A Century of Government Blunders
The Terrible
10: A Century of
Economic Folly
The Independent
Institute, 27/08/2013
The U.S. economy
made impressive gains in the 20th century, but this progress makes it easy to
forget a harsh reality: Americans were also the victims of disastrous
government policies that cost trillions of dollars in wasted resources, created
mass unemployment, and kept millions in poverty who otherwise could have
participated in the nation's growing prosperity. Government decision-makers,
regardless of political party, have tended to favor short-run benefits for
friends while imposing costs on current and later generations. The ten worst
blunders divide equally among Democrats and Republicans. The
Terrible 10 also provides key lessons to help us avoid repeating
such policy mistakes in the future.
Contents:
- Prohibition:
The War on Booze
- Monetary
Policy During The Great Depression: How to Turn a Recession into a
Depression
- The
Hawley-Smoot Act: Holy Smoke, We Started a Trade War!
- Social
Security: America's Greatest Ponzi Scheme?
- Tax
Follies: The 91-Percent Solution
- Medicare
and Medicaid: Unsustainable Promises
- The
Nixon-Burns Political Business Cycle: How to Create a Decade of Inflation
- Environmental
Mismanagement: How to Make a River Burn and Other Magic Tricks
- Government
Failure and The Great Recession: Turning the American Dream into a
Nightmare
- Decades
of Deficits: The Real Red Menace
The Terrible
10
A Century of
Economic Folly
- Politicians
and bureaucrats foisted a host of costly and destructive economic blunders
on Americans this past century. The worst include: Prohibition;
the Great Depression; a global trade war that helped spark World War II; a
complex and wasteful tax code; pay-as-yougo entitlements that discourage
saving; inflation and political business cycles; environmental
mismanagement; the Great Recession; and decades of deficits. These
disasters resulted from policymakers doing one or more of the following:
(1) caving in to special-interest groups; (2) treating adult citizens like
they’re the government’s children; (3) allowing electoral majorities to
take advantage of the rest of society; (4) obsessing about the short run
(what Burton A. Abrams calls immediosis); (5) choosing to stay
ignorant about the deeper ramifications of government policies; and (6)
rationalizing bad policies on the grounds of their “plausible
acceptability.”
- Without
a doubt, the worst economic mistake of the past one hundred years was the
Federal Reserve’s handling of the Great Depression. The
U.S. economy was hit so hard in the early 1930s that even if the nation’s
central bank deserves only a modest portion of the blame (and that’s a big if ),
it would still be responsible for trillions of dollars in lost output.
Consider a thought experiment: Suppose the Fed deserves blame only for the
portion of unemployment above 10 percent in the years
1931 to 1935. That amount of joblessness alone caused an estimated 23
percent decline in production and income—a loss of $15.5 trillion over
five years!
- The
Hawley-Smoot Act of 1930 imposed an average tariff rate of 53 percent and
thereby hiked up consumer prices, ignited a retaliatory trade war, and
intensified the Great Depression, making this protectionist legislation
among the costliest economic blunders in U.S. history. Due
partly to the trade war sparked by Hawley-Smoot, by 1933 world trade had
fallen 67 percent. The trade barriers also helped set the stage for World
War II.
The conversion of Social Security from a “full
service” retirement program to a pay-asyou- go system in 1939 is perhaps the
worst of several bad decisions associated with the plan. This
blunder permitted the government to postpone increasing taxes to pay for the
program and enabled several increases in unfunded benefits. From 1960 to 2011
the program’s outlays as a share of GDP rose from 2.4 percent to 4.8 percent,
and they’re expected to reach 6 percent around 2030. By then the ratio of
workers to retirees—which has hovered around 3.2 since the early 1970s—is
expected to have fallen 35 percent to around 2.1. This mismatch will require
future tax hikes, cuts in benefits, and/or more government borrowing to cover
the shortfall. Worst of all is Social Security’s damaging effect on savings and
investment: by weakening people’s incentives to save for retirement the program
has reduced the amount of funds available to borrowers for private investment
and wealth creation and has thereby hampered economic growth. As hard as it may
be to imagine, Medicare presents an even worse threat to the nation’s fiscal health.
