mind would throw gasoline on a fire. But, if we use this story as a parable, it brings a deeper meaning: think before you act.
Oftentimes, in economic situations, people do throw gasoline on a fire. The urge to do something, especially in a recession, can be overwhelming. When there are large job losses, failing companies, and hurting people, there can be a rush to judgement and the cry “we must do something!” is heard loud and clear. But few ever stop to ask if what they’re doing will help.
Unlike my house on fire story, there is often very little direct observations of cause and effect in economics. Economics, like Nature, is a highly complex system and ripple effects can be felt among long and distant channels. You throw gasoline on a fire and the fire increases, that’s pretty obvious. But if you increase minimum wage and some folks lose a job/lose the opportunity for a job, the effect is less obvious (especially when dealing with the unseen).
I’m not about to launch into a prescription for solving the world’s problems. I’ll save that for a future post (and I suppose readers can guess with reasonable accuracy what I’ll say). At this point, all I want to say is be careful of rushing to do something; it can sometimes cause more harm than good.