By Thomas E Woods Jr
Most of us have probably heard just about all the arguments we can take in favor of the so-called stimulus package Barack Obama urges upon us. They boil down to this: if the government seizes resources from individuals (whether by direct taxation, borrowing, or inflation) and devotes them to arbitrary projects, we will prosper.
Japan has been through countless "stimulus" packages over the past 18 years, none of which has accomplished a thing apart from driving that country deeply into debt. And after years and years of government attempts to give artificial stimulus to the stock market and the real estate sector, the Japanese stock market is now about where it was in the mid-1980s, and real estate is selling, on average, for the same prices it was in 1975.
The same is true of the American economy of the 1930s, the decade in which President Franklin D. Roosevelt was supposedly lifting the country out of the Great Depression. Far from restoring prosperity, Roosevelt did everything he could to interfere with the economy's adjustment from depression to health. Thus instead of letting prices and wages move freely so the economy could reallocate resources rationally, he kept wages artificially high (and workers artificially unemployable) and propped up consumer prices.
More pertinent to our situation, FDR's make-work programs dwarfed even Herbert Hoover's public-works spending, which had allocated more funds for that purpose in four years than had been spent in the previous 20. Billions of dollars later, what FDR had succeeded in doing was to divert resources from a private sector starved for capital, and thereby weaken the forces of recovery. When genuine wealth generators have to compete with government for labor and resources, the productive sector is weakened at the hands of the parasitic sector.
>From 1933 to 1940, the unemployment rate averaged 18 percent. As the 1930s ended, FDR's Treasury secretary, Henry Morgenthau, wrote in his diary: "We have tried spending money. We are spending more than we have ever spent before and it does not work.... We have never made good on our promises.... I say after eight years of this Administration we have just as much unemployment as when we started...and an enormous debt to boot!"
What a perfect summary of the stimulus scam: it doesn't deliver what it promises, and it saddles the people with more debt. You'd think we would have learned this simple lesson, but instead our children have been taught that FDR -- as big an economic ignoramus as has ever occupied the White House -- was a genius who saved the American economy. The economic and historical research debunking this view is all over the professional journals, but the New York Times professes to be horrified to learn that dissent exists over the legacy of FDR.
It is impossible to devise a plan for economic recovery without knowing what caused the downturn in the first place. FDR didn't have the slightest idea.
As the great free-market economists Ludwig von Mises and F.A. Hayek (who won the Nobel Prize in 1974) showed, when a government-established central bank, such as the Federal Reserve, forces interest rates below the level at which the free market would have set them, it sets off an unsustainable investment boom, particularly in time-consuming projects far removed from finished consumer goods (mining, construction, etc.).
Now if interest rates had come down because the public was saving more, then the public's saved resources would have provided the material wherewithal to see all the new investment through to completion. But if interest rates come down because the central bank forces them down artificially, as in the case we're examining here, then the investment boom cannot persist because insufficient resources have been saved to fund them. The passage of time will reveal that they cannot all be completed. Many of these investments turn out to be malinvestments -- that is, investments that should never have been undertaken in the first place, but that investors were misled by artificially low interest rates into thinking were profitable. They have to be abandoned. The bust comes.
In other words, it isn't the "free market" that causes the boom-bust cycle. It's the central bank's interference with the free market.
It's essential that government not interfere in the economy during the bust. Malinvestments need to be liquidated, not propped up with emergency loans. The economy's structure of production needs to be reorganized, with resources moving out of firms and sectors that were artificially and uneconomically expanded during the boom, and into genuinely profitable lines of production that cater to real consumer wants. Prices and wages need to be flexible in order to effect this rearrangement.
FDR interfered in this healthy process every step of the way. Not surprisingly, recovery eluded him. (And as I show in Meltdown, my new book, even the common claim that "World War II got us out of the Depression" is false and yields unnecessary ground to the stimulus-mongers.)
That's why the depression of 1920, whose first year was worse than that of the 1929 depression, was so short lived. Instead of a "stimulus" package, the federal government cut its budget. The Federal Reserve didn't try to inflate the boom back into existence. The economy sorted out the sound investments from the malinvestments, and before long the United States was back to setting production records once again.
Where is Warren G. Harding when you need him?
Thomas E. Woods, Jr., is the New York Times bestselling author of nine books, including The Politically Incorrect Guide to American History and, most recently, Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse. Read a free chapter at MeltdownTheBook.com and visit Tom at ThomasEWoods.com.