Most people understand that the environment is a dynamic system and that there are consequences to actions, most people do not understand that the economy is also a dynamic system. If you try to engineer it, you often get results that aren’t pleasant. In fact, sometimes they are downright ugly.

Take the so called war on coal for example. Like the war on poverty or the war on drugs it’s hard to figure out who the winners are, but when it comes to the war on coal we can tell who the losers are. As West Virginia struggles mightily with a budget deficit, every taxpayer in our state can be considered a loser. But there is additional collateral damage.

There was a post on the Zero Hedge website a couple weeks ago entitled “The New Normal: From $34.00 to $2.65 plus tips”. From the post, “normally we head south…but Saturday was different…From our high perch in Southwestern Virginia, heading northwest sends us into coal mining country, West Virginia to be exact”. The blogger describes a stop at a restaurant for lunch and an encounter with a waiter named “Henry”. From the blog, “Henry (not his real name) is 27 years old, clearly a Millennial”.

The blog goes on to relate the conversation with Henry. “It turns out Henry was laid off from the coal mine two years ago. When he mentioned additional layoffs and mine closings since then, I got the impression Henry had decided his chance of returning to the mines was slim to none and had decided to change ‘careers’.” The “old career” in the mines had paid $34.00/hour while the “new career” paid $2.65/hour plus tips.

Again from the blog, “I was a bit shocked by both ends of that pay scale. Essentially his income plummeted from $70,720 per year (plus overtime and benefits), exceptionally good pay for a then 25 year old man, to $5,512 (assuming 40 hours a week) plus tips based solely upon his excellent service and the local economy, which was not good based upon Henry’s own assessment as a local of 17 years”.

The war on coal has economic consequences on both the macro and micro levels. Former coal miners are struggling. The state government is struggling.

Back to the state budget. One of the proposals on the table is a substantial increase in the excise tax on cigarettes. While almost all of us (except perhaps cigarette manufacturers) hopes that there will come a day when everyone will have kicked the habit, the current proposal of increasing the tax by $1.00 per pack will also have economic consequences.

Studies have shown that raising taxes can have a significant negative impact on economic activity. One such study was published in “The B.E. Journal of Economic Analysis & Policy, Vol. 7 [2007]” entitled “Cross-Border Shopping and the Sales Tax: An Examination of Food Purchases in West Virginia” by Mehmet S. Tosun and Mark L. Skidmore.

According to the authors, “In this article we present new evidence of cross-border shopping in response to sales taxation…we utilize a unique opportunity to evaluate the effect of a large discrete change in sales tax policy. Using county level data on food sales and sales tax rates for West Virginia over the 1988-1991 period we estimate that for every one-percentage point increase in the county relative price ratio due to the sales tax change, per capita food sales decreased by about 1.38 percent. Our estimates indicate that food sales fell in West Virginia border counties by about eight percent as a result of the imposition of the six percent sales tax on food at the beginning of 1990”.

In other words, the negative impact on sales was greater than the tax itself. And over time, the negative result compounds causing even more harm. It becomes a negative feedback loop. And yet government and politicians never seem to learn from past policy errors.

Again back to the budget — another issue facing West Virginia is the Public Employees Insurance Agency (PEIA) funding problem that has had to cut benefits this year by around $40 million. The problem is not confined to PEIA. Pension funds are also struggling — mightily. The US Treasury department recently rejected the Teamsters Pension funds’ request to reduce benefits.

According to the Wall Street Journal, “Under optimistic actuarial assumptions, the plan will go broke in the next decade and take down the Pension Benefit Guaranty Corporation with it. The PBGC’s multi-employer program is already running a $52 billion deficit”. The PBGC is to pension funds what the FDIC is to banks. They are both government provided insurance programs and neither is capable of living up to their stated obligations if there is another financial crisis.

The problems facing pension funds and insurance companies, particularly in the public sector, again has to do with policy makers intervening in the market place. Actuarial tables are based on an “expected rate of return”. That benchmark tends to be set at or around 7.5%. Under normal economic conditions, pension funds and insurance companies invest a large portions of their funds in “risk free” government bonds at 4-6% and then invest a small portion in riskier assets to make up the difference.

However, since the Federal Reserve, our economy’s Central Bank (and de facto Central Planner) has fixed interest rates artificially low, essentially at zero (commonly referred to as the Fed’s zero interest rate policy or ZIRP) these institutions are not able to make their expected rate of return causing not only shortfalls in their ability to meet their obligations, but then forcing them to chase yield in riskier assets. If there are hiccups in these riskier markets, well, look out below.

The most democratic of all institutions is the free market. In a free market, decision making and risk taking are decentralized, making systemic risk less likely. When policy is directed by government or other central authority, risk becomes concentrated and economic miscalculation more likely. For example, as a reaction to the recent $15.00 minimum wage enactments by local governments, KFC and Wendy’s have announced that they will be building restaurant kiosks run by robots, eliminating thousands of jobs.

There are no quick fixes for systemic problems. Interventions in the marketplace, no matter how well intended, do more harm than good. Much more. While grappling with budgetary shortfalls, I hope that the West Virginia legislature has the fortitude to resist short term solutions like raising taxes that do more harm than good and instead pursues long term solutions based on sound economic principles.