Mises Wire |
- Interventionism Turns Crisis into Depression
- What Happens When the State Has Power over Adoption Agencies
- Imagining a Better Way: Foundations of a Healthy Healthcare System
| Interventionism Turns Crisis into Depression Posted: 26 Jun 2021 12:00 PM PDT Austrian economists have a well-developed theory that explains the boom, bubble, bust, and recovery. A good introduction to the Austrian theory of the business cycle can be found in Larry Sechrest's article "Explaining Malinvestment and Overinvestment." Larry wrote the article to provide a pedagogical device for economics students, but academic economists will probably be able to understand it as well. Here we examine the case of business cycles where instead of recovery, the economy enters a prolonged economic depression or recession. The types of intervention that cause business cycles are restricted to money and credit. The types of intervention that cause depressions can be of a monetary, fiscal, or regulatory nature. Even moral suasion can contribute to the making of a depression, as was the case with Herbert Hoover. The most effective depression-producing program would include a variety of interventions. The only necessary requirement is that the interventions help to forestall the correction process and that the interventions collectively undermine the ability of the price system and the system of profit and loss to properly reallocate resources. Austrians find that the cycle is the result of monetary intervention and that depressions emerge as the result of subsequent interventions designed to forestall the corrective processes of the bust. Among all business cycles, few have degenerated into prolonged depressions or recessions. Most business cycles come and go so quickly that received wisdom recommends that the government do nothing except for minor adjustments to monetary and fiscal policy along with so-called "automatic stabilizers." The exceptions to this rule include the Great Depression, the stagflation of the 1970s, Japan's Lost Decade, and possibly the [Great Recession]. What makes the difference between the ordinary business cycle and an extraordinary depression? The one factor that is consistent in all four of the major crises is massive government intervention to address the initial economic crisis. In all four cases, the government responded not in the traditional laissez-faire manner of leaving things alone but instead with policies that attempted to reverse the economic crisis. In the first three major depressions, governments consistently intervened in the economy and made long-term institutional changes in the economy. In the case of the stagflation of the 1970s, the government met the initial crisis with comprehensive wage and price controls and the closing of the gold window, along with a loose monetary policy, deficit spending, and bailouts. The Japanese bubble-bust was also met with intervention on a massive scale, including bailouts, zero-percent interest rates, public-works spending, and huge budget deficits. Even Paul Krugman was impressed with Japan's efforts:
Unfortunately it did not work, the stagnation continued, and all that deficit spending has left Japan with a staggering national debt. The reason that interventionism does not work is that it misallocates more resources in the economy. More importantly, it disturbs, distorts, and destroys the corrective process whereby entrepreneurs, the price system, and the bankruptcy and foreclosure procedures do their jobs in reallocating resources and prices back into a sustainable framework. In dealing with economic crisis, one prominent weapon in the arsenal of interventionist economic policy is a loose money and credit policy. This policy has the defect of preventing, or at least stalling and distorting, the process of deflation that provides the cleansing and rebalancing effect on the economy where resources can be reallocated to more valuable and sustainable uses. Loose monetary policy also sets up expectations for a more restrictive monetary policy in the future, while its low interest rates discourage savings and future growth. Loose monetary policy in the 1970s (United States), 1990s (Japan), and today (globally) have produced no curative effect; and notice that most economists consider Paul Volcker's restrictive monetary policy in the early 1980s a success. Public-works spending, stimulus packages, and deficit spending are also (wrongly) considered important policies to address economic contractions. The idea is that government spending replaces declining private-sector spending in order to maintain the level of GDP. However, it is easy to recognize that such policies also stifle the reallocation of resources that are called for in any type of correction process. Government spending is determined politically and bureaucratically, so there will inevitably be mismatches in resources in the economy. As government spends it creates relative scarcities in resources like cement and bulldozers and relative abundances in resources like golf carts and electrical engineers. Such micromisalignments create new roadblocks on the path to economic recovery. In the short-run, such policies produce less than a dollar's worth of bang for the buck (even if it does increase GDP by a dollar). In the longer term, this approach increases the government debt and tax burdens on the economy. The evidence from the Great Depression, the stagflation of the 1970s, and the Japanese malaise clearly suggests that the government-spending approach has more of a debilitating than a remedial effect. In the [Great Recession], the stimulus package of $787 billion has failed by a wide margin to meet projections of the Obama administration of containing the unemployment rate at less than 8 percent.7 Bailouts are simply a hidden form of discretionary protectionism and should be the poster child for the ill effects of interventionism. Instead of allowing for entrepreneurial-driven change (restructuring, downsizing, outsourcing, takeovers, mergers, etc.), bankruptcy and foreclosure, and other forms of adjustment to take place, bailouts forestall the adjustment process, engender rent-seeking, and create a moral hazard. In the absence of bailouts, there are myriad ways in which individuals adjust to economic downturns that are largely "unseen" by politicians and bureaucrats but are nonetheless the basic elements of the corrective process. The presence of bailouts turns the attention of entrepreneurs away from such adjustments and toward the acquisition of bailouts and