Thursday, May 27, 2010

What NOT to do to Stop a Recession

The US has been in a recession for quite a while now, and the national debt tops $13 trillion. The federal government is also intent upon providing more and more stimulus to struggling industries to prevent them from failing and yet, the economy continues to show no signs of drastic improvement and new layoffs continue. Economist Jesus Huerta de Soto detailed the specific actions that government should not take to stop a recession. Huerta de Soto cataloged these items in Money, Bank Credit and Economic Cycles. The following list can be found on pages 436-439.
  • The granting of new loans to companies from the capital goods stages to them from going through a crisis, suspending payments and having to reorganize. The granting of new loans simply postpones the eruption of the crisis, while making the necessary subsequent readjustment much more severe and difficult.
  • Any policy of artificially preserving jobs which is financed with inflation or credit expansion is self-destructive, insofar as consumers spend the new money created, once it reaches their pockets, in a way that makes it impossible for those very jobs to be profitable. Hence the only labor policy is to facilitate the dismissal and rehiring or workers by making labor markets highly flexible.
  • Monetary policies intended to maintain at all costs the economic boom in the face of the early symptoms of an impending crisis (generally, a down-turn in the stock market and real estate market), will not prevent the recession, even when they are sufficient to postpone its arrival.
  • Any manipulation of the market rate of interest is counter-productive and exerts a negative effect on the liquidation process or generates new entrepreneurial errors. In fact we can conclude with Hayek that any policy which tends to maintain interest rates at a fixed level will be highly detrimental to the stability of the economy, since interest rates must evolve spontaneously according to the real preferences of economic agents with respect to saving and consumption.
  • Any policy involving the creation of artificial jobs through public works or other investment projects financed by the government should be avoided. It is evident that if such projects are financed by taxes via the issuance of public debt, they will simply draw resources away from those areas of the economy where consumers desire them and toward public works financed by the government, thus creating a new layer of widespread malinvestment.

1 comment:

  1. Sound, fundamental economic policy. Will the politicians follow it. It is about as likely as finishing the boarder fence and upholding their Constitutional duties. Nice job.