The Sixth Day
Wednesday, December 24, 2008
  Three blind mice. Three blind mice. See how they run.
There are three schools of thought concerning recessions and the business cycle:

Keynesian thought is that recessions are bad and should be fought vigorously with low interest rates and deficit government spending, even on make-work projects, to “prime the pump” and stimulate economic growth.

Monetarist thought is that recessions are bad and should be fought vigorously with consistent and predictable money supply growth irrespective of interest rates or government spending.

Austrian thought is that recessions are normal and a natural part of the business cycle. In a boom, investment and production tends to get out of alignment with consumer preferences so that a retrenchment is beneficial as well as necessary.

U.S. economic policy is entirely dominated by Keynesian and Monetarist thinking. Alan Greenspan and Ben Bernanke “successfully” steered the U.S. through more than twenty years with only two relatively short and shallow recessions by keeping interest rates artificially low and the money supply growing at a rate that was probably at least double the rate needed to match economic and population growth.

Low interest rates produced low saving rates.
With little savings in the U.S., we turned to China and the Gulf States of the Middle East to finance our government deficits. At the same time we neglected our factories, preferring to purchase imported goods, and paying for them with plentiful paper dollars. We thought we could have capitalism without capital, without production, and without risk of failure.

These policies led to the development of an economy based more on consumption and less on production. This is a sure route to excessive debt, much of it used to finance imports.

Keynesian and Monetarist policies can make an economy grow when it otherwise would not. However, preventing recessions is like trying to only breathe in. The U.S. economy is collectively exhaling now and will for some time.

Where will we go from here? The pursuit of Keynesian and Monetarist policies following a collapse will bring stagnation. Witness the eighteen years of stagnation in Japan since its stock market bubble burst in 1989. Stocks there have recently touched a twenty year low.

We’ve seen this movie before. Government spending did not end the unemployment problem in the 1930’s – all it did was to create an enormous debt. That was the opinion of Henry Morgenthau, Treasury Secretary under Franklin Roosevelt.

Economic theories are blind. They operate based not on the stated intent of bureaucrats, but on the incentives inherent within them. Austrian economic theory is like tough-love. In return for pain in the short run, it will yield prosperity in the long run, especially when combined with sound money.

Bureaucrats and congressmen get their perks and raises; we are the blind mice whose tails are cut off.

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Commentary about all things human; life, the Christian religion, ethics, politics, economics, sociology, art, anything to do with twenty-first century American culture. Perhaps I will inform, perhaps I will anger and frustrate, but I hope always to make you think!

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Location: Fort Wayne, Indiana, United States

I grew up in Kansas in the 1950's - 60's. I attended Kansas State (B.S. in Soc. Science) and Washburn Law School (J.D.). My wife and I have been married for over thirty years and are the parents of three grown sons.

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