“The law of unintended consequences is what happens when a simple system tries to regulate a complex system. The political system is simple. It operates with limited information (rational ignorance), short time horizons, low feedback, and poor and misaligned incentives. Society in contrast is a complex, evolving, high-feedback, incentive-driven system. When a simple system tries to regulate a complex system you often get unintended consequences.” (Andrew Gelman)
Andrew Gelman is dead on. He states that the political system is simple. I’d go a step further and say that lifetime politicians and entrenched government bureaucrats are simple. They show no indication of knowledge or expertise in American history or rational financial theory. The President, Congress, Federal Reserve, and Treasury try mightily to direct our economy. It is an impossible task. With a GDP of $14 trillion, there are thousands of inputs and outputs that feed the system. Their hubris leads them to believe that they are in control and can manipulate the gears of capitalism in a way that will produce their desired outcomes. If a desired outcome occurs, it is simply due to dumb luck. The more likely result of their manipulations of our complex system is a set of bigger problems that never occurred to them.
Congress definitely fits Mr. Gelman’s definition of a simple system. I can’t think of a body of people operating with more ignorance than Congress. The information they act upon, is provided by the 17,000 lobbyists that wine and dine them on a daily basis. Corporate lobbyists, PACs, unions, and special interests buy their votes. Their time horizons are less than a few months. They are constantly running for re-election, raising money and handing out goodies to their constituents. The only feedback they care about is their standing in the polls and the amount of money they’ve raised from “donors”. Their incentives are poor and not aligned with the needs of the American people. They are not willing to do what is right for the country because they have no incentive to do so. Their only incentive is to get re-elected by insuring that their district gets as much pork spending as possible. They do this by selling their votes to the highest bidder.Unintended Consequences of the Last 100 Years
The 20th century is a laundry list of events that led to unintended consequences.
- Assassination of Archduke Ferdinand of Austria
The assassination of Archduke Franz Ferdinand of Austria by anarchists in 1914 was the fuse that set off World War I by causing various Treaties to cause all the countries of Europe to take sides. All sides envisioned a short painless war. The war lasted 4 years and killed 20 million people, with another 20 million casualties. It also lead to the Russian Revolution of 1917 with Lenin and Marxists gaining control of Russia.
- Treaty of Versailles
The harsh terms inflicted upon Germany by the victorious Allies were so ruthless that Germany was unable to meet their reparation obligations without printing currency at tremendous quantities. This eventually led to a hyperinflationary collapse of the German Mark and weakened the Weimer Republic. This eventually led to the rise of Adolph Hitler as dictator and ultimately to the deaths of 70 million people in World War II.
- Creation of Federal Reserve
The Federal Reserve was created in 1913 in order to make bank panics less likely and to manage the nation’s monetary policy. They have created persistent inflation that has caused the U.S. dollar to lose 95% of its value since 1913. Their actions contributed greatly to the Great Depression of the 1930’s. Alan Greenspan’s self serving actions, in the late 1990’s and early 2000’s, led to the recent collapse of the worldwide financial system.
- FDR’s New Deal
The programs created during the Roosevelt administration to combat the Great Depression, particularly Social Security, have been on automatic pilot for eight decades. A program whose purpose was to protect poor old people from starving during a Great Depression has morphed into a perceived right of all Americans and has led to an unfunded future liability of $10 Trillion.
As Adolph Hitler was beginning to gain power and started to flaunt the Treaty of Versailles, other European countries could have crushed him as early as 1935. His military was not yet powerful. Hitler became emboldened by his early success and took more aggressive actions with the Rhineland, Sudetenland, and Czechoslovakia. The appeasement strategy practiced by British Prime Minister Neville Chamberlain to avoid bloodshed allowed Hitler to gain enough power to bring about the most destructive war in history. Winston Churchill explained the consequences after the war.
I cried out but no one would listen and now Europe is devastated…There never was a war easier to win…Not a single shot needed to be fired…But, no one listened.
- Manhattan Project
Robert Oppenheimer’s project was to create an atomic bomb before the Germans could invent one. The atomic bomb led to the end of the war in the Pacific as the bombs were dropped on Hiroshima and Nagasaki. His response after the successful test was, “Now I am become Death, the destroyer of worlds." It led to the positive development of the nuclear power industry. It also led to an arms race with the Soviet Union which almost led to nuclear war in 1962. The proliferation of nuclear weapons is one of the biggest dangers to world peace today.
- Creation of Military Industrial Complex
The United States had no Defense Industry prior to World War II. The rise of this industry was essential to winning World War II. In his Presidential farewell address, President Eisenhower warned about the increasing power of the defense industry. “In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.” His unheeded words have led to the Defense Industry amassing overwhelming power in Washington DC, with spending on defense in the U.S. exceeding $800 billion per year and representing 50% of all the military spending in the world. The U.S. spends as much as the next 43 countries combined.
- LBJ’s Great Society
President Lyndon B. Johnson stated his goal in 1964.
We are going to assemble the best thought and broadest knowledge from all over the world to find these answers. I intend to establish working groups to prepare a series of conferences and meetings—on the cities, on natural beauty, on the quality of education, and on other emerging challenges. From these studies, we will begin to set our course toward the Great Society.
These noble words led to the creation of Medicare and Medicaid. The unfunded future liability of Medicare is $61 trillion, six times the unfunded liability of Social Security. The programs did not reduce poverty or improve the healthcare system. The Great Society became the Debt Society. Barack Obama’s soaring rhetoric is reminiscent of LBJ’s vision. Beware!
Their purpose was to purchase and securitize mortgages in order to ensure that funds were consistently available to the institutions that lend money to home buyers. LBJ moved them off the government books in order to make his government deficits appear better. The two companies have been compromised for decades by the Democratic Party and were pushed to loosen their standards by politicians like Barney Frank and allowed millions of unqualified buyers to get home mortgages they could never pay off. Both companies have lost tens of billions and are now under the conservatorship of the U.S. government. The likely future liability to the U.S. taxpayer is $200 billion.