Government Policy Caused and is Prolonging the Recession

Ludwig von Mises and F.A. Hayek predicted in 1927 that government expansion of credit in the 1920's was causing a bubble and would lead to a collapse of an over-inflated stock market.

In 1932 they predicted that this would become the longest recession in history, because it was the first time that the government used monetary expansion and economic socialization to try to "fix it."

In the late 1960's, Hayek specifically predicted the recession and stagflation that struck in the 1970's--again because of credit expansionist policies. And again, he predicted the late 80's credit crunch.

Milton Friedman, Ron Paul, and (god forbid) Pat LaRouche correctly predicted that the housing market was a bubble in the 2000's, driven by the 1993 American Dream Act and the interference of Fannie Mae and Freddie Mac (which together incentivized banks to give risky mortgages). Combined with cheap credit, banks were over-leveraged, and collapse was coming. When the Obama administration published its optimistic 2009 report on the speed of the recovery, Austrians and Monetarists laughed: they knew that the planned government policy would inhibit it.

In Canada and the UK, this banking collapse did not happen! They had much, much higher interest rates, which made banks more conservative and mortgages (and other loans) more expensive. It was too expensive and risky to be over-leveraged, and one made more money saving money and collecting interest. Canada also had regulations that limited how leveraged a bank could be. This wouldn't be strictly necessary if the Federal Reserve was not making money historically cheap, but it helped protect the British and Canadian banking systems from the American collapse (their economies were too small and too integrated with the US to avoid the recession that our monetary policy caused).

All of our major recessions in the modern age have been predicted--both in that they're happening and the mechanisms by which they'd happen--by Austrians and Monetarists. They argue, as I do, that it is not an unpredictable "animal instinct," that the bust of the business cycle is not caused by "greed" (why would "greed" be greater at one time than another?). Overly risky behavior, bubbles, over-leveraging, mal-investment: it is a very simple argument that they are (at the _very_ least) greatly promoted and expanded by artificially cheap credit and cheap money. It's simple supply and demand.

But prolonging it? Before the Great Depression, recessions in the liberal countries (namely the UK and US) recovered _quickly_. Coming out of a recession, growth was _faster_ than beforehand, until the economy continued its normal upward track. Unemployment quickly dropped as the market re-adjusted.

Since the Great Depression, this has not happened. In fact: I see a very strong correlation between the _amount_ of government intervention and the _length_ of the depression and length of persistent unemployment. Why?

Part of the problem is that when larger credit expansion policies cause bigger bubbles and more mal-investment, it will take more time, more pain, and more re-adjustment to ultimately get back on track. Unfortunately, there is no "quick" fix the government--despite its best intentions and desperation to do so--can employ. Keynes tells us that by increasing consumer spending, we fix the problem... but consumer spending in the US is already higher than pre-recession! We're trying to increase consumer spending, encourage loans, and discourage savings by making money cheap. To the Fed's surprise (but _not_ the surprise of a Monetarist or Austrian economist), pumping money into the system ("increasing liquidity") did _not_ cause banks to give loans again... they hoarded it. The economic environment was ultimately toxic due to the mal-investment of the past 10 years, and more paper money couldn't change that.

The other problem is that government policies stunt growth. Increasing consumer spending arbitrarily means there is less savings. This means more resources are turned towards non-durable goods and less towards re-investment. Ultimately, creating more pieces of paper money in the system doesn't mean there are more resources to both consume and invest... the economy only has as many man-hours and as many materials as it has, and the more those are driven to consumption, the less they are driven to investment and durable goods.

This lack of investment in durable goods, new factories, etc, means new jobs aren't produced. Because the old bubble had huge amounts of fat and wasted labor (from cheap money and mal-investment), we can easily create the same amount of consumer goods with less labor. Consumer spending also, of course, means that much of the printed money is exported when we import other consumer goods. But ultimately, directing demand to consumer goods will, predictably, not cause employment to reach the levels it did.

