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Is the Worst Yet to Come? / Artikel mises.org, engl.

verfasst von - ELLI -, 13.01.2003, 18:52

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Is the Worst Yet to Come?
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by William L.
Anderson

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[Posted
January 13, 2003]

 

As the
economic downturn moves into its third year, making it the longest in the
postwar period, the White House announces yet another economic"stimulus"
package. Now, this set of proposals is not to be confused with"Stimulus
I" or"Stimulus II," or even the ongoing"stimulus"
actions taken by Alan Greenspan and the Federal Reserve System. No, this
proposal is based upon the same foolishness as the other legislative packages
emanating from Washington that not only have brought about this recession, but
also block the real recovery.

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Moreover, the
chatter by economists and other pundits over which is the proper"stimulus"
action to take demonstrates that the Keynesian Revolution has been even more
influential in the economics profession than the textbooks would have us
believe. From Milton Friedman to Larry Kudlow to Paul Krugman to Maestro
Greenspan himself, most economists can proudly repeat what President Richard
Nixon uttered August 15, 1971, when he introduced"Phase I" of his
disastrous economic program,"We are all Keynesians now."  

 

The old joke
that"if you take all the world's economists and lay them end to end,
you'll never reach a decision" has been discredited, at least when it
comes to proposing policy"solutions" to the moribund economy.

 

Actually, the
belief that government can"stimulate aggregate demand" does not
begin with Keynes, although there seem to be some economists who actually
believe this. One can accurately say, I believe, that most of the economics
profession has not progressed much beyond the 18th Century
Mercantilists and their"inflation stimulates trade" nonsense that
time and again has driven national economies to ruin.

 

While I
suspect that most pundits actually would cheer the prospect of Kudlow and
Krugman agreeing that the way to stop the economic mess is for the Fed to
print wads of new money, the tragedy here is that neither man has even the
slightest idea how this current downturn came about and what should be done.
Should the government continue to listen to this newest generation of cranks
in the tradition of Silvio Gesell (the Italian inflationist who Keynes called
a"prophet"), we can expect to follow in the footsteps of Japan.

 

As has been
written on this page many times, the 1990s boom—termed then as the"new
economy"—was credit-driven and collapsed under its own weight of
malinvested capital. Unfortunately, those with political power—and their
allies in academe and the media—believe that our current problem is nothing
more than a lapse in"aggregate demand," which can be cured by some
new money and a few thousand government checks to be written for various
wasteful federal and state projects.

 

While there
seems to be no shortage of advice given from all quarters on how to stop this
downturn, the answer is simple—and brutal: let the liquidation continue
until it reflects the proper patterns of consumer spending and preferences. In
other words, unless we permit an unhampered economy to engage in the very
necessary adjustments, the economy will continue to slide further and further
into ruin. Contrary to the beliefs of the chattering cranks, the U.S. economy
is not depression proof.

 

While most
Mises.org readers are aware of the massive U.S. recession of 1981-82, few
remember that the Fed engaged in a much more responsible manner than what we
have seen under Greenspan these past few years. First, and most important, the
Fed permitted interest rates to soar to very high levels in response to the
high rates of inflation that had plagued the U.S. economy for more than a
decade.

While high
interest rates temporarily choked off a number of credit-fueled industries
like housing and farming, what is most important is that it permitted the
massive malinvestments of the previous boom to be rapidly liquidated, thus
allowing for a robust recovery. Although President Ronald Reagan won a huge
landslide victory in the 1984 elections, few people remember that in 1982, as
the recession raged on, most political experts had declared Reagan to be
politically dead and there was open talk in Republican circles of someone else
filling the GOP ticket for 1984.

 

Had the Reagan
Administration—however unwittingly—not permitted the liquidation process
to go on, it is doubtful that the economy would have experienced a strong
recovery in 1983 and 1984. Unfortunately, the administration of George W. Bush
does not see things that way, and the government has been desperately
attempting to keep the needed economic liquidation from occurring. From the
Fed's setting interest rates at near-zero levels to massive housing subsidies
to steel and lumber tariffs to the latest re-emergence of huge farm subsidies,
not to mention the saber rattling of the so-called war on terror, the Bush
Administration has failed to permit the economy to settle back into its
correct proportions.

 

While I
applaud the president's attempts to cut the tax burden, his plans to increase
government spending and pay for it with borrowed money makes his entire
economic package a hollow one at best. Moreover, the Democrats seem to be
taking their orders from Paul Krugman, who seems to believe that inflation
plus a few checks from the already-bankrupt U.S. Treasury will cure nearly
every economic ill.

 

The belief
that our present economic downturn is nothing more than a lack of"aggregate
demand" is simply wrongheaded on all counts. First,"aggregate
demand" is in and of itself a fraudulent term. It assumes that all
spending—and all investments and capital, for that matter—are homogeneous
when they clearly are not. Furthermore, it is impossible to measure"aggregate
demand," and even the way that it is shown (with the Consumer Price Level
on the"y" axis) presupposes that inflation is the key to
consumption. To put it another way,"aggregate demand" is, as
economist Roger Garrison once put it, a way to try to teach macroeconomic
principles"on the cheap" by trying to model the entire economy with
single demand and supply curves.

 

Not only is
the methodology of measuring"aggregate demand" terribly flawed, but
the belief that simply encouraging"consumer spending" by placing
more money in the hands of people through the"magic" of inflation
is also ridiculous. Let me explain.

 

Cranks like
Kudlow and Krugman write that if the government finds a way to quickly
increase the incomes of individuals, then those folks are likely to spend a
goodly portion, if not all, of the new money on items like a new car or
television or some other set of goods. Inventories for those goods will be
cleared at the"old" prices and people who sell those goods will
have at least a temporary source of further employment. (Where they differ is
that Kudlow believes in more across-the-board tax cuts, while Krugman wants
only lower-income people to get the new money, since he believes they will be
more likely to spend the money immediately.)

 

Even if the
scenario painted by the cranks is true, there is nothing in their plan that
will lead to economic growth. At best, items that had been languishing in
warehouses and elsewhere will be sold, but that does not provide a signal to
investors and business executives to engage in further investment of new
capital—or even to keep current lines of production open.

 

For example,
one of the demands made by Democrats is that any tax cut be temporary and
limited to lower-income individuals. While I would welcome any reduction in
taxes to anyone at any time, the idea that this plan would"stimulate"
the economy is simply ridiculous. At best, it would permit existing
inventories to be pared down, but that is about the extent of its"stimulus"
qualities. Apparently, anything that might permit solid long-term
possibilities of economic growth is anathema to the nation's policymakers of
both parties.

 

Unfortunately
for the political classes (and the rest of us who have to live with the
political classes), the key to setting the table for economic recovery is to
endure the liquidation without trying to interfere. Since any politician who
"doesn't do anything" to stop the recession, either by intervening
to keep firms in business or doling out government largess to those who lose
their jobs, will come under heavy criticism, the prospects of non-intervention
during this critical period are just about nil. Thus, the"compassionate"
politicians are those who actually are doing the most damage to the economy.

 

During Bill
Clinton's 1992 presidential campaign, his manager, James Carville, posted
"It's the economy, stupid" signs throughout campaign headquarters
and elsewhere. Perhaps we need a new slogan to fight the recession: It's the
liquidation, stupid. While I doubt the motto will catch on with Bush and his
political rivals, in the end, it really is the liquidation. Those who ignore
this kernel of truth really are the stupid ones.

 

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

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Is the Worst Yet to Come? / Artikel mises.org, engl. - - ELLI -, 13.01.2003, 18:52