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The Law of Unintended Consequences

In 2007, Congress eliminated all funding for equine slaughterhouse inspectors, effectively shutting down the industry in the U.S. The animal rights activists who had pushed for the ban celebrated, but, as reported in a Wall Street Journal article last week, “some now say they may not have thought through the...

In 2007, Congress eliminated all funding for equine slaughterhouse inspectors, effectively shutting down the industry in the U.S. The animal rights activists who had pushed for the ban celebrated, but, as reported in a Wall Street Journal article last week, “some now say they may not have thought through the consequences.”

One such activist quoted in the journal, Whitney Wright, who runs a horse rescue group in North Carolina, “worked to shut down slaughterhouses but now would like to see a few reopen under strict guidelines for humane handling.”

What happened to cause such a dramatic about-face among these horse lovers? Simply, the ban they pushed so hard for, like many bans, had some unintended consequences.

Horses, like every other living animal, get old, and they get sick. But horses are wildly more expensive to care for than other domestic animals, and euthanizing a suffering horse costs hundreds of dollars. So commercial slaughterhouses—which primarily exported the meat from the animals they killed—were an end-of-life option for thousands of horse owners.

Now, with that option removed, horses near the end have one less option. Some lucky ones get sent to horse rescues or sanctuaries like the one Wright runs in North Carolina. But volunteers like her have finite resources and space, and most horses aren’t so lucky. Over 50,000 horses a year are now sent to Mexico for “processing”—auctioned for $10 or $20 and then packed onto crowded trains to travel across the border and meet their fate. As you can see in the graph from the Journal, that’s up from a few thousand before the ban.

Some activists are now advocating for a ban on exporting horses for slaughter. But others, like those interviewed for the Journal article, have learned a valuable lesson about the unintended consequences of prohibition. And faced with the prospect of starving, abandoned horses whose owners can neither care for them nor find a suitable place to send them, activists now arguing for the creation of a limited number of humane slaughterhouses.

Wright and her fellow animal rights activists are far from the first prohibitionists to learn this lesson the hard way. The most well known ban in the United States’ history, on making, selling and transporting alcohol, was repealed in 1933, after Americans had dealt with its unintended consequences for 13 years. The year before repeal, John D. Rockefeller sadly summed up these unintended consequences:

“When Prohibition was introduced, I hoped that it would be widely supported by public opinion and the day would soon come when the evil effects of alcohol would be recognized. I have slowly and reluctantly come to believe that this has not been the result. Instead, drinking has generally increased; the speakeasy has replaced the saloon; a vast army of lawbreakers has appeared; many of our best citizens have openly ignored Prohibition; respect for the law has been greatly lessened; and crime has increased to a level never seen before.”

Not to mention the vast sums governments spent trying to enforce the law, and the tax revenue from legal alcohol sales they lost.

There are plenty of more recent examples as well. Bans on prostitution have had unintended consequences that range from the tragic to the ridiculous. At the former end, there’s human trafficking and enslavement. At the latter, there are occasional scandals like the one that removed Elliot Spitzer from office, made David Paterson New York’s governor, and then landed Spitzer a gig on CNN two years later. In between the two dramatic ends of the spectrum are the everyday consequences: less safe conditions for sex workers, the criminalization of ordinary people, and, of course … the lost tax revenue.

Likewise, the prohibition of marijuana has made federal offenders out of both casual drug users and prohibition-circumventing entrepreneurs. It fills our jails with non-violent offenders, costs an estimated $13 billion annually, and deprives black communities of potentially productive citizens (a 2010 study of four years of California arrest records by the Drug Policy Alliance found that statewide, blacks are arrested for marijuana possession at higher rates than whites—over triple the rate in Los Angeles—despite consistently reporting lower usage rates). And again: Imagine the tax revenue we’re not collecting—legalization and taxation bills have proposed taxes of $50-$250 per ounce of marijuana; California estimates a marijuana tax could raise $1.5 billion a year.

