Government Economic Policy Cannot Cure A Problem It Caused

Bush Obama

Neither President Bush’s nor President Obama’s economic policies brought this recession. The event was preordained from years of governmental economic mismanagement and intervention. The crisis could have come sooner, or later. It happened on Bush’s watch. Now Obama must deal with it.
democracygod
The insanity of current economic policy has been dealt with here before. Keynesian economics, as practiced by politicians, was not what Keynes advocated. He envisioned the role of government as a controller/moderator of the economy, stepping to help in down times. Keynes never proposed a government consistently spending beyond its revenues. The government was expected to run surpluses in good economic times. To understand how badly the Keynesian system was bastardized, one only need know that the last true surplus in this country was 50 years ago! Have we been in a depression for 50 years?

Why has this happened? Politicians are not economists, and they don’t think like economists. Rational politicians live for the moment. Like renters of a home, they do not care about wear and tear or residual value. Politicians “enjoy the home to the fullest.” The residual value of their home (country) is not their concern; staying in the home (retaining office) is. This point was made by Hans-Herman Hoppe in his book Democracy The God That Failed and in this article:

Both kings and presidents will produce bads, yet a king, because he “owns” the monopoly and may sell or bequeath it, will care about the repercussions of his actions on capital values. As the owner of the capital stock on “his” territory, the king will be comparatively future-oriented. In order to preserve or enhance the value of his property, he will exploit only moderately and calculatingly. In contrast, a temporary and interchangeable democratic caretaker does not own the country, but as long as he is in office he is permitted to use it to his advantage. He owns its current use but not its capital stock. This does not eliminate exploitation. Instead, it makes exploitation shortsighted (present-oriented) and uncalculated, i.e., carried out without regard for the value of the capital stock.

Ludwig_von_MisesCarrying the home analogy a bit further, the last several decades of governmental economic policy has seen wealth destruction. Such policies are analogous to the government heating its home by burning the furniture. Burning furniture might get you through a few winters, but unless it is replaced eventually there is nowhere to sit and no fuel for next winter. Fortunately our ancestors were industrious and frugal, creating a lot of furniture. We stayed warm for a long time as a result, but the furniture is disappearing.  (I believe the furniture-burning analogy first came from Ludwig von Mises. His “eating the seed corn,” leaving nothing to plant next year, would have been just as applicable.)

Massive supplies of capital and wealth enabled the government to mostly avoid small downturns in the economy by intervening. But each intervention came at a cost. Higher taxes, increased spending, larger deficits, too much credit, and distorted interest rates and prices resulted. These factors consumed wealth directly or produced distortions in the allocation of resources, particularly capital. With each intervention, the distortions grew, creating the need for ever bigger future interventions. This cycle has now gone on for at least 50 years. The effects in terms of malinvestment of capital and the increasing size and frequency of downturns has only become more apparent in the last decade.

Whether furniture-burning can work one more time or not is moot. We are getting progressively poorer as the result of consuming and misallocating capital. At some point, we run out of furniture. If we wiggle through this crisis, it only means that the next crisis will be bigger and more devastating. It is likely also to occur soon. The current one started around 2007, only about six years after the 2001 crisis. As a result of trying to avoid them, each subsequent crisis has been coming quicker and bigger than its predecessor.

The presumption that politicized macroeconomics works is the basis for current Administration policy. A growing portion of economists disagree. Many feel that current policies will make matters worse. John Williams, as quoted by  Greg Hunter, suggests a complete collapse may be imminent:

… according to economist John Williams of Shadow Government Statistics, it is too late.  In Williams latest report he writes “The United States Economy and Financial System Face an Eventual Great Collapse.” Williams told me in an interview this week that because of all the bailouts, stimulus packages, giveaways and short-term debt, the U.S. has to finance nearly $5 trillion in 2010 alone. That’s about $96 billion in debt auctioned off each and every week!!  Williams said, “Someone has to buy those Treasuries, and if no one does, then the Federal Reserve will become buyers of last resort.” The Fed buying that much in Treasuries is the same as printing huge amounts of money.   Williams says that “is the tipping point that will start a dollar crisis.” According to Williams, this will produce a “high risk of an ultimate dollar crisis that will begin unfolding in year ahead.”

Keynesian economics depends upon the assumption of stable (actually causal) relationships between macro variables over time. Yet history is not particularly supportive. Japan and our own Great Depression provide two dramatic examples of the failure of the “science.”japan-stats

Japan has been through two “lost decades” of economic growth. In the 1980s, conventional wisdom believed that Japan would overtake the US economy early in the 21st Century. The Japanese bubble burst in 1989. Their economic response to their downturn was similar to ours; support the failed banks with massive credit expansion and the economy with large stimulus in the form of government spending.

These policies created zombie banks and a zombie economy in Japan. The table to the right shows key variables over this two decade period. The results were devastating. Japan no longer is considered an economic contender to the US.  Japan is now considered an economy in danger of sovereign default. Its government debt is almost twice its GDP. Its stock market is still off close to 75%. Rolfe Winkler stated with respect to Japan (my italics):  “My hope is that America finds the political will to deal with debt. If we don’t, even matching Japan’s sorry trajectory will be tough.”

Political mythology of our Great Depression of the 1930s holds that President Roosevelt ended the Great Depression. According to Robert P. Murphy, among others, Hoover and Roosevelt’s policies turned what would have been a normal downturn into a Great Depression. Prior to the 1930s, all downturns in the US were called depressions. None were as severe. But none before the Great Depression had any significant government intervention. Arguably the depression that began in 1920 was more severe at its inception than the Great Depression. With no government intervention, this depression became little more than a minor footnote in history. The details can be found here:  The Depression You’ve Never Heard Of: 1920-1921. The reality is that our Great Depression did not end until WW II concluded, 15 plus years later.

Less analytic, but at least as compelling as Murphy’s analysis, was Roosevelt’s Treasury Secretary Henry Morgenthau’s emotional 1939 admission:

We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong … somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises … I say after eight years of this Administration we have just as much unemployment as when we started … And an enormous debt to boot!

It is doubtful that we can escape the mess we are in without a complete economic collapse. Current economic policies virtually assure such an outcome.

Some grownup with gravitas needs to stand up and say: “Enough!” Whether there is anyone brave enough to do so is the question. Government economists seem too corrupted by fame, pay and politics to do so. This group seems infected with the same integrity possessed by climate “scientists.”

This article was adapted from Burning The Furniture and Eating The Seed Corn To Survive which originally appeared on this site.

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