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June 2002, Volume 20, Number 6

Sustainable Growth: or, How to Kill an Economy

by Llewellyn H. RockwellJr.

The headlines of the business pages have been trumpeting the arrival of recovery now for months. How do the experts decide when recession has turned to recovery? By looking at the data, which come in packages labeled in various ways: the GDP, the leading indicators, the unemployment rate, industrial production, housing starts, commercial borrowings, office vacancy rates, and a host of others. If these tend in the negative direction, we are said to be entering a recession. If they move in a positive direction, it is said that we are recovering. 

Let's grant, first, that the larger the data set, the more subject to manipulation it is. We can count housing starts, but measuring something like national productivity is very tricky business. The great scandal of the way that GDP is collected is that it does not measure wealth destruction, as caused by something like September 11 or the 40 percent of private wealth consumed by government at all levels every year, and neither does it make a distinction between private production and outright government spending. Because of this, looking at the data alone, without a proper theory of economics, can produce a highly misleading picture. 

For a year, the government engaged in a serious effort to bring us out of recession through a variety of fiscal and monetary policies. If recovery is really here, can we say that these policies have worked? Not necessarily, because it is necessary to establish a firm relationship between cause and effect to draw such a conclusion. The economy might have recovered without such stimulus efforts. In fact, such stimulus efforts might make the recovery weaker than it otherwise might be. 

A more serious possibility is that the stimulus efforts have actually created an illusion. While everyone is celebrating the unexpected economic recovery, which is also unexpectedly robust, it serves us to look beneath the surface. There are aspects of this recovery that are highly unstable because they were brought about through artificial means. There are also certain policy trends which suggest that it might not last or that it will not be as robust as it might otherwise be. 

A report from the Congressional Budget Office points out that new government spending has surpassed the amounts envisioned in the congressional stimulus measure, exceeding what even the most vociferous advocates wanted. The government spending, which has very quickly pumped $100 billion into the economy, began in October and continued through winter and spring. Outlays are up over last year's increases by 13.1 percent. In terms of GDP, it accounts for fully 1 percent. As for consumer spending, it is financed almost entirely by new borrowing fueled by artificially lowered interest rates. Looking even deeper, we can see that Federal Reserve policy has been astonishingly loose since the beginning of 2001, reaching as high as 20 percent per annum by some measures. 

While recognizing that some of the rebound may consist of sustainable investment begun after the great shakeout of 2000, these factors just cited strongly suggest that the current economic recovery consists of more illusion than reality. We need to ask ourselves whether and by what means it can be sustained. The only means for doing so is for it to be supported through strong economic development and sound investment—investment that is born out in consumer purchases and long-term profits.  

It turns out, however, that the federal government seems to be doing everything possible to undermine the likelihood of a sustainable recovery. Last month, the US imposed a 30-percent tariff on steel. The idea here is to help one inefficient, bloated, and pampered industry at the expense of all US consumers of steel, including US businesses, and all producers in EuropeAsiaBrazil, and Australia. This is brazen protectionism, deeply harmful all around, not to mention morally repugnant.

Will it help the steel industry? In the short run, yes. But we have to ask ourselves whether this kind of help is a good thing in the long run. The tariffs permit an inefficient industry to continue to produce inefficiently, and forestall improvements in technology and cutbacks in wages that are necessary if the industry is to adjust to twenty-first-century realities. There is no virtue to keeping dying and inefficient technology humming along so that workers who might be better employed elsewhere can continue to enjoy fat checks doing outmoded work. 

How long must such tariffs remain in place? The steel industry says they are only necessary in order to get the industry back on its feet. But that belies the question of what, precisely, is going to inspire this sector to clean up its act? Protecting an industry from competition is a method that permits everything wrong with the industry to persist and not change. Either these tariffs will have to be in place permanently, or the industry will have to be shaken up. 

If you think about it, Soviet socialism survived for seventy-two years on precisely such policies. The Soviet state protected all its industries from market competition under the alleged need to build socialism. Factories were never closed, and workers were never let go except for political reasons, when their services were employed in the Gulag. The system worked only if your standard is not efficiency but merely the guarding of the status quo. Eventually this system collapsed, as it must, and the Soviets woke up to a world that was backward and decayed. 

The steel tariff imposed by the Bush administration is different from Soviet socialism only in degree, not in kind. It is an attempt to circumvent the market process through a centrally administered system of rewards and subsidies for industry to abide by political priorities rather than market dictates. In the meantime, every purchaser of steel, whether consumers or other businesses, is harmed by being forced to pay a higher price for an inferior product. 

Most recently the US also imposed massive punitive duties on softwood imports from Canada. Why? Because Canada refused to obey a US demand that it place a new tax on its softwood. The new duties raise the price of softwood, used for building nearly every home in America, by 27 percent. This is going to massively distort the housing market, among many other sectors that use wood. Higher prices for steel and wood put additional pressure on other businesses that use these products in production. 

In economic terms, tariffs are indistinguishable from taxes. They take people's property by force by requiring businesses and consumers to pay higher prices for goods than they would otherwise pay in a free market. To that extent, they harm the prospects for economic growth. If anyone says otherwise, he is ignoring hundreds of years of scholarship and the entire sorry history of government interference with international trade. 

The repercussions of these two actions are already being felt via damaged relations in Latin America and Europe. The World Trade Organization will likely give the green light for retaliation. Russia has banned imports of US chicken, and protectionist lobbies all over the world are rushing to take advantage of the opportunity. The EU has imposed tariffs on US steel, and Canada is considering retaliatory measures. This way lies trade war, which is the worst thing that can happen to an economy outside hot war. 

Another policy that endangers recovery is the war on terrorism. I'm not taking issue with the need for justice after September 11. But it seems clear that the government is using this tragedy as an excuse to vastly increase spending and regulation over the American and world economy. President Bush, who campaigned on a platform of cutting government, has asked for another $28 billion to pour into the military, even as he is pushing for more regulations on banks and financial privacy in the name of rooting out terrorism. 

Here again, this spending can create the illusion of prosperity, but we must also remember that first lesson of economic science: the world is a finite place where the use of any and all resources is constrained by scarcity. This is just another way of saying that you can't always get what you want, and when you do, it must come from somewhere. When the government spends resources, it must drain them from the private economy through taxation, borrowing, or by inflating the money supply to pay for the new spending. 

Economics doesn't deny that redirecting resources from one sector where they are valued by consumers, to another sector where they are valued by government, can create pockets of expansion. What economics suggests is that this is not an efficient or sustainable use of such resources. Only the unhampered competitive market economy, with its system of market prices, profits, and losses, can reveal to us with any certainty the most desirable destination of economic goods. 

If credit expansion, protectionism, and government spending were a path to prosperity, mankind would have long ago created heaven on earth. Sadly, however, the politicians engaged in these activities have to contend with reality, and the reality is that economic forces in society must be mutually sustaining. To have production and borrowing, there must be savings, which only occurs when people forestall consumption today to prepare for tomorrow, and investment that pans out in the form of consumption. Absent such conditions, economic growth lacks a foundation in reality and turns to dust when economic conditions change. 

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Llewellyn H. RockwellJr., is president of the Mises Institute (rockwell@mises.org).

 

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