During the 20th century, the United States became the world’s largest economy. It is often forgotten, however, that en route to its world superpower status, the United States also suffered from disastrous economic policies. In The Terrible 10: A Century of Economic Folly, Independent Institute Research Fellow and University of Delaware Economics Professor Burton A. Abrams tells the story of ten failed economic policies, such as Prohibition and the Smoot-Hawley Act, and extracts lessons for better future governance.
As the United States faces a changing world abroad and tumultuous politics at home, now is the perfect time to examine the country’s economic policies. NerdWallet recently spoke with Professor Abrams to ask him about disastrous economic policies of yesteryear and to hear his thoughts on the economic policies of today.
How did you choose your book’s 10 economic blunders?
I wanted “big” issues that clearly produced large net losses to the economy. I also wanted blunders that could be quantified. Whenever possible, I tried to put a net dollar loss on the blunders.
It has been a busy two weeks in Washington. Most recently, the president has nominated Janet Yellen to be the new Federal Reserve Chairman. What lessons could she learn by reading your book?
She might benefit most from reading the chapter on how Arthur Burns, Chairman of the Federal Reserve System, was manipulated by President Nixon and the disastrous consequences that followed. Nixon pressured Burns into giving the economy a short-run boost prior to his reelection bid that led to a decade of inflation. It took three recessions to get inflation under control. Once inflation gets rolling, it is hard and costly to extinguish.
What lessons does your book have for Obamacare? You have chapters dedicated to the problems plaguing Medicare and Social Security.
Policies that seem reasonable often produce undesirable and unintended consequences. Obamacare will have effects on the labor force participation rate and retirement decisions and its tax-credit subsidies will shrink the tax base. This will put a heavier tax burden on fewer taxpayers. Are the magnitudes and distribution of the subsidies “fair”? How all this plays out will become clearer in the future.
What’s your take on the government shut down?
It’s not the first time and won’t be the last. Both parties have contributed to our economic problems and I’m confident that whatever short-run compromise is reached to end the shutdown will have little or no effect on correcting longer-run problems.
Interestingly enough, the 10 blunders you chose were pretty evenly split among Democratic and Republican presidents. What are some of the factors that lead decision-makers to create bad policies or legislation?
Managers of corporations are often criticized for their focus on the short-run bottom line without concern for the long-run. Politicians are even worse. Politicians, regardless of party affiliation, need to produce immediate benefits for constituents to boost reelection prospects. Their obsession with the short run, something I’ve dubbed “immediosis,” is viral in Washington.
Money, of course, also plays a role in lubricating the bad-policy machine. The benefits of bad policies often go to special-interest groups whose members receive large benefits and make large campaign contributions. Meanwhile the cost of these bad policies get spread widely over the population or pushed off to future taxpayers.
How can we improve government governance?
I suggest a number of answers in the book, but this is a really tough and important question that is not easily answered. But I think finding a cure for immediosis would help. Lengthening and limiting terms of office might serve to encourage consideration of longer-run costs and benefits. I also favor rules to restrict deficit spending and the public debt. A full-employment balanced-budget rule or a constitutional rule limiting public debt as a percent of GDP would help to prevent the pushing of costs on to future generations.
Which of the 10 economic follies that you write about will still be haunting Americans in 50 years?
Many of the terrible ten will be producing long-term costs. Social Security and Medicare have reduced national savings and wealth, making our nation poorer.
Our large public debt relative to our GDP is a drag on economic growth. It is going to grow going forward and its anti-growth effects worsen.
Attempts to simplify and correct our wasteful income tax system keep failing. I suspect future reforms also will fail and the waste will continue.
What current or pending economic policy has the potential of becoming a disastrous economic folly?
It’s the ones you don’t see coming that really hurt you. But I see several. Here are two.
The Federal Reserve’s “quantitative easing” holds the potential for a massive problem. Is the Fed re-inflating a bubble in real estate and creating a bubble in financial assets? If the answers are “yes” and the bubbles pop, expect major economic disruption. Also, can the Fed efficiently wipe out $2.2 trillion in bank excess reserves before they cause an explosive growth in the money supply and inflation? Janet Yellen will have her hands full.
Unfunded state and local government pensions are enormous. The future tax burdens these pensions impose are going to make the most indebted states unattractive for businesses and retirees. If enough people vote with their feet, bankruptcy might await some states.
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The Terrible Ten via Independent Institute