So we've discouraged further investment--especially long-term--through this credit expansion. We're trying to use the "hair of the dog" to cure the hangover, and it's not working. (Hayek called it "using poison to treat the symptoms of the same poison.") Other policies that we've had in place for a long time mean that growth is going to be ultimately slow, no matter what. High safety and consumer "protection" legislation, along with building and zoning codes, safety codes, and other excesses of regulation and paperwork make investment much more expensive. Businesses are citing the coming Obamacare mandate as the reason they prefer part-time to full-time employees. Despite sitting on piles of money, banks aren't finding suitable investment projects.

This seems mad! One would think that a recession would cause a depression in prices that would spur investment, because the IRR of projects would go up. This depression of prices of wages and materials was _exactly_ what caused the free market to quickly deal with any recession before the Great Depression. But government policies add significant costs across-the-board to investment projects for both large and small businesses. It's supply and demand: if the price is too high, the supply (in this case, spare labor and materials) won't be consumed.

I am a bit outraged that the only counter-arguments I've seen here are "excesses of capitalism" and "corporate greed" causing both the recession and its prolonging. The argument here is predicated on the idea that corporate greed goes through ebbs and flows: sometimes corporations are "good guys" that choose to--altruistically!?!?!--pay workers more, invest in durable goods, etc... and when they're "greedy," they pay their workers less, make short-term investments, make riskier investments. It's senseless. We don't attribute "goodness" and "badness" to differences in consumer behavior because we would be laughed out of the room. Very simple economics makes it very clear that when we have a system-wide change in behavior, it is because the systemic conditions are encouraging it!

Keyensians have no alternative explanation: every time we follow Keyensianism, we have longer recessions with slower recoveries than when we don't. Now, we're doing everything Lord Keyenes would want, and every metric is going as he predicted... except for employment and wages! And aren't those the ones that matter?

Our left-wing pundits, hand-wave blaming "greed," "neoliberalism," and whatnot, are guilty of truly despicable levels of unscientific, unrigorous exploration to the causes of current economic conditions. The recessions are much deeper and longer in Europe; unemployment is much, much higher (28% in some countries!). Is this due to greater "corporate greed" here? No. The "greed" argument is an embarassingly foolish line of conclusion that depends on willful ignorance of economic history, of the clear facts in the economy today.

How tragic that, again and again, we blame the "free" market for the flaws of government policy. How tragic that we keep putting our faith in credit expansion when in the last 100 years it has been in _every_ instance a policy of disaster that led to crippling busts and then prolonged them. It's so tempting to blame those making the obscene profits that are being made today for our problems, that due to their personal greed and lack of altruism for their employees, they are rich and we are poor. But it's time for a news-flash, my friends: shareholders, capitalists, owners, board members--whoever you're blaming--are always profit-motivated, they're always just as greedy. Good times are not caused by their mass altruism and their desire to help the economy at their own expense... and bad times are not caused by their sudden mass evil and "excess." This behavior is not an independent variable.

Unfortunately the public is not educated in economics, but they are full of envy, they are prone to find someone to blame for their woes (look to the Great Depression in Europe for the truly ridiculous mass delusions in the public to the causes of the bust!). Who else to look at but those that aren't suffering with us? It's easy and tempting to do. But I implore you: if you wish to _fix_ a broken economy, rather than _punish_ the profitable for being profitable, it's time to let go of repeatedly, universally failed government policy and get back, finally, to the liberal principles that have been the first and only means by which the masses were brought prosperity in the whole of history.

Leftism's Philosophical Retreats

It is a blessedly rare event in the post-Soviet days to see a truly left-dominated country, despite its popular appeal (who doesn't love free money?) and its appeal to the intelligentsia.

But when we do see it in action, I see what I think might be a pattern of "philosophical retreat" on the part of the left as the harsh realities of their policies set in. Idealism turns way eventually towards hatred, vilification, and eventually complete denial.

Let us begin with the ideal: socialism or leftism will bring great prosperity, beyond the failed and ineffective systems of the free market.

When this fails to work: leftism will bring prosperity for the poor, but not the already-rich, rather than the alleged other-way-around of a free market.

This leads to: vilification of the rich that seemed to gain their wealth from philosophically un-approved ways. Profit is a "necessary evil" to incent the greedy to do what is right for the community.

When this fails to work: growth is unnecessary, we have already grown as much as we need. We need only redistribute what we have, for the rich have more than enough.

