“The Great Depression, like most other periods of severe
unemployment, was produced by government mismanagement rather than by any
inherent instability of the private economy.”—Milton Friedman
If you read the financial press, you
can almost hear the gurus scratching their heads. They study past business
cycles and can’t understand why robust growth isn’t the order of the day. Since
WWII, strong recoveries have always followed recessions. And the deeper the
recession, the faster the climb back to prosperity. Considering the depth of
our latest crash, we should be rip-roaring into the stratosphere. What’s
going on?
All the supposed stimulants have
failed. Since December of 2008, interest rates have been near zero. The Fed has
pumped so much cash into the economy that all of our wallets ought to be
bulging. Bail-outs have increased government control of whole industries.
Congress rammed through a huge health care entitlement, and celebrated with the
kind of fanfare befitting simultaneous victory over hunger, global warming, and
the common cold. Despite horrific deficits, our dear Congress continues to
throw money around like it was confetti. Yet underemployment stays embarrassing, productivity is anemic, everyone is husbanding resources, and foreigners lecture us on irresponsible spending.
With one exception, we have lifted
ourselves out of every downturn in the past two centuries. During the Great
Depression we took the same actions as we are taking today—with
the same results. You can’t spend your way to posterity, or Greece would be the model for the rest of us. When the government applies emergency
measures repeatedly, but bad behavior continues unabated, then shallow
recessions turn into great recessions. Current inept government actions are
making a longer downturn inevitable.
The problem is that the political
class doesn’t understand how a capitalist system works. Business cycles are as
natural and as necessary as the change of seasons. Downturns are beneficial
because they cleanse the system of crooks, incompetence, and excesses. But
recessions scare politicians, so if something bad happens—like
an S&L Crisis, dot.com bust, Enron bankruptcy, a catastrophic terrorist
attack, or a housing collapse—the answer is always the same: flood
the world with dollars so nobody notices that something imploded on the way to
a it’s going to be different this time world.
Beltway wise men believe easy money,
massive spending, and cheap credit can cure any ill. Rolling a crash-cart up to
the economy doesn’t fix anything; it just buys time. The time could be spent
applying strong medicine, but instead we’ve used it to party like there’ll never
be a reckoning. Now we have a huge hangover. We can either take a drink of the
dog that bit us or sober up and fly right.
If Americans insist that the
government stand down from all this interference with our economy, we may
temporarily suffer a worse recession, but it will be shorter and our recovery
will look like the robust recoveries of the past. The alternative is a lost
decade like the one the Japanese experienced after their real estate bubble
burst.
We need to change course.
Unfortunately, Yellen and her crew keep going back to the same elixir bottle for another
dose of patent medicine. The real cure is easy to prescribe. We need to get
back to basics. For the government, this means returning to founding principles.
For the economy, it means allowing the best economic system ever invented to
operate freely without the government acting like an indulgent parent.
We can fix this mess—for
ourselves and our children—but it won’t be easy. The first step
is to tell our leaders to grow up and lead responsibly.
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