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The Government Wrecks the Economy

June 15, 2008

Tags Booms and BustsThe FedFree MarketsInterventionism

At this point it is just a waiting game for the National Bureau of Economic Research to declare that we have been in recession. Of course they work from past data; we all do. But the data will show what has been true for months. Investment is falling. Unemployment is rising. The trends are consistent with every single recession on record. Have a look for yourself.

All that is bad enough. Maybe your job is secure. Maybe you are out of the stock market. Maybe you aren't waiting for a return on some real estate investment. The problem that hits everyone is inflation, which is roaring out of control in all the sectors we care about. We have entered the double digits, and if producer prices forecast consumer prices, we are in for tougher times ahead.

So what does Washington do? In an act of incredible stupidity, Congress has passed an extension of unemployment benefits. The old rule remains true: if you subsidize something, you get more of it. So this will give us more unemployment. No question about that. It will thereby worsen and prolong the problem.

It takes only a second of economic logic to see why. In a recessionary environment, we need freer, not more socialized, labor markets. Business needs to be able to hire workers at lower prices. You don't want to increase the cost of hiring; you want to reduce it, especially with unemployment rising. Instead, Congress loots the workers of this country in order to prevent people from entering the job market.

This is not only stupid; it is highly dangerous. Britain tried this in the 1930s, and more than any other action, this contributed to the high unemployment rates that fueled socialist political movements, which led to the destruction of that economy. It could do the same here in the United States.

Moving on to the Fed, here we see a cabal of obsessives that believes that the greatest threat to the country right now is falling prices. And they are wholly dedicated to preventing this from happening — precisely at the time when falling prices would be the best thing that could happen to the country.

And what generates this obsession? A faulty understanding of the Great Depression. Like FDR and his advisors, this bunch is convinced that what caused the downturn was the fall in price of everything. This is what bad economic thinking generates. Low prices were the best thing the 1930s had to offer. Imagine that same depression occurring with inflation roaring! The people's sufferings would have been immeasurably worse.

So leave it to Washington to make sure that the next experience with any economic phenomenon will always be worse than the last. They are trying to give us the Great Depression with an even worse trend: falling production, rising unemployment, plus soaring prices! (If you haven't read it yet, please pick up a copy of Rothbard's America's Great Depression. Send a few copies to the Fed while you are at it.)

Bernanke's view of the Great Depression makes no sense of course. But it's the only explanation I can come up with for why the Fed is doing its best to pump up the economy by inventing ever more tricky ways of getting banks to lend money, as if money and credit will save the world. You might think they would take a look at the economic plight of many African nations with inflation running in the many thousands of percent. Their economies are not performing well. But a person like Bernanke is capable of looking at a place like Zimbabwe and pointing out that at least it is not plagued with deflation!

At this stage in the debate over what to do about the recession, the Bush administration and the Republicans look pretty good by comparison to the Democrats. It is easy to forget that Bush bears most of the direct responsibility for this fiasco. His war has drained the capital stock, diminished oil supplies, and crowded out private investment. He has done nothing to keep gas prices low and specifically rejected proposals early on to try to reduce prices.

He has egged on the Fed with its inflation, by putting a priority on his military adventures over sound economic policies. It is a crude simplification, but it still contains truth: Bush's warfare state is the cause of this recession. It is simplified in the sense that it would not have happened but for the money machine down the street from the White House that he has demanded go into overdrive.

What is the right response to a recession? The first rule must be to do no harm. When it comes to government, that is asking a lot and enough. Beyond that, in an ideal world, we would shut down the Fed, reduce the cost of employment, reduce taxes, zap environmental controls on exploring for and refining oil — this would be a good beginning. We could expect the recession to last less than a year under these policies. As it is, we could be in for a very long and deep recession.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

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