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Advancing Austrian Economics, Liberty, and Peace

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Making Economic Sense
by Murray Rothbard
(Contents by Publication Date)

Chapter 69
Bush And The Recession

Unfortunately, John Maynard Keynes, the disastrous and discredited spokesman and inspiration for the macroeconomics of virtually the entire world since the 1930s (and that includes the Western World, the Third World, the Gorbachev era, as well as the Nazi economic system), still lives. President Bush's reaction to this grim recession has been Keynesian through and through not surprising, since his economic advisers are Keynesian to the core.

Since Keynesians are perpetual trumpeters for inflationary credit expansion, they of course do not talk about the basic cause of every recession; previous excesses of inflationary bank credit, stimulated and controlled by the central bank--in the U.S., the Federal Reserve system. To Keynesians, recessions come about via a sudden collapse in spending--by consumers and by investors. This collapse, according to Keynesians, comes about because of a decline in what Keynes called "animal spirits": people become worried, depressed, apprehensive about the future, so they invest, borrow, and spend less.

The Keynesian remedy to this "market failure" brought about by private citizens being irrational worry-warts, is provided by good old government, the benevolent Mr. Fixit. When guided by wise and cool-headed Keynesian economists, government is able, as a judicious sea-captain at the helm, to compensate for the foolish whims of the public and to steer the economy on a proper and rational course.

There are, then, two anti-recession weapons available to government in the Keynesian schema. One is to spend a lot more money, particularly by incurring large-scale deficits. The problem with this weapon, as we all know far too well, is that government deficits are now permanently and increasingly stratospheric, in good times as well as bad. Current estimates for the federal deficit, which almost always prove too low, are approaching the annual rate of $500 billion (especially if we eliminate the phony accounting "surplus" of $50 billion in the Social Security account). 

If increasing the deficit further is no longer a convincing tool of government, the only thing left is to try to stimulate private spending. And the principal way to do that is for the government to soft-soap the public, to treat the public as if it were a whiny kid, that is: to stimulate its confidence that things are really fine and getting better so that the public will open its purses and wallets and borrow and spend more.

In other words, to lie to the public "for its own good." Except that many of us are convinced that it's really lying for the good of the politicians, so that the deluded public will continue to have confidence in them. Hence all the disgraceful gyrations of the Bush Administration: the year-long claim that we weren't in a recession, then the idea that we had been in it but were now out, then the soft-soap about a "weak recovery," then the nonsense about "double- dip" recession, and all the rest. Only when an aroused public hit him in the face did the President acknowledge that there's a real problem, and that maybe something should be done about it.

But what to do, within the Keynesian framework? First, the Fed drove down interest rates, expecting that now people would borrow and spend. But no one feels like lending and borrowing in recessions, and so nothing much happened, except that short-term Treasury securities got cheaper to buy--not very useful for the private economy. But, darn it, credit card rates stayed high, so Bush got the idea of talking down credit card rates, stimulating more consumers to borrow.

The resulting fiasco is well-known. Senator Al D'Amato (R-N.Y.), ever the eager beaver, figured that forcing rates down is more effective than talking them down, and so Congress only just missed passing this disaster by a vigorous protest of the banks and a mini-crash in the stock market bringing it to its senses. Outgoing chief-of-staff John Sununu, as ever attentive to the actions of "this President," tried to justify Bush's jawboning as correct, asserting that Congress's error was to try coercion.

But Bush's idea of talking credit card rates down was only slightly less idiotic than forcing them down. The point is that prices on the market, including interest rates, are not set arbitrarily, or according to the good or bad will of the sellers or lenders. Prices are set according to the market forces of supply and demand. 

Credit card rates did not stay high because bankers decided to put the screws to this particular group of borrowers. The basic reason for credit card rates staying high is because the public--in its capacity as borrowers, not in its capacity as economic pundits doesn't care that much about these rates. Consumers are not credit-card rate sensitive.

Why? Because basically there are two kinds of credit-card users. One is the sober, responsible types who pay off their credit cards each month, and for whom interest charges are simply not important. The other group is the more live-it-up types such as myself, who tend to borrow up to the limit on their cards. But for them, interest rates are not that important either: because in order to take advantage of low-rate cards (and there are such around the country), they would have to pay off existing cards first--a slow process at best.

There was another gaping fallacy in the Bush-D'Amato attitude, which the bankers quickly set them straight about. Interest rates are not the only part of the credit-card package. There is also the quality of the credit: the ease of getting the card, the requirements for getting it and keeping it, as well as the annual fee, etc. As the banks pointed out, at a 14 instead of a 19 percent rate, far fewer people are going to be granted credit cards.

Pathetically, the only positive thing that President Bush can think of to speed the recovery is to spend money faster, that is: to step up government spending, and hence the deficit, early in the year, presumably to be offset later by a fall in its rate of spending.

What about tax cuts? Here the Bush administration is trapped in the current Keynesian view that, the deficits already being too high, every tax cut must be balanced by a tax increase somewhere else: i.e., be "revenue-neutral." Hence, the administration feels limited to the correct but picayune call for a cut in the capital gains tax, since this presumably will be made up by a supply-side increase to keep total revenue constant.

What is needed is the courage to bust out of this entire fallacious and debilitating Keynesian paradigm. Massive tax cuts, especially in the income tax are needed (a) to reduce the parasitic and antiproductive burden of government on the taxpayer, and (b) to encourage the public to spend and especially to save more, because only through increased private savings will there come greater productive investment. 

Moreover, the increased saving will speed recovery by validating some of the shaky and savings-starved investments of the previous boom. First of all, massive tax cuts may force the government to reduce its own swollen spending, and thereby reduce the burden of government on the system. And second, if this means that total government revenue is lower, so much the better. The burden of tax-rates is twofold: rates that are high and cripple savings and investment activity; and revenues that are high and siphon off money from the productive private sector into wasteful government boondoggles. The trouble with the supply-siders is that they ignore the second burden, and hence fall into the Keynesian-Bush "revenue-neutral" trap.

And finally, if the Bush Administration is so worried about the deficit, it should do its part by proposing drastic cuts in government spending, and justify it to the public by showing that government spending is not helpful to a prosperous economy but precisely the opposite. Then, if Congress rejects this proposition, and keeps increasing spending, the Administration could put the onus for prolonging the recession squarely upon Congress. But of course it can't do so, because that would mean a fundamental break with the Keynesian doctrine that has formed the paradigm for the world's macroeconomics for the past half-century.

We will never break out of our economic stagnation or our boom-bust cycles and achieve permanent prosperity until we have repudiated Keynes as thoroughly and as intensely as the peoples of Eastern Europe and the Soviet Union have repudiated Marx and Lenin. The real way to achieve freedom and prosperity is to hurl all three of these icons of the twentieth century into the dustbin of history.

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