PrintMay 25, 2010
Why Things Will Not Get Better
From Financial Armageddon comes a reasonable description of what has motivated economic policy during this financial crisis:
Throughout the financial crisis, policymakers have focused on keeping things afloat until the storm passes. They've spent vast sums of taxpayer funds trying to jumpstart growth until the economy is back on track. They've encouraged people to keep the faith until businesses start hiring again.
This governmental response is rather Pavlovian. It has been hard-wired into political DNA for the past 50 years. If you have a problem: spend, stimulate, run deficits, hope the recession goes away and then take credit for saving the economy when it does.
All recessions are self-correcting so long as prices are not interfered with. There is no need, other than the twin political desires of increasing power and the White Knight syndrome, for the government to do anything. The government, like the rooster who believes his crowing brings the sun up each morning, is delusional or at least expects you to be delusional enough to believe they are responsible for the sun rising again.
In reality, the rooster's delusion is harmless but the politician's placebo is not. Each intervention shrinks the private sector relative to the public sector. That ensures slower future economic growth because the government produces nothing. As a result, there are fewer productive people supporting more unproductive people. The economy becomes structurally damaged and cannot grow at normal rates under such circumstances.
Each intervention makes it more difficult for markets to work properly, ensuring that slowdowns are more frequent and exaggerated. These interventions damage the long-term viability of an economy. The developed economies of the Western world are now laden with cancerous debt, both public and private, as a result of the distortions of the past 50 years. This debt can no longer be serviced.
But what happens if all those "untils" turn out to be wide of the mark? What if the carnage we've experienced so far is structural, not cyclical? If that's the case, then Americans are going to find that instead of experiencing better times ahead, they are going to be much worse off than they were -- or are.
We are at the point where the "untils" are now wide of the mark. The Ponzi scheme known as Keynesian economics and the welfare state has passed its sustainability point. The damage has been accumulating since the late 1970s. Short-term political considerations have produced structural problems that cannot be corrected by applying more of the harmful policies. "... Americans are going to find that instead of experiencing better times ahead, they are going to be much worse off than they were -- or are."
The Piper is now presenting his bill for the past transgressions. Fifty years of transgressions is not an easy bill to pay.
Monty Pelerin at www.economicnoise.com montypelerin@gmail.com
