Altes Elliott-Wellen-Forum - Doubts about Recovery / Artikel mises.org

- Elli -

08.10.2003, 16:07

Doubts about Recovery / Artikel mises.org

Thread gesperrt

--><div>
http://www.mises.org/fullstory.asp?control=1337
</div>
<div>
 
</div>
<div>
Doubts about Recovery
</div>

 
by DW Mackenzie

[Posted October
08, 2003]

<img alt src="http://www.mises.org/images3/dwm1.gif" align="right" border="0" width="276" height="237">The
popular
press has adopted a more
optimistic tone regarding economic conditions. The reasons for this are clear.
It appears that the current recovery is picking up pace. Recent reports
indicate that second quarter GDP for this year increased by 3.3%, instead of
the earlier 3.1% estimate. This is more than double the GDP growth rate from
the preceding two quarters. Analysts expect 4% or higher growth for the
following two quarters, with some predicting 6 to 7% growth. Falling
inventories and strong spending, some say, indicate that this recovery will
continue.

Those who
comprise the current pool of unemployed labor will surely see this as good
news. Unemployment rates have not come down with the recent surge in GDP.
Falling inventories will no doubt prompt employers to take on more employees.
In trying to assess the merits and shortcomings of this recovery we should,
however, consider both the changing composition of GDP and the source of its
expansion.

However, this
fact is crucial: a considerable portion of this increased GDP has come from
increased military spending. Military spending rose 45.8% for the second
quarter. This is the strongest quarterly increase in military spending since
the Korean War.

<img alt src="http://www.mises.org/images3/dwm2.gif" align="right" border="0" width="279" height="234">Overall
economic efficiency does not concern GDP growth per se. It concerns the
satisfaction of consumer demand. Increased military spending does not directly
satisfy consumer demand. Some might argue that this spending, largely on
military operations in Iraq, will improve long term domestic security and
satisfy the demand by Americans to avoid future terrorist attacks. Others
clearly object to the methods employed by the Bush administration in fighting
the war on terror. These objections range from the practical matter of how
best to prevent another 9-11 to the moral legitimacy of military foreign
intervention.

In any case,
does the redirection of available resources into the War on Terror reflect an
efficient use of scarce resources? Politics reflects the will of narrow
special interests, rather than the general public. There can be no doubt that
the Iraq incursion has been good for Haliburton. Has it been good for American
consumers overall? The general biases that exist in democratic politics
indicate that public policy will favor narrow interests, like corporate
interests (i.e. Haliburton) over general interests (i.e. ordinary consumers)<a id="_ftnref1" title href="http://www.mises.org/fullstory.asp?control=1337#_ftn1" name="_ftnref1">[1]</a>.

<img alt src="http://www.mises.org/images3/dwm3.gif" align="right" border="0" width="280" height="237">It
is also the case that many misconstrue the economic effects of such spending.
Resources expended on the military could go to other uses. Those who argue
that increased military spending stimulates the economy employ faulty
reasoning. They say that resources lie idle because of insufficient spending.
It is therefore the case that anything that prompts greater spending, even
destructive acts, can improve economic conditions. While a superficial look at
GDP statistics and Federal spending might indicate to some that this is true,
this proposition lacks both sound reasoning and valid evidence.

The recent
increases in Federal deficits have certainly drawn funds into particular uses.
However, these funds were already available for other private uses, such as
private investment, mortgages, and other consumer credit. The Bush
administration bid these funds away from these private uses, which arguably
would have been better uses. The spending or Demand Side Economics point of
view ignores the fact that the resources used by recent increases in military
spending have alternative uses, and that there are always others competing
vigorously for these, and all other resources. Great thinkers like Bastiat,
J.B. Say, Ricardo, Mises, Hayek, and Hazlitt have been pointing to these ideas
for centuries. All scarce resources have alternative uses, and since our
incomes derive from spending on goods, there are never general deficiencies in
spending throughout the economy.

<img alt src="http://www.mises.org/images3/dwm4.gif" align="right" border="0" width="276" height="244">My
arguments raise legitimate questions. If the Bush administration is bidding
funds away from private uses in credit markets, then why are interests rates
so low? If there is sufficient spending in the economy, why did unemployment
rise in recent years? The explanation lies within the alternative to spending
theories: price theory. Carl Menger founded modern price theory when he
developed the notion that exchange values on markets derive from marginal
valuations by consumers in markets. Relative prices are what determine the
overall efficiency of the economy. One set of prices in particular pertain
directly to the trade cycle and unemployment, namely, interest rates.

The popular
press often associates changes in interest rates with the Federal Reserve, and
rightly so. By varying the rate of money supply growth, the Federal Reserve
changes market interest rates. Interest rates are supposed to reflect the
willingness of consumers to defer consumption. That is, people spend their
income on more and less immediate consumption alternatives. By saving,
individuals indicate a willingness to forgo some more immediate satisfactions
for some less immediate satisfactions. Rational consumers will equate the
expected marginal costs of forgone immediate consumption with the expected
marginal benefit of increased less immediate consumption.

