Reverse Your Expectations

by Burt on November 15, 2012

On the subject of the effectiveness of government programs, Milton Friedman once wrote:

“There is a sure-fire way to predict the consequences of a government social program adopted to achieve worthy ends. Find out what the well-meaning, public-interested persons who advocated its adoption expected it to accomplish. Then reverse those expectations. You will have an accurate prediction of actual results.”

If we take a trip through American economic history, we find Friedman’s formula vindicated more often than not. Let’s begin with the first government subsidy in U.S. history: a government-operated fur company in the American Northwest. Its purpose was to allow the U.S. to trade furs with the Indians, earn their loyalty, and keep the British fur traders away from the Mississippi River. What happened? Just the opposite. The government fur company was incompetently managed; Indians mocked it because it sold farm equipment and jews harps instead of cheap and useful blankets, guns, and axes. The British, therefore, flagrantly expanded their fur trading deep into American territory.

In the 1860s, the U.S. began building transcontinental railroads to pull our nation together and give passengers cheap railroad fares across the country. What happened when the federal government poured money into railroad building? Did the country gain well-built railroads? Again, just the opposite. The country became more divided because (1) some states were left out of the transcontinental building, (2) the first transcontinentals were so poorly built they never provided cheap transportation, and parts of those roads had to be rebuilt later after bankruptcy hearings, and (3) the Irish on the Union Pacific fought with the Chinese on the Central Pacific, which sparked ethnic tensions nationwide. Furthermore, the costs of transportation were not so cheap because the transcontinentals often went into receivership, and their rates became highly regulated. Only when James J. Hill built the Great Northern Railroad with no federal subsidy did the U.S. emerge with a competitive and unifying railroad from the Midwest to the Pacific.

As a final example, in 1971 President Nixon instituted wage and price controls to halt inflation. When the price controls were lifted a couple of years later, inflation skyrocketed, and remained in the double digit range for the rest of the decade.

All of these examples need to be discussed and debated to gain insight in how to make public policy. As Milton Friedman pointed out, politicans should ask, “What have been the actual results of earlier policies? Where was the money actually spent? Did the public really benefit from this intervention by government?”

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