Synopsis
The U.S. economy
made impressive gains in the 20th century, but this progress sometimes makes it
easy to forget a harsh reality: Americans were also the victims of disastrous
government policies that wasted resources, created mass unemployment, and kept millions
of people in poverty who otherwise would have participated in the nation’s
growing prosperity. A strong case can even be made that the success of the U.S.
economy cannot be fully understood unless the story of these abysmal policy
failures is told.
The
Terrible 10: A Century of Economic Folly, by University of Delaware economics professor Burton A.
Abrams, tells this story.
The Terrible
10 takes both
political parties to task to show the causes and consequences of their worst
policy mistakes. Leading the list of causes is that government decisionmakers,
regardless of political party, tend to favor short-run benefits for
friends—especially major campaign contributors and special-interest
groups—while imposing costs on the rest of us or imposing the costs on later
generations. The ten worst blunders therefore divide equally among Democrats
and Republicans.
The Terrible
10 provides more
than an identification of the worst policies. It provides lessons to help avoid
repeating such blunders and for developing policies that might extricate us
from the lingering costs that those wasteful policies spawned.
Worst Economic
Blunders of the Past Century
The book begins
with an introduction laying out key factors that have motivated politicians and
bureaucrats to enact destructive laws and edicts. With those preliminaries out
of the way, the book proceeds more or less chronologically, with a
chapter-bychapter look at the past century’s worst economic blunders. The book
concludes by offering guidelines to improve government decision-making.
Prohibition
Ratified in 1919,
the 18th Amendment reflected the desire of a minority of Americans to impose
their views of morality and the proper lifestyle on the majority. The effort
failed miserably. In hindsight, most Americans—and especially those who lived
through it—probably view Prohibition as a bizarre, foolish, and even dangerous
experiment: a massive, precedent-setting governmental intervention in personal
freedom, a waste of our national resources, a loss of an important source of
tax revenues, a boon to criminals, a corrupting influence on public officials,
and an encouragement to otherwise law-abiding citizens to disregard and
disrespect the law. Prohibition produced many more costs than benefits and
clearly belongs among the ranks of the worst economic interventions of the last
100 years.
The War on Drugs
has had the same sort of unintended and undesirable consequences that
Prohibition had, and it has failed for exactly the same reason: government
officials cannot stop people from engaging in mutually agreeable exchanges.
They may reduce the extent of such exchanges with harsh penalties, but they
won’t stop them. Efforts to stop such exchanges will spawn many unintended and
undesirable outcomes.
Monetary
Policy During the Great Depression
The Federal
Reserve Act of 1913 was created to resolve a problem: frequent banking panics,
or widespread runs on banks, that plagued the U.S. economy. The Act created a
central bank—the Federal Reserve System—which was expected to eliminate them.
But the biggest banking panic in U.S. history was in the making, and the Fed
did little or nothing to prevent it. What would have been a recession was
turned into the Great Depression. The Fed’s failure to act decisively was one
of the most costly economic policy errors to have been made in the past 100
years.
The
Hawley-Smoot Act
In an
unprecedented show of unanimity, over 1,000 economists from the United States
signed a letter urging Congress and President Herbert Hoover to reject the
Hawley-Smoot Act. Their warning went unheeded. The Act touched offa trade war,
intensified the Great Depression, and helped set the stage for World War II.
The Act and the story of its passage highlight Congress at its worst in
pandering to special interests. More than fifty years after its passage,
President Ronald Reagan referred to the Republicansponsored Act as “the most
destructive trade bill in history.”
Social
Security
The pay-as-you-go
government program originally was designed to have a “full reserve,” but members
of Congress couldn’t keep their fingers out of the cookie jar. The result is
the second largest Ponzi-type scheme sponsored by the U.S. government (Medicare
is the biggest). Social Security has contributed to de-capitalizing the economy
by substituting government promises of retirement income obtained through
taxation in lieu of income that would have been obtained from private-sector
savings. The Social Security program is a non-transparent welfare program that
redistributes enormous amounts of wealth, often in ways that most Americans
would find undesirable.
