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Wednesday, February 24, 2010

Must We Live in Long-Term Recession?

Or is there a sure way out?

The current downturn, even if the recession “officially” is over, is beginning to look like a reply of the 1930s. In fact, the “Progressive” Atlantic recently ran a most depressing story about what happens as joblessness becomes institutionalized:

The worst effects of pervasive joblessness—on family, politics, society—take time to incubate, and they show themselves only slowly. But ultimately, they leave deep marks that endure long after boom times have returned. Some of these marks are just now becoming visible, and even if the economy magically and fully recovers tomorrow, new ones will continue to appear. The longer our economic slump lasts, the deeper they’ll be.

If it persists much longer, this era of high joblessness will likely change the life course and character of a generation of young adults—and quite possibly those of the children behind them as well. It will leave an indelible imprint on many blue-collar white men—and on white culture. It could change the nature of modern marriage, and also cripple marriage as an institution in many communities. It may already be plunging many inner cities into a kind of despair and dysfunction not seen for decades. Ultimately, it is likely to warp our politics, our culture, and the character of our society for years.

The powers that be say government must “stimulate” the economy through new spending or the system will be moribund for the foreseeable future. That means activist government, government that forces up wages (to give us “purchasing power”), government that taxes the “rich” and “gives to the poor.” Indeed, the editorial pages of the mainstream New York Times and the Washington Post provide a cornucopia of such utterings.

However, there is an alternative, one that will lead to economic recovery, more wealth, and higher living standards. To put it another way, we don’t have to live the way we are living right now.

This is a bold statement, I realize. Some even may think it arrogant. I prefer to call it the truth. We don’t need to live with the current economic regime because Ludwig von Mises, Murray N. Rothbard, and F.A. Hayek prepared a roadmap out of the doldrums that is guaranteed to be effective.

The key to understanding the current downturn is to know why it happened. Yes, everyone knows about the housing meltdown and the financial collapse of Wall Street, but the central issue is that government policies drove the economy to throw vast amounts of money into what in hindsight are understood to have been massive malinvestments. Our economy has not faltered because of a sudden lack of “aggregate demand,” but rather because the government tried to block the liquidation of those malinvested assets in order to “save jobs.”

Wasting Resources

Here is the issue in a nutshell. By keeping derelict firms like General Motors afloat, not to mention spending billions on worthless “stimulus” projects and “green jobs,” the government also is drawing resources away from the very sectors of the economy that have real strength. Thus the government weakens the profitable firms in order to prop up politically connected companies that have almost no chance to be truly productive and profitable again.

For all his faults, President Ronald Reagan did not try to “reflate” the economy during the recession of 1982, and after the unprofitable malinvestments were liquidated, what emerged was an economy based on solid foundations of advanced technologies and telecommunications. Unfortunately, the present administration seems hell bent on following the advice of Paul Krugman, who recommends we embrace the chimera of inflation.

This means, I’m afraid, that the gloom and doom in The Atlantic is becoming outright prophecy. It does not have to be this way, but those in charge of the government have decided that they will pursue the Keynesian mirage no matter where it leads, and it is leading us to disaster.

  • Dr. William Anderson is Professor of Economics at Frostburg State University. He holds a Ph.D in Economics from Auburn University. He is a member of the FEE Faculty Network.