What To Do About the Recession by William L. Anderson

From: Technotranscendence (neptune@mars.superlink.net)
Date: Sun Nov 04 2001 - 06:19:47 MST

What To Do About the Recession
by William L. Anderson

[Posted November 2, 2001]

With the latest news that the U.S. economy officially has been shrinking, it
is time to admit the obvious: We are in a recession. Consumer spending is
down, along with business investment. The only people making money these
days are those who contract with the Pentagon.

Some are claiming that the attacks of September 11 triggered this latest
economic slide, but all signs point to the fact that the U.S. economy
already was in recession even before the attacks. Moreover, there is no
scarcity of counsel to be given to those we are told are "in charge" of the
economy, as though there are a few people who can just pull the right levers
to make things work. For the most part, we hear the pundits telling
everyone else what must be done to "stimulate" the economy in order to drive
it from the doldrums. Good luck.

Actually, I would like to give some advice of my own to the august chairman
of the Federal Reserve System, Mr. Greenspan: Quit, and close down your
whole operation. You will not be missed.

Of course, that is not what we are hearing from the pundits. Instead, the
word from nearly all quarters is for the Fed to continue to cut interest
rates, which it has already done on numerous occasions, with the results
being that the economy still falters. We also hear calls for new tax cuts
that should be targeted to people who would "spend money" and thus
"stimulate" the economy.

As an Austrian economist, I am always for tax cuts and more tax cuts,
because lower taxes mean a smaller state. However, to say that the chief
purpose of government policy is to "stimulate" the economy is to engage in
silly talk. For all its alleged great powers, the government cannot stop
this recession. The government and its wrongheaded policies are responsible
for this economic calamity, not the hijackers who murdered several thousand
people, as dreadful as that act was. (No doubt, even if the economy were
strong, U.S. productivity would be down in the wake of such a terrible
event.) The problem is simple: Bad ideas are leading to bad policies.

American economists like to think of themselves as a sophisticated lot, but
to read their numerous policy prescriptions gives further proof that few in
that profession have progressed beyond Bernard de Mandeville's _The Fable of
the Bees, or Private Vices Public Benefits_. The difference between the
admonitions given by someone like Paul Krugman in the New York Times and
Mandeville in _Fable of the Bees_ is that Mandeville was a better writer.
For that matter, "I Want to be a Consumer," which appeared in the April
25,1934, edition of _Punch_, describes the Keynesian fallacies even better
than Keynes and Krugman could do themselves. At least the editors of Punch
realized that "stimulating" consumption was a joke, while Krugman takes
Keynesianism quite seriously.

Despite the fact that Keynesian "theory" has been discredited time and
again, it always makes a comeback. The only point of argument these days
seems to be what kind of "stimulus" the economy requires, as opposed to why
this business-cycle bust has happened in the first place. Until people
understand why we are in recession and what must be done for the economy to
climb out and avoid this problem in the future, we are doomed to repeat
these failures time and again.

First, repeat after me: Greenspan did not cause this recession by raising
interest rates in 2000. That is correct. Instead, Greenspan helped caused
this recession by lowering interest rates during the late 1990s. To put it
another way, Greenspan's "cure" to fight business-cycle downturns is
actually responsible for the problem it was trying to correct.

Conventional wisdom goes as follows: the health of the economy directly
depends upon aggregate demand. If consumers are confident and secure, they
will spend money and the economy will flourish. However, if consumers lose
confidence or if they believe the future to be uncertain, then they will
withhold some spending and drive the economy into recession. Thus, we have
been hearing articles about the "heroic consumer" who was supposedly
propping up the economy until losing heart after the September 11 attacks.
The terrorists who destroyed the World Trade Towers and damaged the Pentagon
committed murder and mayhem; however, they are not guilty of causing a
recession that was already inevitable. Greenspan did just fine on his own,
thank you.

Second, in order to "stimulate" the economy, we must rebate tax dollars to
consumers so they will spend it quickly; so say the Keynesians. At this
point, people on the "right" and "left" disagree who should be the main
beneficiaries of tax cuts. So-called conservatives argue that cuts in
capital gains taxes and of high marginal income tax rates will stimulate
investment, while leftists hold that lower-income people should receive most
of the cuts, since they are likely to spend money instead of saving or
investing it like upper-income individuals might do.

While Austrians obviously would be more sympathetic to the former proposal
than the latter, most people involved in the current public discussion of
economics actually are clueless about what causes business cycles.
Furthermore, their ignorance of the reason economies run through
boom-and-bust cycles blinds them to the real damage done by government
policies, regardless of which political party holds power.

Although I agree that the government should slash tax rates, I believe so
out of a matter of principle, not because I believe that government has the
power to "stimulate" private investment. That the economy is in recession
in the first place is testament to the policy failures of the U.S.

In going back to an earlier statement, let me say again that the
inevitability of this current recession began when the Fed began to force
down interest rates during the mid-1990s. The Fed's actions had a major
role in triggering a boom, especially in the high-technology sector of the
economy. As the boom continued, it was fed by artificially low interest
rates and a false belief that we had entered a "new economy" in which
business cycles were a thing of the past.

Austrian economists--and only the Austrians--were pointing out that the boom
was not a new era of prosperity that had been created by former President
Bill Clinton's 1993 tax increases or Secretary of the Treasury Robert
Rubin's brilliant business strategies. While we need to acknowledge that
some of the business, transportation, and financial "deregulation" (or
re-regulation) of the late 1970s and early 1980s improved the basic climate
for business investment, the Greenspan-led boom created an atmosphere in
which billions of dollars became malinvested into lines of production that
could not be sustained, especially in the high-technology and Internet

Once those malinvestments took place on a huge scale, it became inevitable
that a recession would occur. To put it another way, there was no avoiding
a bust, once those billions of dollars found their way into unsustainable
lines of production.

What about the present efforts of the Fed to stave off the recession by
lowering interest rates? For one, those malinvestments that once responded
to lower interest rates have either been liquidated or are not looking to
borrow large sums of money. Thus, at best, this effort by the Fed to create
massive new amounts of bank reserves is ineffective.

However, it is doubtful that we can easily walk away from this newest mess
that Greenspan has created. Would that the Fed were doing nothing more than
creating new reserves that won't be used at all. Unfortunately, that is not
the case. By performing aggressive open market operations and by forcing
interest rates below the rate of inflation, all of which are increasing the
U.S. money supply at very high rates, the Fed is basically setting the stage
for the next wave of malinvestments--even before investors have had the
opportunity to malinvest their funds!

What should be the proper response, given all that the Fed and the U.S.
government have done to cause this calamity? Murray N. Rothbard, in his
classic _America's Great Depression_, eloquently answers that question:

    If government wishes to see a depression ended as quickly as possible,
the economy returned to normal prosperity, what course should it adopt? The
first and clearest injunction is: _don't interfere with the market's
adjustment process_. The more the government intervenes to delay the
market's adjustment, the longer and more grueling the depression will be,
and the more difficult will be the road to complete recovery. (p. 25,
italics in original.)

The prescription for recovery could hardly be clearer. Yes, cut taxes to
the bone, because the lower the burden of government, the more private
investment there will be, and it will be investment that can be sustained,
not the malinvestments triggered by Greenspan and his allies at the Fed.
Furthermore, the regulatory state we have created should be cut back
severely or, even better, abolished altogether.

This recession does not have to last for a long time. We have the tools in
hand to drastically shorten this economic downturn. It is just that most
people don't know where to look or, instead, are mistakenly trying to use
tools that caused the trouble in the first place.

William Anderson, an adjunct scholar of the Mises Institute, teaches
economics at Frostburg State University.

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