Panic Has Led to Government “Cures” That Are Worse than the Disease, History Shows

 Let’s take the novel coronavirus seriously, but let’s not throw reason, prudence, or the Constitution out the window.
Anyone who’s seen the John Hughes movie Ferris Beuller’s Day Off probably remembers the scene where Ferris’s economics teacher (Ben Stein) explains the Smoot-Hawley Tariff Act to a roomful of bored, sleeping students. The scene is brilliant for many reasons, perhaps most so because it perfectly demonstrated how some of the most boring things in history are also the most important.
Smoot-Hawley was, of course, one of the great blunders in history.
Passed in 1930 over the objection of more than a thousand economists, the legislation increased tariffs (which were already high) on imports to protect US industries and farmers, sparking a trade war that deepened the Great Depression. It’s a perfect example of authorities taking decisive action to alleviate a crisis—and making things much worse.
What many forget is that Smoot-Hawley didn’t cause the Depression. It was a response to the Depression. Indeed, it may never have passed at all without the catalyst—the Stock Market Crash of 1929—that sent the nation into a frenzy. Senate Republicans had defeated the GOP-controlled House bill the previous year, but trade restrictionists found a convenient crisis in Black Tuesday, which triggered widespread hysteria, allowing the law to squeak through. (President Hoover opposed the bill but signed it anyway because of political pressure, which included resignation threats from several Cabinet members.)
Designed to protect Americans during the economic crisis, Smoot-Hawley proved disastrous. Imports fell from $1,334M in 1929 to just $390M in 1932. Global trade fell by roughly 66 percent, government data show. By 1933 unemployment was 25 percent, the highest in US history.
To “correct” things, Americans elected Franklin D. Roosevelt, who launched a series of federal programs—which made the crisis even worse. The rest, as they say, is history.

The Government Has a History of Making Panics Worse

Smoot-Hawley and the New Deal are hardly the only examples of government actions making a panic worse.
In his book Basic Economics, the economist Thomas Sowell recounts several instances in which governments turned small problems into major ones by using blunt force—often price controls—to respond to public panic about rising costs of a given commodity.
One of the more famous examples of this is the gasoline crisis of the 1970s, which started when the federal government took a small problem (temporary high costs of gasoline) and turned it into a big one (a national shortage).
It began when OPEC (the Organization of Petroleum Exporting Countries), a newly formed oil cartel, cut oil production, causing fuel prices to rise. To address the rise, the Nixon administration (and later the Ford and Carter administrations) resorted to price controls to keep fuel prices low for consumers.
The result? Mass fuel shortages across the country that led to long lines and many Americans unable to buy fuel. This “energy crisis,” as it was dubbed at the time, in turn wreaked havoc on the automotive industry.
As Sowell explains, however, there was not an actual scarcity of gasoline. There was nearly as much gas sold in 1972 as the previous year (95 percent, to be precise). Similarly, Americans in 1978 consumed more gasoline than in any other previous year in history. The problem was the resources were not being allocated efficiently because of state-imposed price controls.
The energy crisis was entirely predictable, two Soviet economists (who had vast experience in the arena of central planning-induced shortages) later observed.

In an economy with rigidly planned proportions, such situations are not the exception but the rule—an everyday reality, a governing law. The absolute majority of goods is either in short supply or in surplus. Quite often the same product is in both categories—there is a shortage in one region and a surplus in another.

No one likes high gas prices, but the energy crisis of the 1970s wasn’t truly a crisis until the government created it. Nor was the result unique. Similar examples can be found throughout history, from the grain shortages in Ancient Rome brought about by Diocletian's “Edict on Maximum Prices” to the mortgage crisis in 2007 and the financial crisis that ensued.

READ ENTIRE POST