other rent-seeking and nonproductive activities. Bailouts also set a precedent and thereby create a moral hazard that destabilizes rather than stabilizes the economy. In the [Great Recession] we [saw] everything from bailouts for banks that are "too big to fail," to the takeovers of AIG, GM, Fannie Mae, and Freddie Mac, and forbearance laws and policies that prevent foreclosure on homeowners who are delinquent on their mortgages. Many of the same effects caused by protectionist trade policies also apply to bailouts. There is yet another negative effect from interventionist policies that is important to consider. The combination of interventionist policies, quickly conceived, implemented, and often altered, fosters an environment of "regime uncertainty." Higgs (1997) described this concept as entrepreneurial uncertainty brought about by uncertainty regarding the future of economic policy, or simply policy that threatens entrepreneurs and investors. You might imagine the entrepreneur who is trying to digest several policy changes being told that there is a crisis and that policy X will save him, only to learn that policy X has failed and will be replaced by policy Y, which will save the day, only to learn that policy Y has not worked but that policy Z will get the job done. All of this confusion causes entrepreneurs to suffer from "regime uncertainty," which in turn reduces investment and the hiring of labor. As the fog clears, entrepreneurs realize that the general economic environment has changed. New entry and profit opportunities for entrepreneurs have been reduced while at the same time economic policy is delaying the exit of firms suffering large economic losses. In other words, the price system is hampered and the economy is no longer competitive. It would be hard to disagree with Ben Powell (2009, p. 20) who characterizes the current political environment as one of "regime worsening." [This article is a selection from "Hoover, Bush, and Great Depressions" in the Quarterly Journal of Austrian Economics, vol. 13, no. 3, pp. 86–100 (2010).]  This posting includes an audio/video/photo media file: Download Now |
| What Happens When the State Has Power over Adoption Agencies Posted: 26 Jun 2021 09:00 AM PDT In a surprising turn of events, the Supreme Court on Thursday ruled in favor of Catholic Social Services (CSS) and against the City of Philadelphia. Upon learning that the Catholic agency would not place children with same-sex couples as a part of its foster care work, the city did not renew its contract with CSS, citing antidiscrimination laws. Philadelphia argued that when hiring independent contractors, the city may include any provisions it wishes in the contract. CSS lawyers argued that the agency's only desire was to be able to continue the work it has done for centuries and that requiring it to endorse same-sex couples as foster parents would violate its religious teachings on marriage, and thus is a violation of the First Amendment. In a unanimous decision, the Supreme Court of the United States sided with Catholic Social Services. Chief Justice John Roberts wrote:
Roberts also added:
The decision, however, was made in such a way as not to challenge Employment Division v. Smith, where the court ruled that "when the government has a 'generally applicable' law or regulation and enforces it neutrally, the government's action is presumptively legitimate, even if it has some 'incidental' adverse impact on some citizens." Not all those on the bench were satisfied with this strict ruling. Justice Amy Coney Barrett called arguments in favor of overturning Smith "serious" and "compelling," and Justice Neil Gorsuch pointed out that cases like this will keep coming up until the court "musters the fortitude" to overturn Smith. Joining Justices Barrett and Gorsuch, Justice Samuel Alito was "disappointed" the court failed to uphold the First Amendment by making this decision so limited. This decision brings to the forefront the absolute absurdity of our current foster system. Given our knowledge of the dangers of monopolies and the inherent unaccountability of the state, it is astounding that the government has a monopoly on foster kids, in any city whatsoever. The fact that Catholic Social Services even needs Philadelphia's permission to take care of children, like the church has for two millennia, should infuriate everyone of goodwill. What is also frustrating is the fact that even though no gay couple has ever approached CSS for fostering, it is apparently not sufficient for gay couples to go to the other twenty-nine agencies contracted by the city (even though CSS stated that if a gay couple were to approach them, they would simply redirect them to one of the other, again, twenty-nine foster agencies in the city). No, the city decided it would try to use the coercion of the government to force the Catholic agency to act in contradiction of its faith. Conservative justices do not have a great track record. Indeed, history shows them to be largely useless (case in point, its recent decision to maintain the so-called Affordable Care Act). But sometimes the useless counteracts the stupid. While it certainly can be argued that the Supreme Court has no constitutional authorization to involve itself in municipal adoption laws, it can at least be celebrated that the city's asinine law will not be imposed upon CSS. Nonetheless, victories should be celebrated as they come. With any luck, Employment Decision v. Smith will be overturned in the near future. Most germanely though, Catholic Social Services will be able to continue practicing its faith in the city of Philadelphia for the foreseeable future. The Catholic Church served children for two millennia before the state usurped that power, and she will serve the poor, and needy long after the state withers away, God willing.  This posting includes an audio/video/photo media file: Download Now |
| Imagining a Better Way: Foundations of a Healthy Healthcare System Posted: 26 Jun 2021 07:00 AM PDT "The groupthink that exists among scholars of healthcare, among policy makers, among politicians — even among the public — is alarming." A new world of medical entrepreneurship is growing. Concierge and cash-only practices, walk-in cash clinics, medical tourism, and cost-sharing plans are just a few of the ways free-market approaches are changing the landscape. Our expert speakers will discuss several of these developments, and more. Recorded in Salem, New Hampshire, on June 17, 2021.  |
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