People need to give up on the theory that anything that hurts in the short term is bad. You have to clear the malinvestments that were made in the boom (and subsequent propping up), which is caused by government monetary manipulation and government spending packages. You want to see a country that does hardcore “stimulus” for 20 years? Japan. And now they are screwed, stock market is 80% lower, and their debt is over 2x GDP.
From Dailykos: “In 1937, FDR followed the same course, pulling back his stimulus programs that had been boosting the economy. The results were catastrophic. The economy tanked.”
First off, there were factors such as federal reserve activity and unionization (causing higher real wages) that contributed to the economic decline. But, look at what the DailyKos storyline is based on: economic went bad, hence this is a bad thing. But why? There are intertemporal tradeoffs, and having government keep spending ridiculously sells out the long term to gain a bit in the short term. When prices adjust in the future and resources are diverted from activities that are in line with consumer demand, this strategy will fail hard (this is the long term). You have to let the malinvestments clear, and after a short delay (can be very fast, see after ww1 and ww2), resources that were once employed in one line of unproductive work - propped up by government - will be liquidated and put back to work in activities that are in line with consumer demand.
http://www.economicthought.net/2009/12/the-dangerous-“lessons”-of-1937/ → written by mises forum member
Don't the events of 1937-1938 prove (to some extent) keynesian economics? —> recent thread on the lessons of 1937
My comments on the previous thread:
"The “stimulus” is a malinvestment and as soon as spending is reduced to bring debts down, the economy goes back into recession (the recession being a period of necessary readjustment). It shows how dumb stimulus is… when you stop it, you slide back into recession cause the activities you propped up aren’t desired by actual consumer demand.
The artificial bubble is the bad thing, and the bust is the necessary correction obligated by the boom. If the economy didn’t have to undergo a correction after the artificial bubble - it would have been a free lunch. It’s not."