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Why No Recovery?

March 28, 2003

Tags Booms and BustsU.S. EconomyBusiness Cycles

No one can argue about the current moribund economy, complete with falling stock prices, nonexistent profits, layoffs, airline bankruptcies, and exploding federal and state budget deficits. People certainly have argued about the cause of this downturn (Democrats and their socialist allies insist that the relatively small, backloaded tax cuts of 2001 are the culprits, while Republicans simply are clueless), including writers on these pages, but few people have accurately pointed out why there is no recovery from the original recession.

Throughout most of the history of the United States, business downturns have been relatively brief—perhaps a year long at most—and recoveries have come soon afterward. Indeed, the last time the economy failed to recover soon after the first crisis of recession was in the early 1930s, when things grew continually worse until the bottom fell out in February 1933, as the nation’s unemployment rate climbed to an astounding 28 percent.

While one hopes that this current sorry situation does not metastasize into a full-blown calamity reminiscent of the Great Depression (let me emphasize the word "hopes"), there are some not-so-obvious but important issues that need to be raised if we are to climb out of this economic mess. In these pages, we have covered the obvious problems like the insistence of the Federal Reserve System to keep interest rates artificially low, government intervention to prevent liquidation of malinvested capital, and the explosion of government spending, complete with yet another war.


However, there are a number of hidden landmines that by themselves might not have much negative effect, but combined with the other factors—like this budget-busting, conflict-fueling, capital squandering war—ensure that economic recovery will not occur anytime soon. These barriers to recovery include tariffs and quotas, an increased regulatory burden upon private enterprise, the new emphasis upon the federal government to criminalize ordinary business transactions, and what can only be termed "tort madness."  


Economists have pointed out that the Bush Administration's decisions to slap tariffs on imported steel and Canadian lumber have had the perverse effects of killing more jobs than they saved—something that should not surprise our readers. Bruce Bartlett recently noted that the steel tariffs have led to growth in the steel industry, but only at the expense of those industries that use steel.


Furthermore, the increased profits that have come to steel companies have spurred capital investment away from more efficient firms and toward the less-efficient steel makers. In a free-market economy, capital follows its highest returns, and steel numbers right now are up. However, with the government, in effect, helping to rig the market for political purposes, capital flows out of the firms that are damaged by higher steel prices (which means layoffs) into steel.


Thus, this attempt by the Bush Administration to make investment into steel more attractive comes about only by causing the larger economy to contract. The gains to steel firms are far overshadowed by the losses of everyone else, a negative sum situation.


Likewise, the Canadian lumber tariffs are part of a double-whammy to the economy. First, the U.S. Government has set vast amounts of forests off-limits to logging, which drives up lumber prices here and also forces people away from rural communities as their livelihoods are destroyed by regulations promulgated by urban environmentalists and their government allies. Second, after it has helped created the economic inefficiencies within the lumber industry, it compounds the problem by forcing up the price of lumber even higher, thus making it more difficult for new houses to be constructed. Consumers ultimately pay, and the economy contracts even more.


Toward the end of the Clinton Administration, as the economy was in the midst of a nonsustainable boom, the federal government greatly increased the regulatory burdens of business, especially in the environmental and labor areas. Not to completely fault Bill Clinton, this trend had been growing ever since the mid-1980s (following the brief but heady period of deregulation in the early 1980s that was more show than substance), but in the last days of that administration, the new edicts came fast and furious.


At the time, few people noticed, since many regulations were not scheduled to kick in until after Clinton had left office. However, they now are here, including the draconian "arsenic" regulations that if actually followed would force entire western communities either to be abandoned or to bring in nearly all of their potable water from outside sources. From the locking up of huge government tracts of land to prevent logging and mining to strict air pollution laws that drive up the price of fuel, these little time bombs have begun to explode, making it that much more difficult for firms to stay in business and discouraging new investment.


One might liken this situation to a champion boxer who has decided to enjoy the fruits of his labor and not to train properly. Furthermore, he begins to eat those things from which he abstained during training, and engages in other habits and practices that cut into his conditioning. During this period he fights only low-level boxers who are easy prey.


However, after engaging in this behavior for several months, the boxer then steps into the ring with a prizefighter who more than matches the first boxer’s every move. In a word, the boxer is fat, out of shape, and soon finds himself on the canvas.


If the champion is serious about regaining his crown, he will shed the excess pounds, run the necessary miles to work back into condition, and put away the harmful practices that impeded his training. Like Muhammad Ali, who was poorly conditioned when he lost a unanimous decision to Leon Spinks in February 1978 but came back seven months later to reclaim his heavyweight title after having put himself through rigorous training, the champion can be successful only if he goes back to doing the things that made him strong in the first place.


Likewise, an economy can recover only when business owners can shed the excess poundage of regulations and do away with frivolous and costly activities. These regulations can be hidden in a booming economy, but in our present situation, they are too great a burden to carry.


There are also the "criminal" wild cards that business owners, managers, and investors must face that did not impede previous economic recoveries, at least at the current magnitude. In the wake of the Enron and WorldCom scandals, Congress has passed a number of new "never again" laws—and the regulatory agencies have also responded with hundreds of new regulations—that further restrict the movement of capital.


On top of that, the new terrorism statutes and increased enforcement of anti-drug laws have this nasty effect of criminalizing cash transactions. Keep in mind that during economic crises, people find it best to stay as liquid as possible, as the prospect of losing everything in a wave of bank failures is intolerable to them. However, the possibilities of facing criminal charges for paying for things in cash or for doing business with overseas banks means that people with the means to invest will be more cautious than ever.


As Paul Craig Roberts has pointed out in his book The Tyranny of Good Intentions, U.S. attorneys have not shied away from going after individuals who engaged in cash transactions even when it was obvious they were not involved in criminal conduct of any kind. While government prosecutors can brag about pursuing criminals, in reality, the current legal climate has made it less likely that people will want to invest in business enterprises in this country.


Of course, the current epidemic of multi-million dollar judgments against business firms serves as warning that being economically successful in the U.S.A. also means that success will place a company in the crosshairs of private and government lawyers. The Microsoft case was not so much about "protecting consumers" as it was about finding ways to pry loose Microsoft’s enormous cash holdings. (Bill Gates had a policy of the firm being as liquid as possible, which also meant that lawyers from Janet Reno on down concocted schemes to put the money in their own pockets or government treasuries by looting Microsoft.)


From the multi-billion dollar judgment against General Motors for the "crime" of having gas tanks on their vehicles to the imposition of unconstitutional bills of attainder and ex post facto law to force tobacco companies to fund the political spending schemes of dishonest state politicians, to the strangling of dozens of firms that have fallen prey to the asbestos quagmire, the tort climate in this country is saying this: Do not invest your money in the United States because your profits almost surely will go into the pockets of trial lawyers.


None of these things by themselves has caused the recession. Trial lawyers did not force Alan Greenspan's fed to recklessly increase the money supply and touch off financial bubbles; regulators did not direct capital into the mirage of the "New Economy," and federal prosecutors did not encourage people to invest in an overpriced stock market. However, once these things occurred, there was only one way out of the mess. Unfortunately, these other players are now actively blocking the exits while the economy burns.


William Anderson, an adjunct scholar of the Mises Institute, teaches economics at Frostburg State University. Send him MAIL. See his Mises.org Articles Archive.

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

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