Quick: what steps would extend the recession indefinitely?

“Consumers’ confidence in the economy falls in September as Americans’ worries about job security offset any enthusiasm about the rally in the stock market,” read the Sept. 29 news flash.

How come? The big bankers running our economy — it’s essentially the same gang under Barack Obama that it was under George W. Bush, make no mistake — keep telling us the recovery is well under way.

Sure, GM — now run by Barack Obama and his pals in the labor unions — announced Wednesday the Saturn auto brand will be discontinued, costing who knows how many more jobs. Unemployment continues to tick upward; small businesses forgo profits on “two-for-one” deals just to keep the doors open.

But we’re in recovery. Treasury Secretary Geithner — the guy who couldn’t get around to paying his own taxes — says so. After all, government is doing all it can to speed the recovery, isn’t it? “Fed keeps key rate near zero,” the Business page headline screamed on Sept. 24. Low interest rates should get things “stimulated,” shouldn’t they? Then, three days later, over a Washington dateline, “Jobless benefits extension backed: Lawmakers voted 331-83 to extend jobless benefits by 13 weeks in 27 states, including Nevada, where the unemployment rate is above 8.5 percent …”

That should help, right?

For the answers, let us turn to Murray Rothbard’s classic account of the economic mistakes made in Washington from 1929 through 1938, “America’s Great Depression.”

When economies get into trouble, Mr. Rothbard points out, is when businessmen are “misled by bank credit inflation to invest too much in higher-order capital goods,” such as houses and cars. The “boom,” then, “is actually a period of wasteful misinvestment. … Errors are made due to bank credit’s tampering with the free market.” This is followed by a recovery period which sees a “rapid liquidation of the wasteful investments,” and, typically, a deflationary credit contraction, which helps restore confidence in the remaining, sound, banks.

“In short, and this is a highly important point to grasp, the depression IS the recovery process. … The depression, then, far from being an evil scourge, is the NECESSARY and beneficial return of the economy to normal after the distortions by the boom. The boom, then REQUIRES a bust. …

“If government wishes to see a depression ended as quickly as possible, and the economy returned to normal prosperity,” professor Rothbard explains, “the first and clearest injunction is: don’t interfere with the market’s adjustment process,” which will include bankruptcies of unsound enterprises, credit contraction, and falling wages and prices.

This policy of non-intervention is the course the government took during the 1920-21 recession, which was over so quickly (except in the farm segment of the economy, where the government made the mistake of interfering to try to hold crop prices at artificially inflated World War levels — a mistake that has now been perpetuated for 90 years) that the history books barely remember it.

But let us say, for the sake of argument, that government wanted to HAMPER the normal process of economic adjustment, which helps make recessions brief and relatively painless.

If anyone in Washington were to be so wacky as to seek to EXTEND the pain of a recession, what course would they follow?

On page 26 of “America’s Great Depression,” professor Rothbard presents that very catalog of idiocy:

“Here are the ways the adjustment process can be hobbled:” he writes.

“1) Prevent or delay liquidation. Lend money to shaky businesses, call on banks to lend further, etc.

“2) Inflate further. Further inflation blocks the necessary fall in prices, thus delaying adjustment and prolonging depression. Further credit expansion creates more malinvestments, which, in their turn, will have to be liquidated in some later depression. A government ‘easy money’ policy prevents the market’s return to the necessary higher interest rates.

“3) Keep wage rates up. Artificial maintenance of wage rates in a depression insures permanent mass unemployment. Furthermore, in a deflation, when prices are falling, keeping the same rate of money wages means that REAL wage rates have been pushed higher. In the face of falling business demand, this greatly aggravates the unemployment problem.”

In addition to “minimum wage laws,” don’t we now have “living wage” ordinances, “project labor agreements,” and, for our unionized government employees, “automatic step and seniority raises” in addition to cost-of-living adjustments which boost the pay of government employees as well as welfare recipients … even when the “cost of living” is actually FALLING?

“4) Keep prices up,” Professor Rothbard continues, cataloguing precisely the wrong things to do if you want a recession to end. “Keeping prices above their free-market levels will create unsalable surpluses, and prevent a return to prosperity.

“5) Stimulate consumption and discourage saving. We have seen that more saving and less consumption would speed recovery; more consumption and less saving aggravate the shortage of saved-capital even further. Government can encourage consumption by ‘food stamp plans’ and relief payments.”

(Note that “America’s Great Depression” was published in 1963. How’s Mr. Rothbard doing at predicting Obamanomics, so far? About the only thing he seems to have missed, so far as I can see, are “Cash for Clunkers,” and possibly our fledgling “Green Energy Jobs” boondoggle.)

Government “can discourage savings and investment by higher taxes,” Professor Rothbard continues, “particularly on the wealthy and on corporations and estates. As a matter of fact, any increase of taxes-and-government spending will discourage saving and investment and stimulate consumption, since government spending is all consumption. SOME of the private funds would have been saved and invested; ALL of the government funds are consumed. Any increase in the relative size of government in the economy, therefore, shifts the societal consumption/investment ratio in favor of consumption, and prolongs the depression.

“6) Subsidize unemployment: Any subsidization of unemployment (via unemployment ‘insurance,’ relief, etc.) will prolong unemployment indefinitely, and delay the shift of workers to the fields where jobs are available.

“These then, are the measures that will delay the recovery process and aggravate the depression,” warns professor Rothbard from the grave, doubtless still cracking his trademark impish grin. “Yet, they are the time-honored favorites of government policy, and, as we shall see, they were the policies adopted in the 1929-1933 depression, by a government known to many historians as a ‘laissez-faire’ Administration.”

Incredible. We know what these measures do. They delay economic adjustment and recovery; they extend economic hardship, regardless of whether we call the hard times a ‘depression” or a ‘great recession.”

This was all proved, laboriously, in spades, from 1929-1938, all brilliantly analyzed and explained by the late Murray N. Rothbard, with whom I had the honor to discuss some of government’s tendencies to repeat the same mind-boggling errors over and over again, during his time here at the University of Nevada, Las Vegas.

The only question remaining: Since the experiment has already been done, and the long-term effects of these policies demonstrated — to the enormous pain and inconvenience of our long-suffering grandparents — why do the boys in Washington now insist on repeating this experiment in economic disaster, all over again?

One Comment to “Quick: what steps would extend the recession indefinitely?”

  1. buzz Says:

    yeap! paper your way ou of a jam… makes perfect sense to the rascals in DC…

    maybe it really is the floride in the water, or the brainwave entranchment of tv’s, but people want to believe that government health care will make them ‘healthy’. that the government will “‘restore the economy to growth”… and everything is fine.

    no point in ranting about the imminent failure of big brother and omnipotent government, or the corruption of the big corporations. but ‘brand amerika’ is finished and good riddance to it.

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