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.
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.
6 comments:
So do you want to comment on the recent "austerity doesn't work" commentary coming out of Greece?
Yeah, great point.
I think I actually agree that austerity doesn't work. When during the "good times" you've built an economy dependent on the government, the "bad times" isn't the right time to lay off government employees. Furthermore, the nation's economy and resources have adjusted themselves to certain subsidies, certain flows of money: when those disappear, it will be a shock. A healthy economy needs to wean itself from the government, but doing it all-at-once seems about as unwise as "shutting down all buggy manufacturers, horse farms, etc immediately" when it's time for the economy to transition to building cars, instead.
Furthermore I think austerity happened not because anyone said, "if we slash spending right now, it'll help the economy recover!" I think austerity is happening because these countries got themselves into such incredible debt through irresponsible tax/spend policies during the _good_ times that they're now broke, their interest payments are becoming massive parts of their government budgets, they're at risk of defaulting so more loans are becoming prohibitively expensive... they've gotten themselves into a situation where they no longer have money left to keep the economy on the teat of government debt... it's not clear that they have any choice other than austerity or handouts from less irresponsible governments, but I'm never going to argue that introducing shocks of unemployment and poverty to an ailing economy is the fix for it.
Sadly, we're in a situation that is a consequence of bad policy and I think the only way out is a hard one. Luckily, the US' borrowing rate and interest payments are not so excessive now that it has choices besides austerity, but I think "printing gobs of money" ain't the only alternative to austerity.
Dah. I just wrote a long multiparagraph response that google ate.
Short form: As I understand it, Keynes agrees with you that government's shouldn't run deficits during good economies, deficits should be countercyclical. (Although "deficit" is different from "size of government" if the government is taxing enough to pay its way. I'm not sure Keynes says anything about that.)
I think you're wrong when you say austerity or handouts were the only options. Defaulting and leaving the Euro, for instance, were both seriously bandied about. I agree that it's unclear whether those paths for Greece would have been better or worse for Greece. I don't think anyone has the data to answer that. But I think the path that was actually chosen was chosen because those other paths would have been worse for the (foreign) banks, and therefore worse for the foreign governments who were largely guiding the decision. And in doing so, they effectively gave their corporations a handout on the back of the Greek population. The banks screwed up their job as much (or more) than the Greek government did, and foreign governments stepping in to shield them from the consequences is its own significant market distortion, helping their economies at the expense of the Greek one.
Yeah, that's definitely very reasonable, that foreign banks were being protected. But I think we can't shift blame away from the Greek government simply due to a market bubble that burst... spending as if there will never be a downturn is hugely irresponsible, no?
Sure, I'm not saying that anyone should (or can) waive a magic wand and give Greece a free pass. But I'm saying that the Greek government was not the *only* one to blame, there were irresponsible lenders involved, as well as irresponsible borrowers, and focusing on only the second distorts your ability to respond to the problem and prevent future occurrences.
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