And in the 2005 bestseller Freakonomics, Steven Levitt and Stephen Dubner present convincing evidence that 1973’s Roe v. Wade (which effectively lifted the U.S. ban on abortion) was the primary reason for a sharp, coast-to-coast decline in violent crime in the 1990s. I know it sounds a little far-fetched, but they present very convincing statistical evidence for their case, controlled for factors from increased police forces (which also helped reduce crime) to gun control laws (which did not.) And though anti-abortion laws are rarely regarded as comparable to alcohol or drug prohibition (possibly because the procedure wasn’t widely available even before a total ban went into place in the U.S. in 1900), they have the same effect as any other prohibition: They turn ordinary citizens into criminals and waste resources. And studies from Sweden to Romania, going back as far as 1930, have found that, down the road, higher crime rates are an unintended consequence of banning abortion.

In recent news, the FDA is considering a ban on menthol cigarettes, a cool minty variety popular with black smokers that critics contend may be more attractive to adolescents. Opponents of the ban (including the tobacco industry) say it could create a black market for the cigarettes. History would seem to be on their side.

For today’s Investment of the Week, I’d like to highlight a company that has been recommended in the Digests several times recently. Back on November 10, 2010, it was recommended in the Dividend Digest by two different newsletters: Steve Christ’s The Wealth Advisory, and Louis Navellier’s Blue Chip Growth Letter. Then, last week, it was chosen as a Top Pick for 2011 by IQ Trends.

The stock is Altria Group (MO, NYSE), the company formerly known as Philip Morris, and one of the world’s largest tobacco companies.

If this company’s business is so distasteful to you that you would never consider investing in it, feel free to skip the description here. Everyone must draw their own line when it comes to behavior they can’t condone, and for some, selling cigarettes is over that line. But for others it might be companies that employ child labor, raise animals in inhumane conditions, contribute to environmental degradation, or support certain political causes—so we’ll refrain from making any of those judgments for you.

If you’re still reading, you may be interested in what IQ Trends Editor Kelley Wright wrote about Altria in his Top Picks recommendation:

“Setting the social and health debate aside, the returns for Altria Group are anything but sinful. The shares opened at $20.19 in 2010 and were recently trading at $25 per share; a 23.82% gain on price appreciation alone. When the $1.42 in cash dividends paid are added to the $4.81 in capital appreciation, the total return for the year is a whopping 30.86%; a significant outperformance over the major equity indices. While a majority of strategists and forecasters are calling for double-digit gains in the S&P 500 for 2011, we are mindful of Bob Farrell’s Rule #9: When all the experts agree on something, it is time to take the other side of the trade. Altria Group is perhaps the most defensive of stock plays; tobacco has a loyal following regardless of the economic conditions. As such, the company turns in earnings like clockwork, and has a very long history of increasing dividends at least 10% per year on average. Indeed, the projected cash dividend for 2011 is $1.52, which we suspect will be boosted in Q3. In closing, this is a stock you buy and put away.”

Regardless of where you think the S&P 500 is going in 2011, MO is a conservative stock with a hyper-loyal customer base. As was hopefully made clear above, trying to take vices away from people will always fail. And while cigarettes have been banished to alleys and sidewalks in recent years, I think—at least I hope—we’ve learned enough from our other attempts at prohibition to not even consider making them illegal. (Plus, the sheer economic and political clout of companies like Altria makes that seem highly unlikely.)

Cigarettes are terrible for your health, but conservative MO—and its regular dividends, amounting to a 6% yield—could be excellent for the health of your portfolio.

Wishing you success in your investing and beyond,

Chloe Lutts

Chloe Lutts Jensen is the third generation of the Lutts family to join the family business. Prior to joining Cabot, Chloe worked as a financial reporter covering fixed income markets at Debtwire, a division of the Financial Times, and at Institutional Investor. At Cabot, she is a contributor to Cabot Wealth Daily.