Tax Follies
The 16th
Amendment to the Constitution, passed in 1913, made the income tax a permanent
fixture of the U.S. tax system. The first personal income tax was quite simple:
three pages of forms and one page of instructions. Income taxes today are
excessively complicated, non-transparent, and costly. There are now over 500
separate tax forms and over 7,000 pages of taxpreparation instructions. In
2009, the IRS estimated there were between 900,000 and 1.2 million paid
tax-preparers to help hapless taxpayers through the morass of tax rules. Worse
yet, the income tax hides over a trillion dollars in hidden subsides that
distort economic decision-making and produce economic waste. Reforming our wasteful
tax system remains a difficult-toachieve goal as entrenched special interests
fight hard to resist change.
Medicare
The pay-as-you-go
health insurance program for retirees, unlike Social Security, was not designed
to have a full reserve. In fact, Bess and Harry Truman received the first
Medicare cards despite never paying any taxes into the program. Today, the
program is the single worst Ponzi-type scheme in the government’s arsenal. It
is $20 trillion to $30 trillion dollars in the red and is in far worse shape
than Social Security. This chapter sheds light on the extent of the transfers
and the impending crisis in financing the program.
The
Nixon-Burns Political Business Cycle
The Nixon tapes,
secret recordings made in the White House, reveal how Richard Nixon pressured
Federal Reserve Chairman Arthur Burns to overheat the U.S. economy prior to
Nixon’s reelection bid. Acting against his better judgment, Burns caved in to
Nixon’s lobbying and set the stage for a decade of inflation that required
three recessions to extinguish. The tapes reveal how the Fed’s independence can
be compromised for political gain and why the power of the Fed’s printing press
must be kept out of the reach of politicians.
Environmental
Mismanagement
The failure to
take into account pollution costs in the pricing of various goods leads to the
production of goods that are worth less than their costs. Economists generally
agree that some type of environmental regulation is needed to correct market
failures arising from producers and consumers neglecting the costs of
pollution. And often they’ve assumed that once a market failure was identified,
the government would take the appropriate corrective actions.
When they’ve
investigated regulatory behavior, however, they’ve discovered that government
regulations all too often failed to correct market failures and all too often
created market failures of their own. Wasteful environmental regulations are
the rule, not the exception. And usually they benefit special-interest groups
while harming the society at large. This chapter highlights the problem with
two case studies: a proposed “clean coal” power plant for northern Minnesota
and the federal ethanol mandate.
Government
Failure and the Great Recession
The busting of
the real estate bubble beginning in 2006 sent the U.S. economy into a tailspin.
This chapter reveals the government’s role in fostering the bubble. The Great
Real Estate Bubble was nourished by paternalistic policies, fostered by both
Democrats and Republicans, to engineer a better society by greatly expanding
home ownership, especially to the young and lower income groups. In contrast to
government’s role in Prohibition, government became a “pusher” during the
housing bubble. The government’s “policy drugs” hooked millions of lower-income
Americans on homeownership, indebtedness they could ill afford, and eventual
bankruptcy. The economic damage done to the young and less fortunate added
another cruel dimension to the economic catastrophe.
Decades of
Deficits
The rapid and
unprecedented peacetime run-up in the nation’s public debt, begun at the turn
of the 21st century, threatens to sink the U.S. economy. Unlike the situation
following World War II, paying down this debt will be much more difficult due
to expected increased outlays for entitlements as the baby-boomers begin to
retire. At the very least, the burden of the public debt will slow economic
growth and raise the normal unemployment rate. This chapter explains why
irresponsible deficit spending is one of the terrible ten.
Can Government
Governance Be Improved?
The final chapter
reviews the causes of bad policies and makes suggestions for improving the
institutional setting in which policymaking takes place. The task of improving
government governance is possible but daunting.
