The U.S. economy made impressive gains in the 20th century, but this progress makes it easy to forget a harsh reality: Americans were the victims of disastrous government policies that cost trillions of dollars in wasted resources, created mass unemployment, and kept millions of people in poverty who otherwise would have participated in the nation’s growing prosperity. A complete dissection of the 10 most egregious economic blunders of the past century, this work provides the key lessons to help in avoiding such policy mistakes in the future. The Terrible 10 notes that, unlike the private sector, when the governance of the federal government fails, the role and scope of government is usually increased and that politicians from both parties tend to favor short-run benefits for friends while imposing costs on current and later generations. With issues and blame divided equally among Democrats and Republicans, this work stands as a highly readable history of how government economic blunders affect everyone.
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About the Author
Burton A. Abrams is a research fellow at the Independent Institute, the director of the Independent Institute’s government cost calculator, and a professor of economics at the University of Delaware. He is the author of An Economic Theory of Lobbying: A Case Study of the U.S. Banking Industry and Return to Animal Farm. He lives in Newark, Delaware.
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The Terrible 10
A Century of Economic Folly
By Burton A. Abrams
The Independent InstituteCopyright © 2013 The Independent Institute
All rights reserved.
The War on Booze
"No tendency is quite so strong in human nature as the desire to lay down rules of conduct for other people."
— William Howard Taft, 27th president of the United States
"Doubts raced through my mind as I considered the feasibility of enforcing a law which a majority of honest citizens didn't seem to want."
— Eliot Ness, agent in the Bureau of Prohibition
THE RADOSEVICH BROTHERS finally had arrived, part of the nearly half-million immigrants that poured into the United States in 1900, lured by good jobs, even for those who could barely speak English. They migrated to Michigan's Upper Peninsula and from there into the northern Minnesota wilderness, where a newly discovered iron range promised even better opportunities for those willing to work hard. And hard work it was. And there were the mosquitoes in summer and the bitter cold in winter. The brothers stayed in a boarding house in Bovey, a small, rowdy mining town of several hundred immigrants from southern and eastern Europe. The brothers saved their money and watched Bovey grow with the open-pit mine. After six years in the mines, they decided to pool their resources and enter the second-biggest growth industry in the region: the sale and distribution of alcohol. The Radosevich Brothers European Saloon was born, and business boomed.
Virtually nonexistent in 1900, Bovey had grown to a population of 1,377 in 1910. It had thirty saloons, about one for every forty-five inhabitants, possibly a national record. A mere one hundred yards down the dirt road was the town of Coleraine, a community designed and constructed by the mining company for the mine's white-collar workers. In the northern states, few towns adjacent to each other could have differed more. Coleraine's single-family homes, overlooking Trout Lake, were built on spacious lots. Its residents were well-educated and second- or third-generation Americans. Bovey consisted primarily of tar-papered buildings packed onto small lots. Nearly everyone in Bovey was first-generation with little formal education and few English skills. Bovey was inhabited by immigrants with colorful nicknames like "Switchman," "Jim, the Turk," "Big Dan," and "Pollock." Coleraine was heavily Protestant, "dry," and home to Mr. John C. Greenway, supervisor of the mine. The contrast between Bovey and Coleraine mirrored a divide that was widening in the nation as a whole. But the Radosevich Brothers' Saloon (shown in Figure 1.1) boomed along with the town and the production of iron ore, until 1920 when the saloon's doors were closed permanently by force of law.
On January 16, 1920, after decades of effort, temperance crusaders finally succeeded in getting the manufacture, transportation, and sale of alcoholic beverages in the United States outlawed through the 18th Amendment to the Constitution. Known as Prohibition or the "noble experiment," the period when the Amendment was in effect would last fourteen years.
Prohibition was a paternalistic/maternalistic law, reflecting the desire of a minority of Americans to impose their views of morality and the proper lifestyle on the majority. It was government-imposed morality. 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 worst economic interventions of the last one hundred years.
How Did It Happen?
In the early 1900s, rural Americans, most of them Protestant, were feeling their way of life threatened. Rural interests controlled the state and national legislatures, and rural concerns often received far more attention politically than did urban concerns. Society was changing in ways that did not meet the approval of people in the rural areas of the country. The nation's population was expanding rapidly, but not evenly. Between 1900 and 1920, the urban population soared by 80 percent, while the rural population grew by a mere 13 percent. By 1917 a majority of U.S. citizens, for the first time in history, lived in cities. Cities offered easy access to saloons, liquor, prostitutes, gambling, and other social features that rural Protestants felt were challenging their values.
Another challenge to rural Protestant values came from the waves of new immigrants, like the Radosevich brothers, arriving on U.S. shores. Between 1900 and 1920, 15 million immigrants arrived, increasing the U.S. population by about 16 percent. Between 1900 and 1914, about 75 percent of the immigrants came from central, eastern, and southern Europe — countries like Germany, Italy, and Russia where alcohol consumption was an accepted part of the culture. Most were Roman Catholic and other denominations not Protestant.
