Making Economic Sense
Making
Economic Sense
by Murray Rothbard
(Contents
by Publication Date)
Chapter 70
Lessons of The Recession
It's official! Long after everyone in America knew
that we were in a severe recession, the
private but semi-official and incredibly venerated National Bureau of
Economic Research has
finally made its long-awaited pronouncement: we've been in a
recession ever since last
summer. Well! Here is an instructive example of the reason why the
economics profession, once
revered as a seer and scientific guide to wealth prosperity, has been
sinking rapidly in the esteem
of the American public. It couldn't have happened to a more deserving
group. The current
recession, indeed, has already brought us several valuable lessons:
Lesson # 1: You don't need an economist . . . . One
of the favorite slogans of the 1960s
New Left was: "You don't need a weatherman to tell you how the wind is
blowing." Similarly, it
is all too clear that you don't need an economist to tell you whether
you've been in a recession.
So how is it that the macro-mavens not only can't forecast what will
happen next, they can't even
tell us where we are, and can barely tell us where we've been? To give
them their due, I am
pretty sure that Professors Hall, Zarnowitz, and the other
distinguished solons of the famed
Dating Committee of the National Bureau have known we've been in a
recession for quite a
while, maybe even since the knowledge percolated to the general public.
The problem is that the Bureau is trapped in its
own methodology, the very methodology
of Baconian empiricism, meticulous data-gathering and pseudo-science
that has brought it
inordinate prestige from the economics profession.
For the Bureau's entire approach to business cycles
for the past five decades has
depended on dating the precise month of each cyclical turning point,
peak and trough. It was
therefore not enough to say, last fall, that "we entered a recession
this summer." That would have
been enough for common-sense, or for Austrians, but even one month off
the precise date would
have done irrepa rable damage to the plethora of statistical
manipulations--the averages,
reference points, leads, lags, and indicators--that constitute the
analytic machinery, and hence
the "science," of the National Bureau. If you want to know whether
we're in a recession, the last
people to approach is the organized economics profession.
Of course, the general public might be good at
spotting where we are at, but they are
considerably poorer at causal analysis, or at figuring out how to get
out of economic trouble. But
then again, the economics profession is not so great at that either.
Lesson #2: There ain't no such thing as a "new
era." Every time there is a long boom, by
the final years of that boom, the press, the economics profession, and
financial writers are rife
with the pronouncement that recessions are a thing of the past, and
that deep structural changes in
the economy, or in knowledge among economists, have brought about a
"new era." The bad old
days of recessions are over. We heard that first in the 1920s, and the
culmination of that first new
era was 1929; we heard it again in the 1960s, which led to the first
major inflationary recession
of the early 1970s; and we heard it most recently in the later 1980s.
In fact, the best leading
indicator of imminent deep recession is not the indices of the National
Bureau; it is the
burgeoning of the idea that recessions are a thing of the past.
More precisely, recessions will be around to plague
us so long as there are bouts of
inflationary credit expansion which bring them into being.
Lesson #3: You don't need an inventory boom to have
a recession. For months into the
current recession, numerous pundits proclaimed that we couldn't be in a
recession because
business had not piled up excessive inventories. Sorry. It made no
difference, since
malinvestments brought about by inflationary bank credit don't
necessarily have to take place in
inventory form. As often happens in economic theory, a contingent
symptom was mislabeled as
an essential cause.
Unlike the above, other lessons of the current
recession are not nearly as obvious. One is:
Lesson #4: Debt is not the crucial problem. Heavy
private debt was a conspicuous feature
of the boom of the 1980s, with much of the publicity focused on the
floating of high-yield
("junk") bonds for buyouts and takeovers. Debt per se, however, is not
a grave economic
problem.
When I purchase a corporate bond I am channeling
savings into investment much the
same way as when I purchase stock equity. Neither way is particularly
unsound. If a firm or
corporation floats too much debt as compared to equity, that is a
miscalculation of its existing
owners or managers, and not a problem for the economy at large. The
worst that can happen is
that, if indebtedness is too great, the creditors will take over from
existing management and install
a more efficient set of managers. Creditors, as well as stockholders,
in short, are
entrepreneurs.
The problem, therefore, is not debt but credit, and
not all credit but bank credit financed
by inflationary expansion of bank money rather than by the genuine
savings of either share
holders or creditors. The problem in other words, is not debt but loans
generated by
fractional-reserve banking.
Lesson #5: Don't worry about the Fed "pushing on a
string." Hard-money adherents are a
tiny fraction in the economics profession; but there are a large number
of them in the investment
newsletter business. For decades, these writers have been split into
two warring camps: the
"inflationists" versus the "deflationists." These terms are used not in
the sense of advocating
policy, but in predicting future events.
"Inflationists," of whom the present writer is one,
have been maintaining that the Fed,
having been freed of all restraints of the gold standard and committed
to not allowing the
supposed horrors of deflation, will pump enough money into the banking
system to prevent
money and price deflation from ever taking place.
"Deflationists," on the other hand, claim that
because of excessive credit and debt, the
Fed has reached the point where it cannot control the money supply,
where Fed additions to bank
reserves cannot lead to banks expanding credit and the money supply. In
common financial
parlance, the Fed would be "pushing on a string." Therefore, say the
deflationists, we are in for
an imminent, massive, and inevitable deflation of debt, money, and
prices.
One would think that three decades of making such
predictions that have never come true
would faze the deflationists somewhat, but no, at the first sign of
trouble, especially of a
recession, the deflationists are invariably back, predicting imminent
deflationary doom. For the
last part of 1990, the money supply was flat, and the deflationists
were sure that their day had
come at last. Credit had been so excessive, they claimed, that
businesses could no longer be
induced to borrow, no matter how low the interest rate is pushed.
What deflationists always overlook is that, even i