Gov't Economic Policy Cannot Cure A Problem It Caused

Monty Pelerin / EconomicNoise.com

Neither President Bush’s nor President Obama’s economic policies brought this recession. The event was preordained from years of governmental economic mismanagement and intervention. The crisis could have come sooner, or later. It happened on Bush’s watch. Now Obama must deal with it.

The insanity of current economic policy has been dealt with here before. Keynesian economics, as practiced by politicians, was not what Keynes advocated. He envisioned the role of government as a controller/moderator of the economy, stepping to help in down times. Keynes never proposed a government consistently spending beyond its revenues. The government was expected to run surpluses in good economic times. To understand how badly the Keynesian system was bastardized, one only need know that the last true surplus in this country was 50 years ago! Have we been in a depression for 50 years?

Why has this happened? Politicians are not economists, and they don’t think like economists. Rational politicians live for the moment. Like renters of a home, they do not care about wear and tear or residual value. Politicians “enjoy the home to the fullest.” The residual value of their home (country) is not their concern; staying in the home (retaining office) is. This point was made by Hans-Herman Hoppe in his book Democracy The God That Failed and in this article:

Both kings and presidents will produce bads, yet a king, because he “owns” the monopoly and may sell or bequeath it, will care about the repercussions of his actions on capital values. As the owner of the capital stock on “his” territory, the king will be comparatively future-oriented. In order to preserve or enhance the value of his property, he will exploit only moderately and calculatingly. In contrast, a temporary and interchangeable democratic caretaker does not own the country, but as long as he is in office he is permitted to use it to his advantage. He owns its current use but not its capital stock. This does not eliminate exploitation. Instead, it makes exploitation shortsighted (present-oriented) and uncalculated, i.e., carried out without regard for the value of the capital stock.

Carrying the home analogy a bit further, the last several decades of governmental economic policy has seen wealth destruction. Such policies are analogous to the government heating its home by burning the furniture. Burning furniture might get you through a few winters, but unless it is replaced eventually there is nowhere to sit and no fuel for next winter. Fortunately our ancestors were industrious and frugal, creating a lot of furniture. We stayed warm for a long time as a result, but the furniture is disappearing.  (I believe the furniture-burning analogy first came from Ludwig von Mises. His “eating the seed corn,” leaving nothing to plant next year, would have been just as applicable.)

Massive supplies of capital and wealth enabled the government to mostly avoid small downturns in the economy by intervening. But each intervention came at a cost. Higher taxes, increased spending, larger deficits, too much credit, and distorted interest rates and prices resulted. These factors consumed wealth directly or produced distortions in the allocation of resources, particularly capital. With each intervention, the distortions grew, creating the need for ever bigger future interventions. This cycle has now gone on for at least 50 years. The effects in terms of malinvestment of capital and the increasing size and frequency of downturns has only become more apparent in the last decade.

Whether furniture-burning can work one more time or not is moot. We are getting progressively poorer as the result of consuming and misallocating capital. At some point, we run out of furniture. If we wiggle through this crisis, it only means that the next crisis will be bigger and more devastating. It is likely also to occur soon. The current one started around 2007, only about six years after the 2001 crisis. As a result of trying to avoid them, each subsequent crisis has been coming quicker and bigger than its predecessor.

The presumption that politicized macroeconomics works is the basis for current Administration policy. A growing portion of economists disagree. Many feel that current policies will make matters worse. John Williams, as quoted by  Greg Hunter, suggests a complete collapse may be imminent:

… according to economist John Williams of Shadow Government Statistics, it is too late.  In Williams latest report he writes “The United States Economy and Financial System Face an Eventual Great Collapse.” Williams told me in an interview this week that because of all the bailouts, stimulus packages, giveaways and short-term debt, the U.S. has to finance nearly $5 trillion in 2010 alone. That’s about $96 billion in debt auctioned off each and every week!!  Williams said, “Someone has to buy those Treasuries, and if no one does, then the Federal Reserve will become buyers of last resort.” The Fed buying that much in Treasuries is the same as printing huge amounts of money.   Williams says that “is the tipping point that will start a dollar crisis.” According to Williams, this will produce a “high risk of an ultimate dollar crisis that will begin unfolding in year ahead.”

Keynesian economics depends upon the assumption of stable (actually causal) relationships between macro variables over time. Yet history is not particularly supportive. Japan and our own Great Depression provide two dramatic examples of the failure of the “science.”

This article was adapted from Burning The Furniture and Eating The Seed Corn To Survive which originally appeared on this site.

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http://www.economicnoise.com/2013/02/25/government-economic-policy-cannot-cure-a-problem-it-caused/