An economic analysis of the current crisis, or "Go, Government, Go!"

Nov 24, 2008 17:09

For the economic case against interventionism and the government's downright asininity, we turn to Bob Murphy's Open Letter to Gary Becker re: Depressions:

"the business cycle is an unintended consequence of government intervention in the monetary and banking system. Specifically, the central bank (the Federal Reserve in the United States) pushes the interest rate down below its "natural" level by injecting new money into the banking system. This artificial stimulus sets in motion an unsustainable boom period of illusory prosperity.
During the subsequent (and inevitable) recession, resources are reallocated in light of the "malinvestments" made during the boom. Far from being "bad," the recession is part of the process of recovery, where entrepreneurs make the best of the untenable situation created during the boom."

Thus, in a way, recessions are a good thing - they are the unpleasant effects of a necessary market correction.  "They are the recognition of the previous mistakes that entrepreneurs have made investing scarce resources, when they were misled by the distorted price signals reverberating from the Fed's interventions."

The road to Hell, they say, is paved with good intentions.  But since I don't want to ascribe to government officials and bureaucrats an ethical character they may not possess, since they are (to give them the benefit of the doubt) as human as the rest of us - and holding the power of coercive force does tend to corrupt the human element - it seems more accurate to say that that unsavory road is often paved with public policy intentions, whatever those intentions may be.  In short, trying to "save" the economy from fixing itself does far more harm than good.

"These "countercyclical" measures try to prevent the recession from unfolding, by stamping down on unemployment and propping up insolvent businesses. Yet these actions simply prolong the agony, and ensure that even more resources are squandered while the economy tries to adjust to a sustainable configuration. To adopt a biological metaphor: [Best. Analogy. EVER.] Of course nobody likes vomiting. But if someone has ingested poison, throwing it up is a good thing. Efforts by physicians to numb the person's gag reflex and settle his stomach will lead to disaster."

He follows up a little later on with another good simile:

"Further "stimulus" efforts can postpone the recession, to be sure, but that just means that when it does hit, it will be all the more severe. Using fiscal and monetary policy to stave off an impending downturn is the economic analog of giving another fix of heroin to an addict in order to avoid the painful period of withdrawal. Such treatment isn't doing the patient a favor, and only ensures that the adjustment back to a sustainable lifestyle will be all the more difficult."

The "Master Builder" example Bob details is a classic, and a wonderfully concise picture of a complex economic analysis.  Suffice it to say that it is well worth the read.  The gist of it all: "rescues", "bailouts", and "stimulus packages" will drag out the recession, and make recovery that much more painful.  If this wasn't obvious from the market's reaction to the Fed's initial medicine - that is, to fall even further into a hole - I don't know what could make it clearer.

economics, politics

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