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Advancing Austrian Economics, Liberty, and Peace

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Making Economic Sense
by Murray Rothbard
(Contents by Publication Date)

Chapter 67
Inflationary Recession, Once More

I am by no means a complete "contrarian," but I have one contrarian index to offer as a sound "leading indicator" of recession: every time establishment economists and financial writers trumpet the existence of a brave new world of permanent boom with no more recessions, I know that a big recession is just around the corner.

It never fails. During the late 1920s the establishment, led by proto-Friedmanite economist Irving Fisher, proclaimed a "New Era," an era of permanent boom with no more depressions--all because of the wise fine-tuning of that wonderful new institution, the Federal Reserve System. And then came 1929.

During the 1960s we were assured by the Keynesian establishment that business cycles were a relic of the bygone Bad Old Days of laissez-faire: that wise fine-tuning by Keynesian officials would insure a world of continuous full employment without inflation. So sure of themselves were establishment economists that "Business Cycle" courses in graduate school were abolished.

Why linger in the antiquities of a pre-modern world? Instead, they were replaced by courses in "Macroeconomics" and "Economic Growth." And then bingo! came not only the deep recessions, but the seemingly impossible phenomenon of inflationary recessions: recessions and price inflation at the same time, first in 1973-75, and then the two-humped recession of 1980-82, the biggest and steepest recession since the Great Depression. (In the old days, such major recessions would have routinely been called "depressions," but therapy-by-semantics has taken over, and the word "depression" has been effectively outlawed as too . . . depressing.)

And now, in the middle and late 1980s, the Reaganite establishment began to assure us that, once again, a new economic era had arrived, that the miracle of the Reagan tax cuts (actually non-existent) had, along with a more global and technologically sophisticated technology, assured us that there would never be any more recessions, except perhaps some painless rolling readjustments in specific industries or regions.

It was time for another Big One, and sure enough, here we are. Not only has the establishment forgotten about recessions, but in particular they totally forgot that postwar recessions have been inflationary. Combining the worst of both worlds, unemployment, bankruptcies, and declines of activity have been accompanied by steep increases in the cost of living. A half-century of Keynesian fine-tuning (from which we still suffer, despite the Reaganaut label) has not cured inflation or recessions; it has only accomplished the feat of bringing us both at the same time.

Everyone is afraid to use his judgment on whether we are in a recession; it has become the custom of everyone to await breathlessly the pronouncement of the National Bureau of Economic Research (NBER), a much revered private institution which has established a Dating Committee of a handful of experts, who sift the data to figure out when, if ever, a recession has begun. The problem is that it takes many months into a recession for the NBER to make up its mind: by the time it pronounces that we're in a recession, it is almost over. Thus, the steep recession that started in November 1973 was only pronounced a recession a year later; but six months after that, by March 1975, we were on the way to recovery. Most recessions are over in a year or year and a hale Of course, maybe that's the point: for the establishment to lull us all to sleep until the recession is over.

The reason why it takes the NBER such a long time to make up its mind, is because it feels that it has to get the precise month of the onset of the recession absolutely right; and the reason it suffers from this precise-month fetish (which, in all reason and common sense, doesn't make a heck of a lot of difference) is because the entire deeply flawed NBER approach to business cycles depends on getting the "reference month" down precisely, and then basing all of its averages, and leads and lags, on that particular month. To date the recession one or two months either way would mess up all the calculations based on the NBER paradigm. And that, of course, comes first, way before trying to figure out what is going on and getting the knowledge to the public as quickly as possible.

Looking at the housing market, unemployment, debt liquidation, and many other factors in 1988, I am willing to state flatly that we are in another inflationary recession. What does this mean? It is heartwarming to see some economists welcoming the recession as having an important cleansing effect on malinvestment and unsound debt, paving the way for more rapid and more sustainable economic growth. Thus, Victor Zarnowitz of the University of Chicago states that "it may be healthier for the economy to endure an occasional recession . . . than to grow sluggishly for a prolonged period," and David A. Poole, economist of Van Eck Management Corp., warns that there shouldn't be a recovery too soon, presumably stimulated by government, for then "the recessionary cleansing process will not have had time to work." Welcome to Austrian Economics!

But how is the current establishment (the Bush administration center plus Democratic left-liberalism) proposing to deal with this recession? Remarkably, by violating every tenet of every school of thought known to economics: by steeply raising taxes! Every school: Austrian, Keynesian, monetarist, or classical, would react in horror to such a plan, which obviously worsens a recession by lowering saving and investment, and productive (as opposed to parasitic and wasteful government) consumption. Raising taxes does nothing to help the inflation, and does a lot to make the recession more severe; and it aggravates the deadweight burden of government on the economy.

But wouldn't raising taxes cure the budget deficit? No, it would only give government an excuse (as if they needed one!) to increase the burden of government spending still further. The one thing worse than a deficit, furthermore, is higher taxes; increasing taxes will only bring us more of both. 

Can't the government do anything to alleviate our current inflationary recession? Yes, it can, and quickly. (Never say that Austrians can't come up with positive, even short-run, suggestions for government policy.)

First, to stop the inflationary part of current crisis, the Federal Reserve can stop, permanently, all further purchase of any assets, or lowering of reserve ratios. This will stop all future inflationary credit expansion. Second, it can cut all taxes drastically: sales, excise, capital gains, medicare, social security, and income (for upper, middle, and lower incomes). Third, it can cut government spending, everywhere, even more drastically: thus cutting the deficit as well as all its other benefits. And that's for openers. You think Newt Gingrich is tough?

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