Economic Meddling Disasters


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They say “all politics is local.” But economic decisions impact the whole economy and reverberate internationally. That is why politicians’ meddling with the economy creates so many disasters.

The time horizon of politics seldom reaches beyond the next election. But, in economics, when an oil company invests in oil explorations today, the oil they eventually find and process may not make its way to market and earn a profit until it is sold as gasoline a decade from now.

In short, the focus of politicians is extremely limited in both space and time — and all the repercussions that lie beyond those limits carry little, if any, weight in political decisions.

At one time, many state banking laws forbad a bank from having multiple branches. The goal was limited and local — namely, to prevent big, nationally known banks from setting up branches that many locally owned banks could not successfully compete against.

But, limited and local as such state banking laws were, their impact was both national and catastrophic, when thousands of American banks failed during the Great Depression of the 1930s. The vast majority of the banks that failed were in states that had laws against branch banking.

Why? Because, when there is a single bank in a single place, the fate of both its depositors and its borrowers depends on what happens there. If it is a wheat-growing region, a drop in the price of wheat means people deposit less money in the bank at the same time when more borrowers are unable to repay their loans.

Banks caught in that kind of crossfire went under on a scale that shrank the total amount of credit in the country and helped plunge the national economy into depression. In Canada, where banks were free to have branches all across the country, not one bank failed during the same years when thousands of American banks failed — and Canada did not yet have deposit insurance until 1967.

A Canadian bank with branches in all sorts of places across the country — with all sorts of different industry, commerce and agriculture — had their risks spread, instead of being concentrated, as in the United States.

Problems in a place where one branch was located would not collapse the whole bank.

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  • Spider

    Great but infuriating article.

  • dbjudd

    Mr. Sowell thinks the attention span of politicians is bad. Try the attention span of a Capitalist: 3 months to the next quarterly statement, or even daily rises and falls of a stock price. There is no way any economic actor can ever act in the strategic interest of a nation since it's not in their interest or even their job description to do so. In the end we are all stuck with the government. Assuming we think a nation should have a strategic interest.

    • SaveUS

      You obviously have not read the article where Sowell explained that attention span of investors is often ten years or more. Even in consumer products, the whole development cycle is often 2 or 3 years, and in case of fuel cells for consumer electronics it is already about ten (with no results in the market place). You think that capitalists are just day traders or stock/security brokers. They are a small part of "capitalist class" and they are mostly red liberals like you (they really have a split personality). But even they are useful because they allow everybody to evaluate whether investments make sense, or not. When lefties select the business winners, we all end up short of billions (see Solyndra and other idiotic goverment waste).

    • SoCalMike

      A "Capitalist" sounds like someone who worships money.
      While I've seen money god shrines in homes throughout Asia I have yet to see one here.
      Free people investing their own money have to actually think about running out of money so they spend it much more carefully.
      Bureaucrats and politicians have no concept of this and are even actively hostile to the idea.

  • coyote3

    Although Thomas Sowell doesn't say it in so many words, his artricle illustrates one of the reasons why the United States Constitution limits the federal government's power to those enumerated and delegated, and further, why that language means what it say, and the founders were serious about. I mean they were really serious about it.

  • NotaBene

    And the wave of deregulations that started in the 80s haven't hurt us at all, have they?

    Government intervention is weighed, not counted. Some of it is absolutely necessary for a sound economy, and of course some of it can be harmful. Idiotic statements like 'economics and politics shouldn't mix' (when they are often one and the same) don't clarify the situation.

  • PETER GRUSH

    The dumbing down of loan qualifications is but one "dumbing down" variant in the last 50 years. In order to create more high school and college graduates, our education system makes "C" grades out of what were at one time "D" of "F" grades. Our businesses must hire people they dont need in order to meet racial quotas. Farmers must stop farming on good land because of a rare rat or lizard. All this while congress and thousands (yes thousands) of city councils and county boards of commissioners create the only non government payroll job they can, "lawyers".

    • NotaBene

      Got any stats to back that up, Grush?

  • http://www.rupe-fenster.de/ Fenster Berlin

    @Peter Grush and NotaBene: I looked that up and did not find ANY statistical data for backing that up. You sure about what you stated?