Did the Recession Ever Really Go Away?
Housing prices hitting 2002 levels, unemployment still at 9 percent, private-sector job growth flat, and retail sales still struggling: these are headlines that few expected three years ago. The prevailing theory in Washington was that the recession was somehow precipitated (and therefore vaguely caused) by the crash in housing prices, and many big and small tricks were used to goose the market. But the price system has once again proven to be the greatest and most persistent practitioner of civil disobedience on the planet. That water just won't flow uphill.
All the stimulus programs (trillions of dollars!), the money creation, the buyouts of bad debt, the bailouts, the nationalizations, the ghastly spending, the new regulations: nothing has worked to bring back the shining city on a hill.
The massive confusion over cause and effect reminds me of a scene from the 1938 classic Bette Davis and Henry Fonda film, Jezebel. The "yellow fever" has swept the low-lying areas of Louisiana, and the local experts are thoroughly confused about the cause. They set up roadblocks, curfews, travel restrictions, and they cart off anyone who is sick to an island to die.
It never dawned on these folks that the yellow fever was carried by mosquitoes living in cesspools of undrained swamps made ever worse by poor sanitation. They figured that the fever was somehow being carried around in the air, so the solution was to shift the wind. How to do that? By the continual firing of cannons. Thus was every night filled with the sound of cannon blasts hurling lead balls into the air, the shots landing randomly.
It didn't work. It couldn't work. But it made the elders of the city — who were hiding out in their mansions on high ground — feel like they were at least doing something. They were unwilling to consider that it was their own failure to clean up the public sanitation system that was the real culprit.
Firing cannons was a way to show people that they were doing something and to distract people from discovering the real cause, even as they protected themselves as best they could.
It was the same with George Bush's gigantic stimulus efforts in October of 2008, followed by Obama's stimulus efforts of 2009, and the same with the Fed's endless rounds of debt buyouts and money creation, and the same with the Treasury's cobbling together of nationalizations and bailouts of its favored firms. It was all about protecting themselves, pursuing phony solutions that did not address the underlying problem, and distracting the public with fiscal and monetary cannon blasts to change the direction of the wind.
The screaming pleas from the political class in 2008 weren't really about finding a cure. They were about saving the top players (banks, unions, insurers) in a system that was built on illusion. According to official dating, the recession lasted only 18 months, and then recovery began. The belief that we are recovered then became the new illusion, mostly fostered by the injection of phony money and massive spending built on debt. As college grads faced a hostile labor market, as retailers dramatically shrunk inventories, as businesses have closed and closed, as income has shrunk, and as prices have pushed higher and higher, the feeling on the part of most people has been: something is not right."In its entire history, the Austrian School has never been more prominent."
Austrian economists were the ones who predicted the 2008 meltdown. And those seeking truthful answers to the mess turned to the Austrians in 2009 and following. The Mises Institute's adjunct scholars have been all over television, print media, conferences, and YouTube; there have been best-selling books and hugely prominent public appearances. This is true: in its entire history, the Austrian School has never been more prominent.
Well, here is something else the Austrians kept saying: the stimulus will not work to dig us out of recession. By extracting wealth from the private sector, bailing out loser companies, distorting interest-rate signals, and gumming up enterprise with ever more regulations, the attempts to stabilize and stimulate will have the reverse effect.
It is the summer of 2011, and we are awakening from the tale the government spun. The fundamentals are worse today in some respects than they were in 2008. The banks are recapitalized but with phony money that is potentially red hot if it should ever leave the vaults. Zombie banks are still walking. Labor markets are frozen. The debt is piled higher than anyone can imagine, and, meanwhile, all the old problems are still with us. Government is not getting out of the way to let the economy find its level, so that a real recovery can begin, but rather quite the opposite: we're getting antitrust, IP enforcement, labor regulation, and regulation in general, not to mention insane spending on wars.
What resources do we need to look at going forward?
Money, Bank Credit, and Economic Cycles by Jesús Huerta de Soto is the mighty treatise on the relationship between the microeconomics and macroeconomics of business cycles. Mises's Theory of Money and Credit explains that all our problems are rooted in central banking and the vulnerable banking system it sustains with fiat money. Walk Away by Doug French explains the housing market and debunks a core postulate of the American civic religion. Rothard's America's Great Depression provides the model for how the business cycle works.
A few we can add to the list in light of new problems include Out of Work by Richard Vedder, Prosperity through Competition by Ludwig Erhard, and Rollback by Tom Woods. These books show how and why the entire statist apparatus must be dismantled. Money, Sound and Unsound by Joseph Salerno is a contemporary Austrian's explanation of money and society, while The Capitalist and the Entrepreneur by Peter Klein shows what is necessary for economic recovery. Ron Paul's Liberty Defined homes in on what's important; the Bastiat Collection shows the case for total freedom; and Conceived in Liberty reconstructs the history of America to show that liberty is the core principle of this land.
To teach the Austrian School to the young, you need Robert Murphy's Lessons for the Young Economist.
And for the most fantastic history of the Austrian School ever written, you need The Austrian School of Economics: A History of Its Ideas, Ambassadors, and Institutions by Eugen-Maria Schulak and Herbert Unterköfler.
There is so much more in the Mises Store.
We can fire cannons in the air and hope that the lead balls don't kill more people than the yellow fever. Or we can drain the swamps, fix the sanitation system, and get back to the business of building civilization.
Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.