This leads to: vilification of the rich, period. A belief that excessive wealth is ultimately immoral and bad for the soul. Profit of any sort is vilified as exploitative.

When the economy fails further: we don't need anything beyond what's necessary to live. Prosperity is bad for the soul.

This leads to: vilification of other countries for being more prosperous. A belief that consumerism of any sort is a sign of excess, of a spiritual malaise. Poverty becomes a virtue and comfort a sin. We must rise above our material needs towards a higher purpose (the commune, or the divine).

Finally: money itself becomes evil, and leftism gives up any notion of improving economic conditions. All forms of economic activity become vilified. The sole noble good becomes self-sacrifice.

A Mean Critique on Keynsianism

When Keynsians consider the economy, the activity is often mistaken for the outcome. For example: when we see China building infrastructure at an incredible rate, and we see their economy grow, we are tempted to think that the construction of infrastructure leads to economic growth.

Is this not true? you ask. Alone it is not and this is a very dangerous subtlety to miss.

Let us consider a bridge. If we build a good bridge, the economy improves. But what if we build a hundred in the same spot? Silly. We all know it is wasteful. But why?

The bridge adds to the economy _not for the jobs needed to build it_. In the middle ages, there was no unemployment--almost everyone was involved in agriculture. Everyone had a job. It was only by _eliminating_ jobs in agriculture (and every other industry) that we created wealth. Is it counter-intuitive? No--let us consider the bridge.

The bridge adds to the economy because it reduces the costs of moving people and goods across the river. Trade can occur. Customers can reach new outlets, live in new houses but still make it to their places of employment--many benefits are conferred by the placement of a great bridge. These benefits for our individual lives are the basis of economy.

But would it not have been better if that bridge were placed for free? Indeed. Bridges are valuable for their benefits, not their costs. Just as agriculture--imagine free food, free energy. This would mean no employment in these areas, no jobs created (in fact, jobs destroyed wholesale). But the benefits are still conferred on society and those resources can be used to go create other benefits still (just as in the middle ages they were "tied up" by agriculture and could do no good elsewhere, and thus we were woefully impoverished).

There is an edge case in which super-automation means nobody can compete with cheap AI that do almost everything. Perhaps this is some hundreds of years in the future, and it is a case in which some limited-state socialism will govern an astounding utopia. What a wonderful problem we will need to solve!

But throughout the ages, with every single advancement in productivity, harbingers and doomsayers have sprung forth like locusts to cry the end of capitalism due to a death-spiral of unemployment and shrinking markets (Marx's obvious error here should have meant the end of it). This was the case, of rcertain, in the Industrial Revolution--it was the case in the automation revolution that lasted throughout the second half of the 20th century. When women in the United States entered employment, there was a terror of mass unemployment. It has been a fear of the "flattening" of the world and "outsourcing" in the early 21st century. Every time these doomsayers have gone up against history, they have been astoudningly wrong, and yet we give them incredible credit when they come back! These doomsayers have not the foresight nor the creativity to understand how the market, how science and technology, how entrepeneurship will bring about new frontiers that will crave labor. Just as we laugh at those those in the early 1900s that claimed nearly everything had been discovered in physics or everything invented, we should keep laughing at these doomaysers. You know that you don't know what will be invented next, but that it will be invented--history should teach you the same about labor-hungry industries. In case you're curious: in the US, as IT gets commoditized and goes overseas, the new frontiers will be in biotech, robotics/AI, and alternative resources (from solar power to asteroid mining). If you want to take a bet, let me know and then we'll meet up again in 20 years.

(Digression: how hypocritical is the left wing of the west for badgering the populace that the people of Africa or South Asia or somesuch are poor and we have not fixed it, and then they badger us when we purchase goods from them as we are "losing jobs" here in the West!)

And certainly there were temporary unemployments, and they were painful if not well-managed. Life-long carriage makers and horse-breeders suffered when the car was invented. It is regrettable that not everyone can have everything all the time, but to believe that the more labor-intensive activities of making a car by hand are somehow more economically helpful than creating the same cars with less labor is a belief unfounded in economics, history, or current reality.

