Treating a cold with a walk in the rain. Killing a mean cough with a pack of Camels. Halting heartburn with jalapenos and five-alarm chili.
If John Maynard Keynes and his followers held a family medical practice, surely his prescriptions would look similar to the ones stated here.
In 2008 and 2009, we were told massive government injections of capital would be the only option to avoid a 21st century Great Depression. We heard time and time again that a neo-Keynesian line of thought would be our way out of the coming economic hell, but after all of the big firms were pumped with fresh money, and most of the “stimulus” money is now going to be absent from state budgets, where is the economic growth?
When proponents of the stimulus were active in the battlefield of debate, defending these mammoth spending or “investment” programs, their estimates showed we would be in the middle of a recovery at this time. But what do we see? The worst jobless number of the year this past week, stocks trembling from weak home sales, 401k withdrawals at an all-time high and fear of a double-dip recession abounds.
We must look at what new spending really means for the economy: more debt. In May 2009, Treasury Secretary Timothy Geithner admitted that interest rates were held too low for too long, not just in the United States, but also around the globe. This, of course, inflated the financial bubble, as credit was cheap and easy to obtain during the time before the crash. If the chief cause of the economic calamity was too much debt, how can more debt be any part of the solution?
With this mindset, it would be advisable to continue to charge on credit cards and take out as many mortgages and loans as creditors would allow so spending on consumer goods and homes would rise. This is growth, right?
If more spending is going to grow the economy, why have any standards for spending?
Why is consumer spending, which a lack of is blamed for crises, the last to fall in a recession if its demise is what causes such?
We saw personal consumption numbers at their highest level in three years this March, but the growth and new jobs were not there. As we all know this formula for growth in the 2000s failed immensely. We added over $6 trillion to the national debt during the decade, and this does not include the takeover of Fannie Mae and Freddie Mac.
As stocks boomed, reaching record levels, real estate and financial companies followed suit, all leading to 2007. Then the wrongs of the past came back to haunt us, and the bills came in. All of the phony growth was proved to be just that – phony. This was not a true expansion of the economy; it was a pyramid of debt with a mask of growth.
We need production and savings to turn this economic Titanic around. We cannot fall again into the stimulus-spending gimmick that obviously failed us.
Historian and NYT bestselling author Thomas Woods did an interesting analysis on the economic downturn of 1920. He found that unemployment rose from 4 percent to 12 percent in 1920 and the Gross Domestic Product fell 17 percent. Woods states that President Harding ignored so called free-marketer Herbert Hoover’s calls for intervention from the Department of Commerce, and Harding cut the budget in half and slashed tax rates. The national debt decreased.
Interestingly enough, the Fed was left out of this recovery, as Woods quoted author Kenneth Weiher on the central bank’s action in his book on monetary and fiscal policy, “Despite the severity of the contraction, the Fed did not move to use its powers to turn the money supply around and fight the contraction.”
Woods quoted another economic examiner of the times, economist Benjamin Anderson, who saw that we took a different route from the Japanese planned economic decision and benefitted, “We took our losses, we readjusted our financial structure, and…we started up again.… The rally in business production and employment that started in August 1921 was soundly based on a drastic cleaning up of credit weakness, a drastic reduction in the costs of production, and on the free play of private enterprise. It was not based on governmental policy designed to make business good.”
Unemployment fell to only 2.4 percent in 1923.
The free market (a real one with no money manipulation and distortion) sounds like sage advice that should have been used just years later, and throughout time since. Let’s go back to the doctor and get the right prescription for our economy and future.
John Anselmo is a senior majoring in economics.
