Making Economic Sense
Making
Economic Sense
by Murray Rothbard
(Contents
by Publication Date)
Chapter 69
Bush And The Recession
Unfortunately, John Maynard Keynes, the disastrous
and discredited spokesman and
inspiration for the macroeconomics of virtually the entire world since
the 1930s (and that
includes the Western World, the Third World, the Gorbachev era, as well
as the Nazi economic
system), still lives. President Bush's reaction to this grim recession
has been Keynesian through
and through not surprising, since his economic advisers are Keynesian
to the core.
Since Keynesians are perpetual trumpeters for
inflationary credit expansion, they of
course do not talk about the basic cause of every recession; previous
excesses of inflationary
bank credit, stimulated and controlled by the central bank--in the
U.S., the Federal Reserve
system. To Keynesians, recessions come about via a sudden collapse in
spending--by consumers
and by investors. This collapse, according to Keynesians, comes about
because of a decline in
what Keynes called "animal spirits": people become worried, depressed,
apprehensive about the
future, so they invest, borrow, and spend less.
The Keynesian remedy to this "market failure"
brought about by private citizens being
irrational worry-warts, is provided by good old government, the
benevolent Mr. Fixit. When
guided by wise and cool-headed Keynesian economists, government is
able, as a judicious
sea-captain at the helm, to compensate for the foolish whims of the
public and to steer the
economy on a proper and rational course.
There are, then, two anti-recession weapons
available to government in the Keynesian
schema. One is to spend a lot more money, particularly by incurring
large-scale deficits. The
problem with this weapon, as we all know far too well, is that
government deficits are now
permanently and increasingly stratospheric, in good times as well as
bad. Current estimates for
the federal deficit, which almost always prove too low, are approaching
the annual rate of $500
billion (especially if we eliminate the phony accounting "surplus" of
$50 billion in the Social
Security account).
If increasing the deficit further is no longer a
convincing tool of government, the only
thing left is to try to stimulate private
spending. And the principal way to do that is for
the
government to soft-soap the public, to treat the public as if it were a
whiny kid, that is: to
stimulate its confidence that things are really fine and getting better
so that the public will open
its purses and wallets and borrow and spend more.
In other words, to lie to the public "for its own
good." Except that many of us are
convinced that it's really lying for the good of the politicians,
so that the deluded public will
continue to have confidence in them. Hence all the disgraceful
gyrations of the Bush
Administration: the year-long claim that we weren't in a recession,
then the idea that we had
been in it but were now out, then the soft-soap about a "weak
recovery," then the nonsense about
"double- dip" recession, and all the rest. Only when an aroused public
hit him in the face did the
President acknowledge that there's a real problem, and that maybe
something should be done
about it.
But what to do, within the Keynesian framework?
First, the Fed drove down interest
rates, expecting that now people would borrow and spend. But no one
feels like lending and
borrowing in recessions, and so nothing much happened, except that
short-term Treasury
securities got cheaper to buy--not very useful for the private economy.
But, darn it, credit card
rates stayed high, so Bush got the idea of talking down credit card
rates, stimulating more
consumers to borrow.
The resulting fiasco is well-known. Senator Al
D'Amato (R-N.Y.), ever the eager beaver,
figured that forcing rates down is more effective than talking them
down, and so Congress only
just missed passing this disaster by a vigorous protest of the banks
and a mini-crash in the stock
market bringing it to its senses. Outgoing chief-of-staff John Sununu,
as ever attentive to the
actions of "this President," tried to justify Bush's jawboning as
correct, asserting that Congress's
error was to try coercion.
But Bush's idea of talking credit card rates down
was only slightly less idiotic than
forcing them down. The point is that prices on the market, including
interest rates, are not set
arbitrarily, or according to the good or bad will of the sellers or
lenders. Prices are set according
to the market forces of supply and demand.
Credit card rates did not stay high because bankers
decided to put the screws to this
particular group of borrowers. The basic reason for credit card rates
staying high is because the
public--in its capacity as borrowers, not in its
capacity as economic pundits doesn't care that
much about these rates. Consumers are not credit-card rate sensitive.
Why? Because basically there are two kinds of
credit-card users. One is the sober,
responsible types who pay off their credit cards each month, and for
whom interest charges are
simply not important. The other group is the more live-it-up types such
as myself, who tend to
borrow up to the limit on their cards. But for them, interest rates are
not that important either:
because in order to take advantage of low-rate cards (and there are
such around the country), they
would have to pay off existing cards first--a slow process at best.
There was another gaping fallacy in the
Bush-D'Amato attitude, which the bankers
quickly set them straight about. Interest rates are not the only part
of the credit-card package.
There is also the quality of the credit: the ease
of getting the card, the requirements for getting it
and keeping it, as well as the annual fee, etc. As the banks pointed
out, at a 14 instead of a 19
percent rate, far fewer people are going to be granted credit cards.
Pathetically, the only positive thing that
President Bush can think of to speed the recovery
is to spend money faster, that is: to step up
government spending, and hence the deficit, early
in
the year, presumably to be offset later by a fall in its rate of
spending.
What about tax cuts? Here the Bush administration
is trapped in the current Keynesian
view that, the deficits already being too high, every tax cut must be
balanced by a tax increase
somewhere else: i.e., be "revenue-neutral." Hence, the administration
feels limited to the correct
but picayune call for a cut in the capital gains tax, since this
presumably will be made up by a
supply-side increase to keep total revenue constant.
What is needed is the courage to bust out of this
entire fallacious and debilitating
Keynesian paradigm. Massive tax cuts, especially in the income tax are
needed (a) to reduce the
parasitic and antiproductive burden of government on the taxpayer, and
(b) to encourage the
public to spend and especially to save more, because only through
increased private savings will
there come greater productive investment.
Moreover, the increased saving will speed recovery
by validating some of the shaky and
savings-starved investments of the previous boom. First of all, massive
tax cuts may force the
government to reduce its own swollen spending, and thereby reduce the
burden of government on
the system. And second, if this means that total government revenue is
lower, so much the better.
The burden of tax-rates is twofold: rates that are high and cripple
savings and investment
activity; and revenues that are high and siphon off money from the
productive private sector into
wasteful government boondoggles. The trouble with the supply-siders is
that they ignore the
second burden, and hence fall into the Keynesian-Bush "revenue-neutral"
trap.
And finally, if the Bush Administration is so
worried about the deficit, it should do its
part by proposing drastic cuts in government spending, and justify it
to the public by showing
that government spending is not helpful to a prosperous economy but
precisely the opposite.
Then, if Congress rejects this proposition, and keeps increasing
spending, the Administration
could put the onus for prolonging the recession squarely upon Congress.
But of course it can't do
so, because that would mean a fundamental break with the Keynesian
doctrine that has formed
the paradigm for the world's macroeconomics for the past half-century.
We will never break out of our economic stagnation
or our boom-bust cycles and achieve
permanent prosperity until we have repudiated Keynes as thoroughly and
as intensely as the
peoples of Eastern Europe and the Soviet Union have repudiated Marx and
Lenin. The real way
to achieve freedom and prosperity is to hurl all three of these icons
of the twentieth century into
the dustbin of history.
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