The Free Market 26, no. 3 (March 2008)
We all want to live well and no one wants their living standard to decline. No one likes recession. It’s just the way we are made. This is one reason that the official environmentalist movement has an uphill battle. The poverty that comes with living without industrial civilization lacks public support—once people clue in that this is what they are after.
At the same time, a major contribution of the Austrian School is that recessions do not appear in a vacuum. They are a response to an economic imbalance that is part of the boom phase of the business cycle—a boom characterized by unsustainable investment made possible by the artificial expansion of money and credit. In this sense, recessions are not only inevitable; they are necessary, and, in an economic sense, a welcome turn of events.
What does not make any sense is the strange article of faith that has descended over Washington, DC, that says that no prices must ever be permitted to decline due to recessionary pressures. All resources in the national treasury, every conceivable monetary manipulation, all efforts of every regulatory body must be marshaled toward the great national goal of re-pumping the economy, which must never ever be permitted to fall even a tiny bit.
Welcome to the War on Recession, which is being pursued with the same vehemence and folly as the War on Terror, and will likely prove just as spectacularly destructive of its own aims as well as liberty itself. Maybe we need songs, banners, and little ribbon pins too.
Let’s think about the big picture. The economy was overinflated due to reckless monetary policy and government agencies treating critical sectors such as housing as a democratic right and thereby too big to fail. The trend dates back decades but the bubble became insanely large only within the last 5–10 years. Something had to give. And it turns out that this was just the beginning. All sectors were puffed up and inflated.
Can we agree that there was a problem—that not all was well, despite appearances? I think we can. So what do we do in this case? There has to be a downward correction, but there’s no reason to panic. A good correction is just what a recovery needs to get going. Such is the nature of the Fed-created business cycle.
So what could it possibly mean to claim that the economy must never be allowed to fall into recession? I’m thinking here of similar claims: “That drunk is sobering up. Quick, give him a shot of tequila!” “That druggie is coming out of his trip. Get the syringe!” “Don’t look now but that insomniac is going to sleep. Someone wake him!”
Now, it’s fair to say that the person hollering out the solution to each of the above scenarios doesn’t really understand the nature of the problem.
So it is with the Fed. It sees stocks falling, credit markets under pressure, unemployment rising, investment falling. But rather than conclude that all these factors represent a bubble, it has the opposite response: keep the bubble inflated at all costs!
It’s time that we question the very foundations of this war on recession. The recession is a regrettable but inevitable backlash against a boom that was not justified by the fundamentals.
That last phrase is the critical thing. I am not saying that the recession is the price we pay for economic growth. Boom times are fabulous times, provided that they are rooted in sound fundamentals. And what are those? Essentially it is this: the timeframe of investment must match the timeframe of society at large. If people are long-term oriented and saving money, resources become available for investment in the future. When production is completed, there are consumers to buy. But if no one is saving money and there is no sound store of capital, there are no resources to invest—unless, of course, the Fed creates that money. The money the Fed creates is wholly illusory, a fiction of investors’ imaginations. It will vanish when the economy wakes up to reality.
This is an example of investment unjustified by fundamentals. What to do in that case? There must be a correction. There is nothing the Fed or the Congress can do about it. They certainly shouldn’t attempt to prevent it. To attempt to prevent the correction is like turning into the skid: it only makes it worse.
All this nonsense about digging ourselves out of recession through government intervention began with the New Deal. Before then, government didn’t do much at all about the downside of the business cycle. And guess what? Recessions were short and less than lethal for economic health. Indeed, they were the essential foundations of future recovery. All that changed with FDR, who used the economic downturn as the great excuse to make himself the economic führer of America.
But here is the amazing fact: not once has this strategy worked.
Not in the New Deal. Not in the 1970s. Not in the 1980s. Not in the 1990s. Not once has government done anything to restore prosperity during a slump. What happens again and again is that government spends, the Fed inflates, the regulators punish, there is wailing and gnashing of teeth, and then, at some point, we hit bottom, and normalcy begins to return again. The most government can do is prolong the period at the bottom. Otherwise, it is just wasting resources.
Take a look at Murray Rothbard’s book The Panic of 1819. Here we have America’s first big financial panic. The public was going nuts demanding answers. Congressmen proposed this and that. Debates raged in the papers. But government ultimately took no action at all. Sure enough, the panic went away on its own. So it was in 1920 and 1921. The government didn’t intervene and voila normalcy returned.
Here’s another strange thing about this anti-recession mania: for years we’ve been hearing from the environmentalists that we need to live more simply, do without, cut back, drive bikes not cars, and generally lower our standard of living and look after the well-being of plants and lizards and things. It turns out that Americans don’t really go for this message. A slight downtick in the price of the house causes hysteria.
So as we look forward to the recession, we might consider two possible linings of silver. In sectors with lower prices, this is a saving grace for consumers. House prices will fall, and many stocks too. These are all buying opportunities in times when the prices of many goods such as oil and gas are inflated. Second, during recessions, the environmentalists won’t get very far with their message that we should embrace poverty and call it our own. I don’t expect that much progress will be made in calls for ending the use of fossil fuels on the speculative hope that this will cool the planet.