The current question that faces us is whether we can prepare this labor. It is certainly not that the country won't be hungry for labor, but we may have unemployment if our labor is incompetent. We will require skilled labor to press forward. Indeed our labor is more skilled than it used to be as a whole, but in the lower reaches of this labor the skill for future jobs is lacking. Already the United States is hungry for 3 million skilled physical labor jobs it cannot fill (despite 7.6% unemployment) and if we do not find a way to inspire our lower labor force to go be trained then we will not be able to fuel these new industries and growth will, sadly, stagnate.

(For more on where this is failing, see my post on China from Foggofwar. This post is inspired in part by Senator Elizabeth Warren's claim that the US needs more infrastructure investment because China is doing it, despite the fact that mal-investment in infrastructure in China is one of the policies that's actually failing there.)

Economic Rant: On Minimum Wage Laws

Our left wing remains baffled at the concept that minimum wage laws might drive unemployment. They see corporations as swollen with profits and thus have money to spare...

Occasionally this is true. It is easy to look at, say, McDonalds, and conclude this.

But even our left wing will agree that consumer goods follow supply and demand laws. B2B goods follow these laws even more tightly... that is, the curve is much less elastic.

There is absolutely no reason that labor is a resource that should work any differently (and, indeed, it does not).

Why is it not a highly elastic resource? At the lower end, if we increase wage rates, there will be many companies that "suck it up" and continue forward.

But, ultimately, profit rates will pinch. For companies without astronomical profits (and that is the vast, vast majority of them), labor-heavy expansions will be much less appetizing... and thus investment in these _will go down_. If these companies do not perform layoffs, they _will_ reduce the amount of labor-heavy growth, and thus job creation, that they perform.

These companies will also be much more tempted to invest in _capital_ (or consulting, in my experience) to _replace_ labor. The capital:labor cost ratio will go down in favor of capital, and thus these companies will invest in replacing this labor. This has become increasingly common in labor-heavy manufacturing, if not as popular yet in service... but it will be. Jobs _will be lost_, and these more labor-efficient processes will persist into the future, reducing job growth.

There will be companies that are "on the margin" of profitability. They exist--I do not know how great a number they are, but they are typically small businesses (which, remember, hire the plurality of Americans!). Some of these will go under and let labor go. Jobs will be killed.

By _all_ economic logic, artificially increasing wage rates will be a job-killer, period.

Left-wingers actually brag that higher minimum wages actually pushes up the wages of those jobs that would be near minimum wage--thus the effect occurs at higher-wage jobs, as well.

Am I in favor of _low_ wages? No, I think it is awful. But high unemployment pushes wage rates down. Again, supply and demand. The higher unemployment is, the more bargaining power the companies have, the lower the wage rates for everyone not benefiting directly from the minimum wage law. And if we are keeping unemployment higher, _which we do by having these wage restrictions_, those wage rates will _never go back up_.

Allowing the market to do its job will mean that rates go down until the labor supply is more-or-less exhausted. When it is exhausted, any further growth in the economy will _necessarily_ push wage rates up. So in the free-market example, we have a temporary period of low wages, replaced by ever-rising wage rates. Excepting immigration, labor (unlike _any other good_) is not a supply that can go up to keep up with demand, and thus the price will rise with labor in a free market unlike any consumer or B2B good.

We see the opposite in Europe--high government intervention in labor means companies are _not hiring_. Young people in France have 40% unemployment; in Italy, it is 60%, and in Spain/Greece it is over 80%. Some of this is the recession, of course, but the US is not experiencing this, Canada is not experiencing this, because they do not have artificially inflated wages and labor restrictions to the extent that these countries do.

Despite our continual denial of this, these simple economic laws will continue to govern labor. The best of intentions (these minimum wage laws and labor regulations ) will continue to drive unemployment and, ultimately, contribute to stagnation and poverty in the countries in which they are employed. The free-marketers, in contrast to the propaganda set against them, do not want to hose the poor in favor of the rich. It is the minimum-wagers that want to hose the unemployed in favor of the employed, and this is working splendidly.

Tragically, we will also blame the "free" market for our woes, increase our minimum wage rates more, and continue the economic death-spirals that we're seeing currently.