In 'Is your recession really necessary?' the FT editors demonstrate their misunderstanding both of the errors in Keynes's delusions, and of the true value of the only economic analysis of business cycles that actually gets it right.
Keynes's idea, according to the article, is that
[g]overnments must respond [to signs of recession] by supporting demand with loosened monetary and fiscal policy. These weapons are slow-acting blunderbusses; they do not allow for rapid responses or fine-tuning. ... It is not possible to liquidate the malinvestment without risking allowing unemployment to spiral out of control and demand to fall with it. ... [G]overnments must work together, internationally, to sustain demand. They must not sit idly by.
On the other side of the issue, the article quotes the Austrian Ludwig von Mises as disagreeing:
[P]olicy that aimed to 'bolster up undertakings that would otherwise have succumbed to the crisis, and on the other hand to give an artificial stimulus to economic life by public works schemes ... eliminated just those forces which in previous times of depression have ... paved the way for recovery'.
The editorial critics dismiss the Austrians as "liquidationists," gloom-and-doomers who believe in the Biblical dictum that you reap what you sow. Economists like von Mises and von Hayek, they think, are no more than repressed social conservatives who confuse science with religion.
But the editors have misjudged two things: (1) the solidity of the Keynesian formula, and (2) the thrust of the Austrian argument.
The Keynesian formula advises attempting to "restore demand," something the Austrians think is futile, to wit impossible, and counterproductive. Sure, they say, you can find holes to fill and keep workers busy; but ultimately government spending drains the financial markets of the very capital that private enterprises will need in order to do a better and quicker job of recovery.
Too many factors influenced the confluence of events following the 1929 crash to enable either side to prove their argument. No one (except Ben Bernanke) pretends that he fully understands what happened. Who really knows how long the Great Depression would have lasted had legislators not imposed the Smoot-Hawley tariffs in 1930, or had Roosevelt not imposed the Keynesian-inspired New Deal in 1933?
But what is certain is that the effects of both the tariffs and the New Deal have been long-lasting and distinctly harmful. To be specific, the New Deal brought us (among other things):
- The Federal Deposit Insurance Corporation (FDIC), backed now by our tax dollars, i.e. bailed out;
- The Federal Housing Administration [FHA], bailed out;
- The Tennessee Valley Authority [TVA], a government-owned power company that could have been privately created and owned just as well and with a lot less controversy;
- The public Social Security System, an unsound pay-as-you-go arrangement that is ready to go bankrupt within a few years;
- The Securities and Exchange Commission (SEC), the one that didn't catch Madoff (or much else for that matter) and that in fact lends Madoff and his ilk an aura of "Certified Okay by the U.S. Government";
- Fannie Mae, that led to Freddie Mac, Ginnie Mae, and Sallie Mae, all bankrupt;
- An acceptance of the corrupting, embezzling, wealth-redistributing influence (in the wrong direction) of chronic inflation on our economy and, by extension, on the stability of our society;
- An expansion of the role of central bankers to the monetary and political power-brokers they are today; and last but not least,
- The abandonment of the gold standard, the most long-standing, underestimated, and maligned financial tool the world has ever known.
What positive things do we have to say about these entities and notions, about the results of their implementation, and about the place they occupy in our nation's economy? Of course, no one objects to the ideas behind them. After all, the purpose of each is laudable. Even Milton Friedman, the man behind the theory of a chronic two- to five-percent inflation rate, had good intentions, as did Keynes with his flippant relegation of the gold standard to the trash bin of outmoded relics.
But it's the format that is defective in each case. None of these implementations has gone through the refinement process that competition brings. And look where they have gotten us today.
The Austrians do not prescribe a bitter pill of unemployment and depression; they merely state the fact that recovery comes through liquidation of excess, and that this liquidation will take place no matter what the legislators and government agents do. Recovery will occur, not through a fiction of temporary occupational busywork, but through the natural cyclical nature of the business cycle. Government usurpation of the wherewithal to finance it will just slow it down.
Von Mises's understanding is not moralistic; it is simply realistic. And no amount of hysterical government grandstanding will change reality--although it can change people's perception of it, which is what the politicians want.
Our dear friend Keynes, consciously or not, played right into the hands of the big-government legislators who are always on the lookout for a new gimmick to impress the electorate. His formula for state spending is only a stopgap measure, something to keep our mind off our problems, while the system clears itself of past misallocations of resources and the politicians insure their own future.
And this time, it's state spending on a grand scale. The new administration plans to allocate almost a trillion debt-inflating-dollars to spend our way back to prosperity; and that's over and above the $700 billion already allocated by Congress, plus the additional billions created by the Federal Reserve to lend to financial institutions, to buy Ginnie's mortgages, and to purchase Treasuries. To put that into perspective, just the $700 billion we have already allocated for bailouts represents a check for $71,000 for each unemployed person in the nation.
If this latest business cycle goes the way of the 1930s, Keynes's ideas will survive this rebirth and reach their culmination in another flight from paper currency, just as they did in the 1970s. Then when prices and/ or bubbles begin to rise again and the central banks find they cannot control them, the Austrians will find favor once more--or so one hopes. This time, however, I doubt it will take 40 years.