Another threat came from alcohol and the problems that were seen to surround its use. In the first decade of the century, alcohol consumption rose rapidly. To accommodate all this drinking, saloons were springing up by the tens of thousands, largely in the cities. Several cities had thousands of saloons. As early as 1906, Chicago reportedly had about 8,500 liquor outlets: roughly one for every one hundred adult males, who at that time were the principal patrons.
The saloon business was highly competitive. In an effort to attract business, many encouraged prostitution and gambling and sold booze to minors. Saloons often stayed open on Sunday in violation of local "blue laws" and saloons were seen as a prime reason for the growing problem of public drunkenness. And they helped to separate wayward husbands from their paychecks, yet another threat to family life. As the 1920s approached, millions viewed saloons as a blight on the American landscape, even many who firmly opposed Prohibition.
Prohibitionists offered other rationales in support of their cause. Prohibition crusaders claimed many positive benefits would flow from Prohibition. The remarks by U.S. Representative Richmond Hobson (D-Alabama) on the House floor in 1914 are illustrative. In support of the temperance movement, he claimed:
Science has thus demonstrated that alcohol is a ... poison, poisoning all living things; that alcohol is a habit-forming drug that shackles millions ... and maintains slavery in our midst; that it lowers in a fearful way the standard of efficiency of the Nation, reducing enormously the national wealth, entailing startling burdens of taxation, encumbering the public with the care of crime, pauperism, and insanity; that it corrupts politics and public servants, corrupts the Government, corrupts the public morals, lowers terrifically the average standard of character of the citizenship, and undermines the liberties and institutions of the Nation; that it undermines and blights the home and the family, checks education, attacks the young when they are entitled to protection, undermines the public health, slaughtering, killing, and wounding our citizens many fold times more than war, pestilence, and famine combined; that it blights the progeny of the Nation, flooding the land with degenerates....
Prohibitionists emphasized the supposed public health benefits of prohibition. Reduced drinking of alcohol would, they claimed, reduce the incidence of serious illnesses, especially cirrhosis. It would cut down on accidents, a growing problem in the rapidly expanding industrial workplace. It would improve productivity and reduce absenteeism, thereby contributing to the nation's prosperity. Irving Fisher, the well-respected University of Chicago economist, wrote:
Since scientific research has shown that alcoholic beverages slow down the human machine, and since the human machine is the most important machine in industry, we should expect the use of alcoholic beverages to slow down industry, and we should expect Prohibition, if enforced, to speed up industry.
The alleged improvement in labor productivity convinced several leading U.S. industrialists, including John D. Rockefeller, to support Prohibition, at least in its early years. The Prohibition crusaders also argued that Prohibition — especially closing the saloons — would reduce crime, another growing problem, particularly in the cities. Reducing crime would, they claimed, greatly reduce the tax burden created by the growing prison population.
These various concerns helped marshal a large coalition consisting of Protestant-based prohibition groups such as the Anti-Saloon League, the Women's Christian Temperance Union, industrialists, and intellectuals. They worked hard to get representatives elected who would vote for a Prohibition amendment. And they wanted an amendment to the Constitution, not just federal legislation. A law could be changed by a majority vote in Congress. With the growing importance of the urban population, it was only a matter of time before the urban influence over legislation would grow, proponents reasoned, so a Prohibition law could be easily abolished. A constitutional amendment was another thing. It would take a two-thirds majority in both houses of Congress and ratification by three-quarters of the states to change it. Thus, a minority of just thirteen state legislatures could block any effort to amend or abolish a Prohibition amendment.
The political activism by the prohibitionists paid off. By 1916, twenty-three states had adopted laws that closed the saloons and prohibited the manufacture of alcoholic beverages. The 1916 elections returned to Congress a supermajority favoring national Prohibition.
World War I also helped speed the progress of legislation. It did not go unnoticed that many U.S. breweries were owned by German Americans, and anti-German sentiments were running high. Congress adopted "temporary" wartime measures to conserve grain for the war effort. In September 1917, it banned the production (but not the sale) of distilled spirits until war's end. Also helping the Prohibition movement was the 16th Amendment, which established the income tax. The income tax greatly reduced the importance of the excise tax on alcohol as a revenue source for the government.
In December 1917, Congress approved the Prohibition amendment in a strong bipartisan vote (65–20 in the Senate and 282–128 in the House) and sent it to the states. The amendment prohibited the manufacture and sale of all alcoholic beverages, effective July 1919, again using wartime powers as an excuse. No saloon could operate legally after that date. By January 1919, the states had fully ratified the 18th Amendment, and it became the law of the land one year later in January 1920. Prohibition had actually begun in July 1919.
