Response to the Economic Stimulus is Necessary Argument

Economics Economics Questions
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1

Hey all,

I am still relatively new to Austrain economics and libertarianism and I was wondering if anyone could clear something up for me.

I was talking with my friend the other day and I was talking bad about the bailouts and “economic stimulus” that is being proposed by politicians here in America and he claimed the stimulus was necessary for the following reasons. He said that we need the economic stimulus because everything will spiral out of control if we don’t get it. He claims that unemployment is on the rise and this means that Americans will be spending less money as unemployment is growing. He said this will lead to more layoffs because businesses will be losing money as fewer people will be buying their goods. As you can see, he says this will lead to a massive spiral of economic decline.

My friend’s argument sounds completely wrong, but I’m not quite sure how to refute it. I would think that at some point unemployment would halt, prices would fall, and our economy would make a recovery. Could anyone clear up my thinking about this or point me to any relavent articles or posts about this? In particular I am interested in how our economy would make a recovery without government interference despite rising unemployment and less consumer spending.

Thank you.

-BordrGuy108

2

Well government interference is the problem.

3

There is a new article on the website that addresses this question very well in my opinion.

http://mises.org/daily/3290

4

First of all, the problem with the economy is that there is a shortage of savings. There is too much debt, but not enough actual capital.

Stimulus is debt, because the American government is broke. So using debt, to pay off debt, is a joke. What’s needed is capital.

Sadly, most people do not understand that capital is not a loan, but the deferred consumption and productive gains already created and saved, then re-invested.

If just printing money could save the economy, then the government would have a utilitarian argument for printing so much money, there were no more poor, and everyone could stop working and just keep consuming.

Of course the economy will adjust naturally. People will not elect to starve to death rather than work. They won’t not work, and allow their homes and vehicles to fall into disrepair. It’s this adjustment that most people fear, because deflation hurts those who have no capital, and have excessive debt. Those debts become harder to pay off, and new credit more difficult to attain (breaking the cycle of the borrowing from Peter to pay Paul).

Government, having the shortest time preference, will do everything it can, to prop up prices, even if that means inflation. In the labour market, even if that means printing up money out of thin air, to pay people to dig holes and fill them in again. This will slow down the recovery, and hinder real, productive employment by diverting labour resources into public make work.

The good news is, regardless of what your friend thinks, the gears of the economy in the aggregate will keep turning, and churning towards a more natural order, snapping the spanners of the social planners, and and crushing their credibility in the process.

5

The Bush and the Obama bailout plans are bound to prolong the recession/depression. It is shear folly to bail out incompetent/crooked bankers and borrowers. An efficient economy works best in both the short and the long term. Government intervention does not an efficient economy make!

The real problem, however, is that the present diminished production of consumer goods no longer contributes much to this economy thereby excluding millions from participating in the one positive economic activity, i.e., creating wealth by changing raw material into desired items. For this economic activity to flourish requires a minimum of government interference, but, alas, the genie is out of the bottle!

For China, with its vast labor pool, is rapidly industrializing. So, any regaining of the previous productive capacity here must be in competition with China and that will result in a levelling of the living standard here with that of China.

This, then, is the real cause of the present economic recession/depression. The subprime mortgage fiasco, however, was only the symptom caused by the Federal Reserve trying to solve the real problem of a declining economy by drastically lowering the prime interest rate beginning about 2001. This very low prime rate, in turn, caused mortgage resales to be extraordinarily profitable and led to the subprime mortgage crises.

Therefore, the real solution is (1.) to drastically cut government expenses and (2.) to eliminate all types of economic interference in the economy such as taxes and regulations and (3.) to go back to a gold monetary standard and (4.) to repudiate the national debt.

Since the real solution will no doubt never be seriously addressed and since it is January, I predict the U.S. economy will go the way of Zimbabwe’s economy.