I wish to address the politicians, bureaucrats and ideologues who see this recession as an excuse for much more intervention into the economy. We are hearing calls for greater Federal Reserve powers, price controls, a radical reconstruction of domestic financial markets and the energy sector — essentially a second New Deal. We are predictably hearing that the last several years have discredited the free market — since Bush’s government, the largest by far in world history, is supposedly not big enough.
All this is very troubling. The war on terror has ushered in the greatest expansion, restructuring and renewal of the national security state, the empire and military-industrial complex since the Cold War, if not the Second World War. We have been spared any economic revolution approaching that of FDR, but our rulers wish to fix this deficiency.
At root here is a belief that laissez-faire has historically failed us, and has now failed us again. As the conventional story goes, free enterprise under Herbert Hoover brought on the stock market crash in 1929, and only the New Deal and entry into WWII brought America out of the Depression. We need once again to abandon our "free-market" economy to rein in the corporations, bring Wall Street into line, stabilize prices, prevent the closing of banks and financial institutions, and allow the central planners and bankers to do their magic to prevent another Depression.
The myths of the FDR era never die. All this despite the fact that the Federal Reserve was created sixteen years before the crash on ’29 and its credit expansion brought the crisis about in the first place; despite the signature of Roosevelt’s hand in the current crisis (Fannie Mae originated with him); despite the fact that for years we have been told the post-New Deal economy was one that would not fail us the way the "laissez-faire" 1920s did.
Indeed, we confront one of the great paradoxes of the left-liberal/neocon/establishment economic narrative: Supposedly, in enlightened modern US politics, the failed reliance on free enterprise has long been discredited, and so all the social democracy in the 20th century has finally saved us from the predations of greedy corporate America. But at the same time, corporations are allegedly more powerful and greedy than ever. They reconcile the contradiction simply by lying about Bush’s record, saying he has loosened the government’s grip on the economy. But there is virtually not a single area in which Bush has been more laissez-faire than Bill Clinton.
The center-left has no problem with such contradictions. The very same folks who five years ago demanded gas taxes to raise the price at the pump and other measures to discourage oil consumption and encourage alternative energy are today complaining that gas prices are too high and the government must do something to lower them. They do not want to just let the price go up, which would of course encourage alternatives all on its own.
Not that the gas prices are a total reflection of market forces. There are immense regulatory, tax and foreign policy costs in play here. Oil markets have been distorted by the war, which itself consumes a remarkable amount of petroleum just to be maintained.
Yet, given the interventionist world in which we find ourselves, supply and demand are still economic law. They cannot be repealed. Even, perhaps especially, assuming the very imperfect status quo, more intervention is not the answer (although as Mises pointed it, it’s the predictably most commonly proposed solution).
Going beyond oil as well as housing, a little monetary theory can explain this whole mess. What we are witnessing is the correction period of the business cycle, probably just beginning. Inflated real estate markets led to that absurd bubble, which Austrian economists have been calling a bubble for years, even as the mainstream pretended it was a permanent boom (just as they did in the 1920s). So we have the bubble’s bust. And inflation — the artificial growth of the money supply — has brought about higher prices in most sectors not currently undergoing correction. Some industries also mask the problem as they continue to outpace inflation — technological improvements have probably been all that has forestalled the very real impact of inflation, but even they will not be able to keep up forever. Ron Paul has made all this very clear in his campaign and in congressional monetary hearings, for those who were listening. (It seems as though the best economic analysis in the mainstream press is in the Onion. We’re laughing now, but how long will that last?)
Yet many people still want to blame the free market. Not the Progressive-Era Federal Reserve, not the New Deal’s legacy in real estate financing and the economic structure, not the Great Society’s entitlement state that continues to drain America’s wealth and drive health care and other prices upward at an accelerated pace, not Nixon’s destruction of the last remnants of the gold standard, not Greenspan and Bernanke’s inflation and not Bush’s economic meddling (some of which, in 2004, he proudly characterized as "the strongest corporate reforms since Franklin Roosevelt held the office that I’m honored to hold").
The interventionists blame the free market for what we are experiencing, which is no less absurd than the neocons’ attempt to blame 9/11 on insufficient intervention abroad.
But on economics, it is not just the neocons who shun the reality-based community. And so we hear from the political establishment: We need a second New Deal. Some put it just that way but most of them mean it, however they put it. How frightening.
This correction is and will be most unpleasant, but America can spring back shortly, just as it did after the sharp recession in 1920 and 1921, if only our leaders do now what they did then: virtually nothing. Get out of the way. You have long been trying to spur artificial growth by suspending the laws of economic gravity. But those laws are reasserting themselves. The worst you can possibly do is try to wage war on the recession, keep prices from rising now with controls, and — this would be especially cruel — keep prices from dropping when they eventually will. Under the Keynesian model, the worst thing you can do during recession is let prices fall, even though right now that’s what everyone claims to want.
But again, all this assumes the FDR legacy was what saved us from Depression. What nonsense. You can go by unemployment, which was only significantly reduced when FDR drafted millions into the military. Or you can go by gross domestic product and conventional metrics, in which case, as Robert Higgs points out, the period from 1945 to ’46 featured "the largest single-year drop of income in American history." But, as he says, no one talks about the Depression of 1946. That was actually the year of recovery.
In terms of the
actual well-being of the American people, in terms of access to milk,
sugar, clothing, automobiles, appliances and the rest, the Depression
didn’t end in the 30s, or during World War II. The economy didn’t
recover, in real terms, until FDR died, civilian production once again
displaced military production, and much of the regulatory state he
created was ratcheted back. Indeed, the Great Depression lasted a
decade and a half exactly because FDR would not let the market work.
For more on this, see Robert Higgs, Depression,
War and Cold War.
Although now, Bush, like Herbert Hoover, is seen as a slave to laissez-faire, this is not true at all. In fact, both presidencies represent significant growths in domestic intervention. The characterization of Bush as another Hoover, with the exact wrong conclusions from the parallel, now threatens to inaugurate a whole new era of intervention. (For the causes of the ’29 crash and Hoover’s aggravating interventions in response, Rothbard’s America’s Great Depression is still the masterwork.)
But in 1932, FDR ran on a platform of cutting government dramatically, reducing taxes, cutting the government payroll, restoring sound money, and, generally speaking, moving toward the free market which Herbert Hoover had abandoned with the Reconstruction Finance Corporation and other efforts to bring relief through intervention.
In short, FDR promised that as president he would get out of the way. Obama and McCain, on the other hand, both promise continuing the current interventionist policies, or even greatly expanding them. If you want real relief as I do, let’s hope they break their campaign promises just as completely as FDR did.
Anthony Gregory [send him mail] is a writer and musician who lives in Berkeley, California. He is a research analyst at the Independent Institute. See his webpage for more articles and personal information.