Sunday, 29 September 2013

Governments behaving badly

That governments often behave badly is clear, but what would be the worst things a government has done?For the U.S. there is now an answer. The Independent Institute has recently released a new book, The Terrible 10: A Century of Economic Folly by Burton A. Abrams. In the book Abrams looks at a series of disastrous government policies that, he argues, 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 favour short-run benefits for friends while imposing costs on current and later generations. Interestingly Abrams's ten worst blunders divide equally among Democrats and Republicans. The book also provides key lessons to help us avoid repeating such policy mistakes in the future.

A summary of worst economic blunders of the past century is given by

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 off a 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 Republican sponsored 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.


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.
This isn't the first book to look at government policy failures. Across the other side of the Atlantic in 2007 the IEA released a related book on They Meant Well, Government Project Disasters by D. R. Myddelton. This book, more tightly focused than the Abrams's work since Myddelton only considers quasi-commercial projects, also highlights just how wrong government policy ideas can go.

A summary of the book's argument is given by
Government officials and ministers usually mean well when they promote and manage quasi-commercial projects in the public sector, which however often turn out to be financial disasters. Any technological advances come at huge expense.

A recurring rationale for grandiose projects, from the groundnut scheme to the Millennium Dome, has been to boost ‘national prestige’, but this concept has little real value.

The costs of ventures dependent on new, untried technology, such as the R.101 airship or nuclear power, are extremely uncertain, so taxpayers have to underwrite their high risks. Initial financial estimates may often be purposely too low.

Partly due to changes in specifications, many of the projects incurred time and cost overruns of more than 100 per cent. The high speed Channel Tunnel Rail Link is still not ready more than thirteen years after the Tunnel itself opened.

The absence of market pressures in the UK’s civil nuclear power programme meant that nobody knew or cared how much it was costing. The result was total losses far exceeding those of all the other five projects together.

State projects are always liable to short-term political interference, which may increase costs, as for the Millennium Dome, or risks, as for the R.101 airship.

The government’s opaque accounting practices often disguise the true level of state spending on large projects, as with the Channel Tunnel Rail Link.

Governments do not understand markets, and on some projects, such as Concorde, made little effort to research likely customer demand.

In the market system investors bear the costs of ventures that fail, but in the political system taxpayers have to do so. As a result, governments often choose to continue projects such as the groundnut scheme and Concorde, even after it has become clear they are not commercially viable.

None of the six projects was well managed and many of the failures were down to politicians: installing inadequate or over-complex organisations, appointing incompetent managers, or insisting on excessive secrecy.
The six projects examined are:
  • The R. 101 Airship (Chapter 2)
  • The Tanganyika Groundnut Scheme (Chapter 3)
  • Nuclear Power (Chapter 4)
  • Concorde (Chapter 5)
  • The Channel Tunnel (Chapter 6)
  • The Millennium Dome (Chapter 7)
But what of a New Zealand list? Think Big would have to be there. The student loans scheme? Capital controls and import controls? A fixed exchange rate? Monetary policy before the Reserve Bank Act? New Zealand Railways? Air New Zealand? Car-less days! Subsidies to framing. Widespread government regulation of economic activities: bars closing at 6pm, a doctor's prescription needed for margarine, shops not permitted to open on weekends, road transportation of goods, except over short distances, prohibited to protect the railways, use of statutory marketing broads etc.

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