April 30, 2010

Prolonged Recessions and the Business Cycle

There are some who have stated that the recession is over, while still others claim that the recession is not over- or at least that its effects will be prolonged. In an article entitled “Extending the Recession Indefinitely, ” the author discusses the various ways in which the current recession is being prolonged. He makes references to Rothbard’s works and discusses a number of his points which serve to provide valuable insight on economic recovery.

In his essay, “Economic Depressions: Their Cause and Cure,” Rothbard takes an in depth look at recessions and recovery from the so called “business cycle.” Rothbard disputes the traditional claim that depressions occur due to decreased consumer spending and instead argues that depressions occur because of excess capacity. Specifically, he states that the boom and bust business cycle affects the capital industries the most. These industries would include the production of machines/equipment, raw materials, and construction. In arguing this point, Rothbard uncovers the fact that recessions stem from the producer side rather than the consumer side of the economy. This claim is a bold one as it goes against the traditional view of the business cycle. However, by making this point, Rothbard can justify his stance in his argument the use of many of the traditional tools used within fiscal and monetary policy during recessions. Mainly, he states that, the governing body’s artificial lowering of interest rates give a false signal to entrepreneurs and they invest in capital goods. As workers’ wages increase, workers change their spending habits and purchase consumers goods rather than saving and investing in producer goods. The distortion in pricing causes a correction, or a depression to occur, during which the mal-investments from the booming period are liquidated.

Seeing that this is the main cause of recessions, it would not be surprising to see that Rothbard sees the following as delaying recovery. The government bailouts, pushes for increased lending, an increase in the money supply, artificial price and wage setting, pushes for increased consumer spending, and the offering of unemployment benefits all contribute to the prolonging of the recession. It is interesting to see most of these same exact policies being used under the current administration. In fact, the kind of policies being implemented under the current administration are the exact opposite of the Austrian recommendation for economic recovery. Specifically, the traditional Keynesian view on recovery is that consumer spending needs to increase, the government needs to inflate its way out, and that businesses that are “too big to fail” need to be saved or bailed out. According to the Austrian economist, nothing could be further from the truth. Simply put, the Austrian would advocate a strict laissez-faire policy under which the government should stay out of the market and allow for a faster adjustment to occur. In their view, the sooner the depression-readjustment is gotten over with, the better. It is sad to see that politicians would rather embrace economic policies that result in a short-term artificially crafted booming economy than to settle for the Austrian approach- which proves to be the more realistic and feasible, long-term approach in which everybody is better off.

Extending the Recession Indefinitely http://mises.org/daily/3764
Economic Depressions: Their Cause and Cure http://mises.org/tradcycl/econdepr.asp

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