New Book Exposes the ‘Terrible 10’ Worst U.S. Economic Policy Mistakes
—P. J. O’Rourke
Despite enjoying impressive economic growth over the past century, Americans have also been the victims of scores of stupid government mistakes that have made them poorer. For many the blunders led only to temporary setbacks, but for others the errors created life-altering disasters from which they never recovered.
In the new book The Terrible 10: A Century of Economic Folly, Independent Institute Research Fellow and MyGovCost.org Director Burton A. Abrams tells the story of the ten worst U.S. economic policy mistakes of the past one hundred years, assesses their magnitudes, and pinpoints the underlying causes that led politicians and bureaucrats to make them.
Written in an accessible style for a general audience, The Terrible 10 provides fascinating (and often little-known) details about the 20th and 21st centuries’ most destructive economic policies: Prohibition, Federal Reserve policy during the Great Depression, the Smoot-Hawley trade tariffs, the byzantine U.S. tax code, counterproductive entitlements, the Nixon-Burns political business cycle, environmental mismanagement, policies that caused the Great Recession, runaway federal spending, and more. One of the book’s key findings is that foolish policymaking is not the monopoly of any single political party.
“The blunders divide fairly equally among Democrats and Republicans,” Abrams writes. “Basic forces work to encourage the production of wasteful economic policies, regardless of the political party in power.”
Here are some additional findings of The Terrible 10:
- 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. For example, suppose the Fed deserves blame for only 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-as-you-go system in 1939 is perhaps the worst of several bad decisions associated with the plan. This blunder enabled several increases in unfunded benefits. From 1960 to 2011 Social Security’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.
- The worst economic-policy disasters of the past century resulted from federal policymakers making one or more of six kinds of mistakes: (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 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.”
The Terrible 10 goes beyond identifying the worst U.S. economic policies and their causes and effects, as valuable as that achievement is. It also makes recommendations designed to change the incentives and constraints that foster bad decision-making. Readers who absorb the book’s timeless lessons will better appreciate the resilience and dynamism of the free-market elements that still remain in today’s mixed economy. And they’ll be better equipped to articulate the reasons why virtually no one’s pocketbook and livelihood are secure so long as federal lawmakers and their bureaucratic stooges are at work.
Read a detailed book summary.
[A shorter version of this post first appeared in the October 1, 2013, issue of The Lighthouse. To receive this weekly newsletter, enter your email address on the Independent Institute’s email subscription page.]