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No Such Thing As A Pain-Free Recession

Peter Schiff notes:

With faith in the free markets now taking a back seat to fear and expediency, nearly the entire political spectrum agrees that the federal government must spend whatever amount is necessary to stabilize the housing market, bail out financial firms, liquefy the credit markets, create jobs and make the recession as shallow and brief as possible.

But is this a sane approach? Schiff argues that it is deeply flawed and the “cure” is far worse than the disease:

Governments cannot create but merely redirect. When the government spends, the money has to come from somewhere. If the government doesn’t have a surplus, then it must come from taxes. If taxes don’t go up, then it must come from increased borrowing. If lenders won’t lend, then it must come from the printing press, which is where all these bailouts are headed. But each additional dollar printed diminishes the value those already in circulation. Something cannot be effortlessly created from nothing.

Similarly, any jobs or other economic activity created by public-sector expansion merely comes at the expense of jobs lost in the private sector. And if the government chooses to save inefficient jobs in select private industries, more efficient jobs will be lost in others. As more factors of production come under government control, the more inefficient our entire economy becomes. Inefficiency lowers productivity, stifles competitiveness and lowers living standards.

If we look at government market interventions through this pragmatic lens, what can we expect from the coming avalanche of federal activism?

By borrowing more than it can ever pay back, the government will guarantee higher inflation for years to come, thereby diminishing the value of all that Americans have saved and acquired. For now the inflationary tide is being held back by the countervailing pressures of bursting asset bubbles in real estate and stocks, forced liquidations in commodities, and troubled retailers slashing prices to unload excess inventory. But when the dust settles, trillions of new dollars will remain, chasing a diminished supply of goods. We will be left with 1970s-style stagflation, only with a much sharper contraction and significantly higher inflation.

The reasons why politicians pursue this course, regardless of the historical record of failure, are not hard to discern. It is more than mere economic illiteracy.

First, there is the “not on my watch” phenomenon we saw so clearly in President Bush’s foolhardy capitulation on the car bailout. The surest way to  renewed economic growth and a robust recovery is to allow failing businesses to fail (or, more accurately, to reorganize), so capital and labor can be redirected to the most productive uses, which in turn will generate wealth and produce more long-term employment. But the short term pain and the political price inherent in a headline like “U.S. Car Industry Dies In Bush Presidency” is simply intolerable for most politicians. We shouldn’t expect any different result from President Obama.

Second, Democrats like big government regardless of its utility in “creating” jobs. Their allies and political supporters — academics, civil service workers and labor unions, to name a few – enjoy the benefits of big government and the employment and power its expansion bestows upon them. Expansion of government from their perspective is a worthy goal in itself. The notion that we should instead help revive the private sector  is anathema to those who have comparatively little to gain by growth in non-governmental, non-unionized firms.

Fred Barnes notes that the private sector doesn’t figure in the plans or the rhetoric of President-elect Obama:

He rarely mentions the private sector. And investment incentives would involve tax cuts for the wealthy, a no-no in the ideology of liberal Democrats like Obama. As president-elect, Obama has talked frequently about the economy but practically never in the language of free markets. Incentives? He’s mentioned “incentives for fuel-efficient cars” and “economic incentives that would be helpful” to Iran to improve relations, but not for capital investment. “Across-the-board tax cuts” or “corporate tax cuts” or “tax cuts to increase investment”? Those phrases haven’t crossed Obama’s lips.

How does this end? If the recession persists, the Democrats may suffer losses in 2010 and we may see a course correction. If the economy picks up despite the Keynesian folly, Democrats will claim credit — as the mound of debt and inflationary pressures build, driving us further along the road to a 1970s economic debacle. But Schiff is right: sooner or later losses must be felt. It’s simply a question of when and how extreme the problems will become before voters begin to  realize that “if we put our faith in the power of government to make the pain go away, we will live with the consequences for generations.”


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