The National Prohibition Act, usually called the Volstead Act, was passed in 1919, over the veto of President Woodrow Wilson. It provided the legal framework for implementing the Prohibition amendment. The act prohibited "intoxicating liquors" (anything with alcohol content in excess of 0.5 percent) but made exceptions for alcohol sold for medicinal, sacramental, and industrial purposes. It also exempted "nonintoxicating" concentrated fruit or grape beverages made for personal use in the home, up to 200 gallons a year. All of these exceptions eventually helped topple Prohibition.
Why Did It End?
As early as 1928, very influential voices — such as Al Smith, the Democratic presidential candidate, a majority of the members of the American Bar Association, and wealthy individuals such as Pierre S. du Pont II — were calling for the repeal of Prohibition. By the late 1920s, if not much sooner, it was clear that Prohibition not only was a failure but also was creating severe problems for the country. In 1930 a group of respected, influential, and well-informed people were polled as to what they saw to be the major problems confronting the United States. Their responses produced the following ranking: (1) administration of justice, (2) Prohibition, (3) lawlessness and disrespect for law, (4) crime, (5) law enforcement, and (6) world peace. Unemployment was ranked 18th! The items ranked first, third, fourth, and fifth had become major concerns primarily as a consequence of Prohibition. When the poll was repeated in 1931, Prohibition was ranked as the most pressing problem, followed by administration of justice, lawlessness, and unemployment. So even with unemployment reaching 16.1 percent in 1931, Prohibition and Prohibition-related concerns still occupied the top three spots in the poll. Democrats and Catholics led the charge against Prohibition, and in 1932, with the economy in depression, Democrats captured the White House.
Prohibition finally ended in 1933 with adoption of the 21st Amendment, passed by Congress in February 1933 and ratified by three-quarters of the states by December 1933. The 21st Amendment repealed the 18th Amendment, the only amendment ever to be repealed. The states ratified the 18th Amendment in record time of 13 months, but they set a new record in abandoning it in only 10 months. By 1936, all but eight states had changed their own laws making them at least partially "wet." Notably, some states never passed laws supporting Prohibition. The speed with which all this occurred helps illustrate how unpopular Prohibition had become.
The 21st Amendment was sent to the states with a novel requirement that states had to call a special convention of delegates elected by voters. This permitted a bypass of the many state legislatures that were still dominated by rural interests. After all, it would take only thirteen states voting no to stop the amendment. The delegates were elected on the basis of their stand on the amendment. Prohibition came crashing down in a landslide: nationally 73 percent of the voters favored repealing Prohibition.
Prohibition ended because many original supporters, including elected officials, came to realize two things. First, they had vastly underestimated the difficulties of preventing tens of millions of people from engaging in mutually beneficial exchanges: the buying and selling of alcoholic beverages. Essentially, they had ignored a basic economic principle: if demand for an item — even an illegal item — is sufficient to make supplying it profitable, then entrepreneurs will always find ways to supply it. Second, they had failed to take into account properly the number and magnitude of adverse consequences created by Prohibition, including changes in consumer and producer behavior and undesirable impacts on government itself.
Just as there presently is widespread disregard for speed limit laws, there was widespread disregard for Prohibition. In 1931 the National Commission on Law Observance and Enforcement (created by President Herbert Hoover to investigate enforcement of the Prohibition laws; hereafter, referred to as the Wickersham Commission, after its chairperson) concluded: "It is evident that ... people of wealth, business men and professional men and their families, and perhaps the higher paid working man and their families are drinking in large numbers in quite frank disregard of the declared policy of the National Prohibition Act." The committee also found that there was much drinking among women and young people.
Drinking at homes, clubs, hotels, public dinners, and conventions was widespread. Tourists drank openly at summer and winter resorts. Drinking parties were hosted and attended by people of high standing and respectability. The Wickersham Commission found that after a brief period in the first years of Prohibition, there was a steady increase in drinking. In fact, historical trends suggest that per capita consumption likely would have surpassed pre-Prohibition levels by the mid-1930s, had Prohibition not been repealed.
Millions of people made their own home brews of wine, beer, or bathtub gin. Wineries sold concentrated grape juice along with the yeast that would cause the juice to ferment into wine. Due to an anomaly in the Prohibition Act, home manufacture of wine for personal consumption was effectively legal. The act stipulated that the wine should be "non-intoxicating," but in this connection, it did not define non-intoxicating. Thus, it became a question of fact to be determined by a jury from case to case. This obstacle effectively removed home winemaking from the purview of the Prohibition Act because it would have been too costly to enforce on a case-by-case basis. As a result, much homemade wine was produced, and a large amount of it found its way into circulation through black markets.
Excerpted from The Terrible 10 by Burton A. Abrams. Copyright © 2013 The Independent Institute. Excerpted by permission of The Independent Institute.
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Table of Contents
2 Monetary Policy During the Great Depression,
3 The Hawley-Smoot Act,
4 Social Security,
5 Tax Follies,
6 Medicare and Medicaid,
7 The Nixon-Burns Political Business Cycle,
8 Environmental Mismanagement,
9 Government Failure and the Great Recession,
10 Decades of Deficits,
About the Author,