Vin Suprynowicz

Extending the recession indefinitely

Unemployment continues to tick upward. Small businesses forgo profits on two-for-one deals just to keep the doors open.

But we're in recovery. Treasury Secretary Timothy Geithner, the guy who couldn't get around to paying his own taxes, says so. After all, government is doing all it can to speed the recovery, isn't it?

"Fed keeps key rate near zero," the Business page headline screamed on Sept. 24. Low interest rates should get things "stimulated," shouldn't they? Then, three days later, over a Washington dateline, "Jobless benefits extension backed: Lawmakers voted 331-83 to extend jobless benefits by 13 weeks in 27 states, including Nevada, where the unemployment rate is above 8.5 percent."

That should help, right?

For the answers, let us turn to Murray Rothbard's classic account of the economic mistakes made in Washington from 1929 through 1938, "America's Great Depression."

When economies get into trouble, Mr. Rothbard points out, businessmen are "misled by bank credit inflation to invest too much in higher-order capital goods" such as houses and cars. The "boom," then, "is actually a period of wasteful misinvestment. ... Errors are made due to bank credit's tampering with the free market." This is followed by a recovery period that sees a "rapid liquidation of the wasteful investments," and, typically, a deflationary credit contraction, which helps restore confidence in the remaining sound banks.

"In short, and this is a highly important point to grasp, the depression is the recovery process. ... The depression, then, far from being an evil scourge, is the necessary and beneficial return of the economy to normal after the distortions by the boom. The boom, then requires a bust. ...

"If government wishes to see a depression ended as quickly as possible, and the economy returned to normal prosperity," professor Rothbard explains, "the first and clearest injunction is: don't interfere with the market's adjustment process," which will include bankruptcies of unsound enterprises, credit contraction and falling wages and prices.

This is the course the government took during the 1920-21 recession, which was over so quickly that the history books barely remember it. (Except in the farm segment of the economy, where the government made the mistake of interfering to try to hold crop prices at artificially inflated World War I levels -- a mistake that has now been ongoing for 90 years.)

But let us say, for the sake of argument, that government wanted to hamper the normal process of economic adjustment, which helps make recessions brief and relatively painless.

If anyone in Washington were to be so wacky as to seek to extend the pain of a recession, what course would they follow? On Page 26 of "America's Great Depression," Rothbard presents that very catalog of idiocy.

"Here are the ways the adjustment process can be hobbled:" he writes.

"1) Prevent or delay liquidation. Lend money to shaky businesses, call on banks to lend further, etc.

"2) Inflate further. Further inflation blocks the necessary fall in prices, thus delaying adjustment and prolonging depression. Further credit expansion creates more malinvestments, which, in their turn, will have to be liquidated in some later depression. A government 'easy money' policy prevents the market's return to the necessary higher interest rates.

"3) Keep wage rates up. Artificial maintenance of wage rates in a depression ensures permanent mass unemployment. Furthermore, in a deflation, when prices are falling, keeping the same rate of money wages means that real wage rates have been pushed higher. In the face of falling business demand, this greatly aggravates the unemployment problem."

In addition to "minimum wage laws," don't we now have "living wage" ordinances, "project labor agreements," and, for our unionized government employees, "automatic step and seniority raises" in addition to cost-of-living adjustments that boost the pay of government employees as well as welfare recipients ... even when the cost of living is falling?

"4) Keep prices up," Rothbard continues, cataloguing precisely the wrong things to do if you want a recession to end. "Keeping prices above their free-market levels will create unsalable surpluses, and prevent a return to prosperity.

"5) Stimulate consumption and discourage saving. We have seen that more saving and less consumption would speed recovery; more consumption and less saving aggravate the shortage of saved-capital even further. Government can encourage consumption by 'food stamp plans' and relief payments."

Note that "America's Great Depression" was published in 1963. How's Rothbard doing at predicting Obamanomics, so far? About the only thing he seems to have missed are "Cash for Clunkers" and the fledgling "green jobs" boondoggle.)

Government "can discourage savings and investment by higher taxes," Rothbard continues, "particularly on the wealthy and on corporations and estates. As a matter of fact, any increase of taxes and government spending will discourage saving and investment and stimulate consumption, since government spending is all consumption. ...

"6) Subsidize unemployment: Any subsidization of unemployment (via unemployment 'insurance,' relief, etc.) will prolong unemployment indefinitely, and delay the shift of workers to the fields where jobs are available."

Incredible. We know what these measures do. They delay economic adjustment and recovery; they extend economic hardship, regardless of whether we call the hard times a depression or a "great recession."

This was all proved, laboriously, in spades, from 1929 to 1938, all brilliantly analyzed and explained by the late Murray N. Rothbard, with whom I had the honor to discuss some of government's tendencies to repeat the same mind-boggling errors over and over again, during his time at the University of Nevada, Las Vegas.

The only question remaining: Since the experiment has already been done, and the long-term effects of these policies demonstrated -- to the enormous pain and inconvenience of our long-suffering grandparents -- why do the boys in Washington now insist on repeating this experiment in economic disaster, all over again?

Vin Suprynowicz is assistant editorial page editor of the Review-Journal, and author of "Send in the Waco Killers" and the novel "The Black Arrow." See www.vinsuprynowicz.com/ and www.lvrj.com/blogs/vin/.

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Comments

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1. smkj4 Oct. 11, 2009 | 8:09 p.m. Report Abuse

   In response to your story about causes of recession, is it just possible that relief will arrive about September of 2010,just in time for the election season and of course it will be because the democrats have been so benevolent... could that possibly be the strategy? Hmmm?

2. nyp Oct. 6, 2009 | 9:08 a.m. Report Abuse

   wow - this is the classic "liquidationist" approach come back to life. The most succinct version came from Andrew Mellon's advice to Herbert Hoover:
   "liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people."
   
   Amazing to see this approach reappear in 2009.

3. John F Oct. 5, 2009 | 10:09 a.m. Report Abuse

   Mr. Robertson,
   
   I didn't say it was monetary expansion AFTER WWII that created the recovery; it was the monetary expansion DURING WWII that did it. The period I cited was 1940 - 1945. That expansion of the money supply in the early 1940's was necessitated by the entry into the labor pool of all the people entering the military and all the people entering industry to supprt the war effort.
   
   I don't doubt that left to its own devices the economy will self-correct eventually, but why make the people who are out of work wait when we can do something to speed the process.
   
   Winston Smith had it just right yesterday. The problem is that neither major party can find the political courage to do what is right when things are good, namely tighten the belt on spending. They either use good times to justify large tax cuts, large spending increases, or (usually) both. Look what happened in 2000 (And I am not blaming only the Republicans on this. The Democrats, minority though they were, could have stopped it had they really wanted to.)
   
   I suppose we'll never really know which of these two major economic theories is correct as there are no true Keynesians actually setting economic policy and there hasn't been such a thing as a truly free market in this country for a very long time. I'd be willing to give either a try.

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