Failures in Prohibition, Tariffs, and New Deals

The US hasn’t learned from its own history when it comes to prohibition, tariffs, and New Deals; and the people are going to pay dearly for that willful ignorance.

June 10, 2019

By: Bobby Casey, Managing Director GWP

Is it just me, or is the US playing some of its greatest disastrous hits of the past 100 years? Were the lessons really that unclear?

A couple years ago, we put out a blog “Let’s Get Back to the Constitution”. The irony of that piece was that no one ever specifies which version of it we should get back to. The Constitution as it is now is a conflicted document that contradicts and undoes itself.

Prohibition

One of the most glaring mistakes chronicled in it was that of Prohibition. The 18th and the 21st amendments mark three decades of one of the bloodiest domestic policies in the last century.

While it leaves little room for doubt that prohibition is a bad idea, we still have iterations of it alive and well today. There’s the obvious drug war; the mission creep of gun control; the highly contested border control; prostitution which has morphed into “a war on human trafficking”; and more recently abortion in some states.

In every single one of these cases, regardless of your personal convictions on the issues themselves, the policy creates criminals and black markets which begets a violent war between government enforcement and market demand.

These activities are dangerous, but that’s exacerbated by their legal status, in that there is no recourse in reporting unscrupulous behaviors in that space. A prostitute can’t report that she’s been raped or beaten because she would have to first confess to prostitution.

The same is true in eliciting eye witness testimony from undocumented immigrants. They might’ve seen everything, but they are fearful of deportation, so they stay quiet and the real dangerous actors get away with it.

It’s uncanny that the government has found a way to make legalization WORSE than full criminalization in some respects. The regulations surrounding “legitimate” cannabis cultivation has become such an expensive matrix it gives law enforcement a bureaucratic pass to harass anyone who colors outside the lines.

(If you’re interested, this article shares the sad attack “legalization” has waged on growers trying to follow the rules.)

Tariffs

It’s not just prohibition, which is an economic black hole, but tariffs!

This trade war has cost the American citizens dearly and from every possible direction. It has been a disaster for American farmers. So, it cost the American taxpayer billions in bailouts to keep the farmers afloat. These costs all fall squarely on the shoulders of every American consumer, regardless of whether they pay taxes in price hikes.

Everyone from Costco to the Dollar Tree has declared that they will need to hike their prices to accommodate the tariffs. The Dollar Tree operates on a low margin high volume model; but it sources nearly 40% of its goods from China.

American enterprises rely on China for imports as well as exports. That’s the simple fact. And what’s more, history has shown that trade wars and high tariffs are terrible if not catastrophic policies.

Whatever benefits Americans realized through the tax cuts, is nearly swallowed by the heavy toll of tariffs.

Here’s how the math works: middle earners got an average tax cut of $930 for the tax overhaul passed in late 2017, according to the Urban-Brookings Tax Policy Center. The tariffs already in effect cost the average household about $831, according to research from the New York Federal Reserve.

This idea that we just didn’t do it right the last time is utter nonsense. There is no doing a wrong thing right. And history is very clear on this point.

The “Black” Tariffs in 1842, while not the exact cause of the Civil War, didn’t help union relations one bit. The 40% tariffs levied on trade put unnecessary hardship on the south’s trade relationship with Britain.

More famously, the Smoot-Hawley Tariffs of 1930, which shoulders some of the blame for protracting the Great Depression. It was a response, of course, to farmers complaining about foreign competition.

As a result, global trade shrank by over 65% in the five years that followed the passing of that act.

I’ve already discussed the toll of steel tariffs under George W. Bush which cost 200,000 jobs and $400,000 per job saved. For every job saved, eight were lost.

“New Deals”

A major policy being touted by the left is another “New Deal”: a Green New Deal. While it may seem completely absurd, the high end estimated costs over ten years is $93 trillion. That sounds entirely make believe until you read the breakdown of where that number comes from. Then it is very sobering.

Factcheck.org tries to debunk this with a much more palatable figure of $18 trillion over 30 years.

Milton Ezrati in a Forbes article suggests that just six of the major tenets of the Green New Deal would cost $2.5 trillion per year, or $25 trillion over ten years.

Aside from the monetary costs, which are inevitably substantial, the US stands to lose in real innovation. Centrally planned ideas cannot keep up with free market innovation. By the time a government executes its plans ten years down the line, the idea itself is already outdated.

Part of FDR’s New Deal was to have a federally subsidized electrification program to get everyone on the grid. While getting 90% of the urban populations on board was easy, the inverse was true for the rural areas. Only 10% of farmers had grid electricity.

Before this federal initiative, farmers were already procuring their electricity through other means. While admittedly it wasn’t all “clean” energy, had the federal policy NOT been instituted, we could very well have had a world of other clean energy options today. As Robert E. Wright of the American Institute for Economic Research contends:

Before FDR subsidized rural electricity grids, the farm-equipment industry was already innovating in battery, windmill, and hydroelectric technologies. Farmers met their electricity needs as inexpensively as they could. Conservation topped the list, but, to listen to Father Coughlin or Bing Crosby on the radio, a large battery, charged weekly at a retailer in town while the family enjoyed the picture shows or a live musical concert, often proved the cheapest and most reliable source. Moving and heating water, though, was often most efficiently done with a windmill. Hand-cranked lights served to illuminate barns and the like at night.

With the advent of rural electrification, the market for decentralized, green electricity production withered.We will never know for sure how much more quickly green-energy technologies might have developed if the New Deal had not squelched the sector by subsidizing its dirty alternative, but if innovations in farm equipment are any indication, it seems likely that the Green New Deal would have been unnecessary because decentralized solar, wind, and battery technologies would have long since become inexpensive enough to compete with, and possibly even supplant, their fossil rivals.

The United States is NOT learning from its own history, despite how densely packed with clear economic lessons it is. Consequently, the US is condemning itself to repeat these same disastrous policy mistakes. In the end, it won’t be China, or Islamic extremists, or immigrants or any other boogeyman policy-makers try to scapegoat that brings the US to its knees. It’ll be the policy-makers themselves.

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