If you want to see how seemingly logical government actions can create massive problems, all you have to do is look at two outwardly different crises: the collapse of the savings and loan industry and the Philadelphia School District financial mess.

Changes in regulations and laws that allowed interest rates to move freely eventually led to the bankruptcy of many S&Ls, while the passage of the charter-school law set in motion events that ultimately bankrupted the School District.

Actions have consequences, especially when they alter the fundamental manner in which business is conducted. Consider the S&L crisis. The root cause was the repeal of Regulation Q, which had set a ceiling on what banks could pay for deposits. That decision was inevitable given the rapid innovation in the finance sector.

How did a needed market-based action lead to massive bank failures? Simple. Before deregulation, bankers operated under what was amusingly called the 3-6-3 Rule: Pay 3 percent for deposits, lend at 6 percent, and be golfing by 3 p.m.

Largely mortgage lenders, savings and loan associations used short-term, Regulation Q-limited cost deposits and lent them out long term at fixed rates to households who wanted to buy homes. Then the market for short-term deposits changed.

Repealing the limits on interest rates created what economists nicknamed "zombie banks" - they were dead; they just didn't know it. Banks had to pay deposit rates that could rise dramatically even as the rates they received on their mortgages remained fixed. When deposit rates did surge, their costs of money exceeded the revenues from the mortgage loans - and you cannot make that up in volume.

Fast-forward to 1997 and the passage of the Pennsylvania Charter School Law: Act 22. This effectively deregulated the public educational system. Act 22 made the financial crisis facing the Philadelphia School District inevitable.

The problem with Act 22 was it reduced revenues without limiting costs equivalently. When students transfer from a public school to a charter school, those children take much of the state funding with them. But public school costs do not decline equal to the loss of aid.

For example, if the class size is reduced only modestly, there may be no change in the number of teachers or classrooms needed. Any cost declines are minimal, but the revenue losses - from the state funding - are large.

The financial issues don't end there. The public school system is mandated to provide capacity for everyone who wants to attend. This required construction of large numbers of schools and the acceptance of the costs associated with financing, equipping, supplying, and maintaining the classrooms and buildings. Those capacity-related expenses don't disappear when a student transfers to a charter school. Those expenses just become a larger portion of the budget.

The loss of revenue that is not matched by a reduction in expenses is an issue faced by all public school districts that lose students to charter schools, be they inner-city, suburban, or rural. But in Philadelphia, parents abandoned the public system in droves.

Currently, more than 67,000 students - or about one-third of all publicly educated students in the city - now attend charter schools. In the coming year, the School District is projected to spend $767 million, or 30.1 percent of the total budget, on charter schools. In comparison, the funding gap is estimated at $320 million.

I am not arguing the School District's financial problems are strictly a consequence of Act 22 any more than the repeal of Regulation Q was the only reason S&Ls failed. Yes, the transfer of students to charter schools has led to a huge loss of income. But decades of fiscal and educational mismanagement, political interference in attempts at reducing costs (such as closing schools), state funding cutbacks, and the underfunding of critical needs such as special education all brought us to this point.

The financial collapse of inner-city school systems was inevitable, especially since the state failed to provide the means to transition from the world of educational monopoly to the new competitive model.

Joel L. Naroff is chief economist and president of Naroff Economic Advisors Inc., in Holland, Bucks County.

jnaroff@phillynews.com