All Commentary
Tuesday, March 26, 2019

Here Comes Another Recession Wrongly Blamed on Capitalism

That a recession is coming is a certainty.

Image Credit: Caleb Smith; Office of the Speaker of the House

The stock markets sold off on Friday, and financial media headlines were dominated by an inverted yield curve, a key recession indicator for the past several decades. Was the selloff just a pullback as equity prices consolidate before heading for new highs? Or is this the top of a dead cat bounce after the December market meltdown?

Economic indicators are somewhat mixed. Unemployment remains low at 3.8 percent, although it is always important to consider what kinds of jobs people are doing, what they are producing, and why. Unemployment is always low just before a bubble pops as monetary inflation leads to unsustainable expansion.

That a recession is coming is a certainty.

Meanwhile, February saw a nearly subterranean jobs report, and December’s much-ballyhooed number was revised downward from 312,000 jobs to just 227,000. Holiday retail sales, reported as “heating up” during December, ended up declining by 1.2 percent, the biggest drop since 2009.

Brace Yourselves; Recession Is Coming

That a recession is coming is a certainty. The question is when. And whether it hits in 2019 or 2020, you can bet it will take center stage in the political arena with Democratic presidential hopefuls climbing over each other to blame President Trump and the Republicans. The GOP will find it hard to fight back after taking full ownership of the tail end of this ten-year, inflation-fueled bubble.

As ridiculous as we free-market types always find it, a recession during a Republican presidential administration is always characterized by our opponents as an indictment of capitalism, even though the business cycle is driven much more by monetary policy than anything Presidents of either party do. And the Federal Reserve is not a capitalist institution.It’s important to recognize what politicians have done to counter claims the free market is somehow to blame for the current economic morass. It’s an economic central planner Karl Marx considered a vital part of moving society towards communism. Since the Fed was created, and especially since 1971 when the US dollar became a completely unbacked, floating currency, the economy has followed a predictable pattern:

The Fed inflates to “stimulate” economic expansion; resources are misdirected towards unprofitable projects; the Fed “tightens” to prevent inflation; the bubble the Fed created pops, and another recession begins. Lather, rinse, repeat. Which party controls Congress or the White House is largely incidental.

That’s not to say Congress and the President have no effect, but their actions are marginal compared to the sea changes caused by the Federal Reserve’s business cycles. Still, it’s important to recognize what politicians have done to counter claims the free market is somehow to blame for the current economic morass.

Tax Cuts

The Republicans always talk a good game about their devotion to free markets, and cutting income tax rates has been a consistent feature of their governance. In a vacuum, this is certainly a move towards freer markets. But when accompanied by increases in federal spending, one must ask whether taxes were really “cut” or merely rescheduled. Every dollar the federal government spends this year is a dollar unavailable to the private sector, whether it was taxed or borrowed. And although government spending is counted in calculating GDP, nothing the government purchases represents a free-market transaction.

Not only has federal spending increased during President Trump’s first term, half of which coincided with Republican control of Congress, but it has also increased much faster than it did during Obama’s presidency. Federal outlays are estimated to be $4.5 trillion this year, and President Trump has proposed $4.7 trillion in spending for Fiscal Year 2020. Assuming he gets it (and even hostile Congresses rarely appropriate spending significantly different from what Presidents propose), that will represent an $800 billion increase—$200 billion per year—in just four years. Spending increased $900 billion, or $112 billion per year, during Obama’s entire eight years.

A look back at historical receipts shows federal spending always increases much faster when a Republican occupies the White House.

This is nothing new. A look back at historical receipts and outlays shows federal spending always increases much faster when a Republican occupies the White House, no matter who controls Congress, at least in the post-WWII era. So, in dollars and cents, perhaps the most objective measure of the government’s influence over our economic and personal lives, the government grows far more during Republican presidencies than Democratic ones.

Financial media have put a lot of the blame for slowing economic growth on Trump’s tariffs, which are undoubtedly negative but not nearly as crucial as we’re led to believe. Total revenue from tariffs rose by $7 billion in FY 2018. That’s .02 percent of all federal tax revenues. We’re poorer with tariffs than without them regardless of whether trading partners tax our exports, but their negative effects are minimal compared to the massive malinvestment and unprofitable debt resulting from Federal Reserve monetary inflation.


When recessions begin under Republican administrations, we always hear about the ill effects of “deregulation.” One is led to believe Reagan and Bush repealed the New Deal root and branch and dastardly corporations ran roughshod over us in a state of near-anarchy. Reality is so far from this that libertarian author and podcaster Tom Woods wrote a whole book about it called The Deregulation Boogeyman. We can expect this boogeyman to storm out from under the bed during the 2020 presidential election season.

It’s very hard to quantify the deregulation Trump claims to have enacted. The federal register is smaller in terms of pages than during the Obama administration, although it increased 10 percent in 2018. Many assume that means fewer rules, but that’s hard to confirm. One can certainly argue the same rules could be promulgated in fewer words than the average bureaucrat might use in his or her first offering. Has anyone really read through the over 68,000 pages of the federal register and compared it to the over 95,000 from the Obama years? Probably not.

It is safe to assume President Trump truly has ended the Obama administration’s “war on coal,” and that’s a good thing. But apart from that and some other marginal changes, the massive regulatory structure hasn’t fundamentally changed.The real story of the next recession will be the same as all the rest: It’s just another bust in the ongoing, Federal Reserve-created boom/bust cycle. Just eight years ago, Republicans were campaigning on eliminating so many federal departments that some couldn’t even remember them all. After holding the White House and Congress for two full years, Republicans eliminated precisely zero departments.

In fairness to President Trump, whose worldview is far more conventional than his opponents would have you believe, this was not something he campaigned on. While there is no reason to doubt his sincerity in attempting to improve the business environment, he hasn’t made fundamental changes. The US economy remains “rigged” in precisely the opposite way critics of free markets claim it is.

When the recession hits and the left attempts to blame tax cuts and “deregulation,” remember that regardless of whether the money was taxed or borrowed, the federal government has consumed more scarce resources over the past two years than it ever did in its history and that consumption has accelerated at twice the rate it did under Obama. As for “deregulation,” what little there was likely helped mitigate the damage done by other policies. But the massive regulatory apparatus stifling economic activity largely remains in place.

The real story of the next recession will be the same as all the rest: It’s just another bust in the ongoing, Federal Reserve-created boom-bust cycle. That the Fed had to stop raising interest rates at half what is usually considered “normal” is far more ominous than who might win the next election.