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From: <A
href="" title=article@xxxxxxxxx>Mises Daily Article
To: <A href=""
title=article@xxxxxxxxxxxxxxxxx>Mises Daily Article
Sent: Tuesday, July 08, 2003 8:12 AM
Subject: Recovery or Boomlet?
<A
href="">http://www.mises.org/fullstory.asp?control=1265
Recovery
or Boomlet?
by William L. Anderson
[Posted July 8, 2003]
<IMG align=right border=0
src="">In recent weeks, the stock
market has staged a mild rally. Though the most recent unemployment numbers are
well over six percent, Republicans, as well as a few market analysts, are
claiming that the long overdue economic recovery has arrived. While I wish that
were the case, the facts demonstrate otherwise; this is not a recovery, but
simply an unsustainable mini-boom that makes the long-term economic picture even
worse.
That is not how we hear things from the government, not
surprisingly. Administration officials, hopeful that a strong economy next year
will boost George W. Bush's election chances, have been trumpeting the end to
the longest economic downturn in this country since the Great Depression of 70
years ago. His media supporters, such as <A
href=""><FONT
size=2>Larry Kudlow, and <A
href=""><FONT
size=2>Neil Cavuto also agree and have called for
the Federal Reserve System literally to open the money spigots. According to
Kudlow:
No matter what the investment -- be it corporate profits paid
out as dividends, or capital gains, or new capital-goods orders and shipments
by large and small businesses, or new high-risk venture start-ups -- higher
after-tax investor-class returns will place new liquidity demands on the
financial system. The Fed must accommodate them.
A shock-and-awe liquidity-expansion policy from the Fed will
counter our underperforming economic recovery, offset the forces of worldwide
deflation and recession, and stomp out deflation fears at home. An aggressive
liquidity stance will also accommodate rising transaction demands following
the latest Bush tax cut. And it will even counter the negative effects of any
potential breakdowns in the investment portfolios of Freddie Mac and Fannie
Mae, the troubled loan institutions.<A
href="" name=_ednref1
title="">[i]
Of course, "liquidity expansion" in Kudlow-speak is nothing more
than a burst of inflation, and the Federal Reserve has followed suit, lowering
its discount rate to something not much above zero. (Kudlow and the other
inflationists wanted the Fed to cut its rates by more than what was actually
done, but it would seem that the next logical step for the Fed would be simply
to dump money from helicopters or hand it to passers by at the street
corners.)
Kudlow is hardly the only offender here, and while his "shock
and awe" analogies are over the top, the truth is that economists and pundits,
both left and right, have been calling for basically the same solution:
inflation, and more inflation. This not only reflects the total misunderstanding
of the current economic situation by both the economic mainstream and political
pundits (Well, what would we expect?), but also demonstrates ignorance both of
business cycles and of money itself.
As Murray Rothbard and Ludwig von Mises tirelessly pointed out,
an economic recovery occurs when consumers and investors begin to direct
investment into sustainable lines of production. A recovery can only happen
after the malinvestments that accumulated during the previous boom
are substantially liquidated. Of course, <A
href=""><FONT
size=2>a liquidation must be permitted to occur in
the first place, something that the Bush Administration and the Fed have fought
at every turn, which <A
href=""><FONT
size=2>I note in previous articles.
Given that the government has done everything in its power to
prevent the full liquidation of malinvested capital, and given that the Bush
Administration and Congress have substantially increased the burden of
government that must be borne by individuals, it seems clear that the U.S.
economy is not poised for a recovery. Indeed, from airlines to manufacturing,
the liquidation has a long way to go before the economic downturn hits
bottom.
Thus, any upturn whether in economic statistics or in the stock
market is almost certain to follow the patterns not of economic recovery but
rather a mini-boom. I say "mini" because there is no way that this particular
boom, as pathetic as it is, can be sustained for a long time, unlike the boom of
the late 1990s. In fact, the Fed's recent actions can only force more
malinvestments which themselves will have to be liquidated in the
future.
There is historical precedence for a mini-boom. During the early
days of the Franklin D. Roosevelt Administration, which were marked by the
passage of legislation like the <A
href="">National
Industrial Recovery Act and the Agricultural
Adjustment Act, the economy also experienced a small boom. In fact, the rate of
unemployment, which stood at about 25 percent when FDR took office in 1933, fell
to about 15 percent two years later.
The Roosevelt Administration was not the only active entity in
Washington. The Federal Reserve System had lowered its discount rates to
near-zero and the government was trying to force up the inflation rate, using
tactics like destroying the gold standard and confiscating all gold money that
individuals possessed.
The strategy worked, sort of. As noted earlier, some people were
put back to work (although thousands also found employment doing
government-sponsored tasks), but the boom was only temporary. Government was
growing quickly, along with the tax burden, the regulatory state was taking
form, and FDR openly savaged businessmen and his comments, as <A
href=""><FONT
size=2>Robert Higgs has written, had a dampening
effect upon the private investment needed to bring real recovery.
Roosevelt's mini-boom came to a screeching halt by late 1937, as
the economy fell into the trenches again, the unemployment rate zooming to about
20 percent. To put it another way, FDR achieved a first: he helped to create a
depression within a depression.
One hopes that the Bush Administration does not seek to emulate
FDR, although, like Roosevelt, this administration has forced through huge
increases in government expenditures and with the recent Medicare bill, has
dumped a gargantuan unfunded liability upon U.S. taxpayers. (At least FDR did
not send the armed forces all over the world – at least during the 1930s. In the
1940s he helped launch the biggest and most destructive war in world
history.)
As we hear the political pundits and mainstream economists
debate the current economic climate, perhaps terms like "shock and awe" truly
are appropriate. One is shocked at the economic ignorance that is demonstrated
time and again by the "experts," who are still stuck in a Keynesian time warp
that while discredited, still seems to rule the intellectual roost. And one is
in awe of the truly bad policy prescriptions that emanate from the White House,
Congress, and the mainstream press.
Yes, 2004 is an election year, and the Bush Administration is
desperate to make voters believe that the long-awaited recovery finally is here.
Furthermore, there is no shortfall of Republican pundits trying to publicly make
the case that the economic policies of Bush II really are better than the policy
disasters of Bush I.
However, there simply is no way that the policies of the Fed and
the Bush Administration are going to give us an economic recovery. As Mises and
Rothbard wrote time and again, an economic recovery within a free market economy
occurs as a matter of course once the government steps out of the
way. That clearly has not happened for the past three years, and now
that Bush is desperate to manipulate the economy in order to pave the way for
re-election, it is not politically possible for this president and his
underlings to take the needed hands-off approach to the economy.
Instead, we will be given the news that the wise policies of the
Fed and the meager and back loaded tax cuts that the Republicans have given us
will be enough to bring recovery. However, pay no attention to the man behind
the curtain (whether it be George W. Bush or Alan Greenspan), for he does not
know what he is doing. We are not in recovery; it is nothing more than a little
boom that ultimately will turn into a bigger bust.
William Anderson, an adjunct scholar of the Mises Institute,
teaches economics at Frostburg State University. Send him <A
href=""><FONT color=#000080
size=2>MAIL. See his Mises.org <A
href=""
target=_blank>Articles Archive<FONT
size=2>.
<A href="" name=_edn1
title="">[i] Larry Kudlow, “Pour it On,”
<FONT
size=2>www.townhall.com, June 17, 2003.
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