Each individual
consumer has his or her own personal preferences concerning more and less
immediate consumption. Interest rates in free credit markets reflect these
preferences for timing consumption. Federal Reserve intervention causes actual
interest rates to diverge from interest rates that reflect consumer time
preferences.

The Federal
Reserve has pursued an aggressive policy in recent years. It has expanded the
money supply rapidly, thus driving interest rates below levels that reflect
consumer preferences. This has surely had a good affect on GDP statistics.
Non-residential investment has risen by 7.3%. and consumer sending, which had
been predicted to rise 3.3%, is up by 3.8%. Consumer will spend more and save
less when interest rates fall because the financial return on deferred
consumption has fallen. Investors will invest more when interest rates fall
because the financial returns on investment rise as the cost of paying back
credit fall. Ludwig von Mises and Friedrich Hayek recognized this long ago.
They also realized that this would lead ultimately to inflation and future
recessions.

Mises
emphasized early in his
career that inflation caused economic discoordination.

As Hayek
latter argued, the problem
that we face is in how to get individuals to pursue their individual aims so
that they are consistent with each other. As a general rule, each individual
in a free society forms plans for their future. In order for the plans of many
individuals to each fit with each other, each must account for what others
plan to do. So, each individual must form plans that contain relevant data
from the plans of others. Interest rates inform individuals of an important
part of this data. If interest rates are too low, then consumers aim at more
immediate satisfactions while investors aim at investing in longer range
projects—projects that aim at less immediate satisfactions. Federal Reserve
inflation puts the plans of investors at odds with the plans of consumers.
This will register, initially, as an economic boom. Since resources are scarce,
increases in both demand for consumer goods more immediately, as registered by
the 3.8% increase in consumer spending combined with increased investment in
satisfying less immediate consumer demands, as registered by the 7.3%
non-residential investment increase, will ultimately lead to inflation, an end
to the current (albeit nascent) expansion and a subsequent recession.

We have seen
this all before. This is exactly what Alan Greenspan did a decade ago. He
implemented an aggressive monetary policy to stimulate the economy. This
triggered the boom of the 1990's. It also led to the need to end this boom,
when it became apparent that continued monetary expansion would lead to
increasingly high inflation rates.

There can be no
doubt that many have endured real hardship in this recent recession.
Inflationary policies will induce a boom, boost GDP statistics, and bring
unemployment down rapidly. However, this will also lead to further
discoordination in the economy, and another boom-bust cycle. We do not need
monetary stimulation to the economy anyway. The desire of each for a
better life drives the economy. Each spends their income on more or less
immediate plans for consumption. This is all the stimulation that the economy
needs, as consumer satisfaction is the goal that we have in mind when
considering economic conditions. It is also the case that increased deficits
merely redirect the use of scarce resources toward highly questionable ends.

Any emerging
optimism regarding public policy and economic conditions should be viewed with
suspicion. It is wrong to think of the use of increased deficits and
expansionary monetary policy as ways of stimulating the economy. Larger
deficits shift the use of resources, in favor of special interests. There are
sound economic and ethical reasons to question the merits of these transfers.
We should also view the policies of Alan Greenspan with suspicion. These are
the same policies, from the very same Federal Reserve Chairman, that gave us
the boom-bust cycle of the 1990's, and also the late 1980's.

We should also
turn our attention to the critics of tax, spend, and inflate economics
practiced by political authorities. In particular, Carl Menger, Ludwig von
Mises, and Friedrich Hayek developed sound explanations concerning the
importance of relative prices in determining economic conditions. Mises,
Hayek, and Olson also developed sound arguments concerning the disruptive
affects of governmental intervention. These explanations derive from the
common sense of marginal cost-benefit analysis and have been borne out by
history again and again. Embracing the free market means accepting its
imperfections. It also means avoiding the large-scale discoordination and
erosion of individual liberty that comes to us courtesy of political
authorities, like President Bush and Chairman Greenspan.

<div>
 
</div>
<div>
<hr align="left" width="33%" SIZE="1">
</div>
<div>

D.W.
MacKenzie is a graduate student in economics at George Mason University.
Send him MAIL and
see his Mises.org  Daily
Articles Archive. Thank you
to Frank
Shostak for the graphical data.

</div>
<div id="ftn1">
<a id="_ftn1" title href="http://www.mises.org/fullstory.asp?control=1337#_ftnref1" name="_ftn1">[1]</a>See
Olson, Mancur The Logic of Collective Action. (Harvard University
Press 1965) for a discussion of the general principles that bias policy in
favor of narrow interests.


</div>