What government should do in a recession

[SaulOhio]

During this economic crisis, its a good time to remember the analysis of the Great Depression by Murray Rothbard. He clearly lays the blame for the Depression on the expansion of the supply of credit, but most importantly, his prescription for quick recovery is laissez-faire:

From America's great Depression (Now available in the public domain in pdf format):

Prelude to Depression:
Mr. Hoover and Laissez-Faire
If government wishes to alleviate, rather than aggravate, a
depression, its only valid course is laissez-faire—to leave the
economy alone. Only if there is no interference, direct or
threatened, with prices, wage rates, and business liquidation will
the necessary adjustment proceed with smooth dispatch. Any
propping up of shaky positions postpones liquidation and aggravates
unsound conditions. Propping up wage rates creates mass
unemployment, and bolstering prices perpetuates and creates
unsold surpluses. Moreover, a drastic cut in the government
budget—both in taxes and expenditures—will of itself speed
adjustment by changing social choice toward more saving and
investment relative to consumption. For government spending,
whatever the label attached to it, is solely consumption; any cut in
the budget therefore raises the investment–consumption ratio in
the economy and allows more rapid validation of originally wasteful
and loss-yielding projects. Hence, the proper injunction to government
in a depression is cut the budget and leave the economy
strictly alone. Currently fashionable economic thought considers
such a dictum hopelessly outdated; instead, it has more substantial
backing now in economic law than it did during the nineteenth
century.
Laissez-faire was, roughly, the traditional policy in American
depressions before 1929. The laissez-faire precedent was set inAmerica’s first great depression, 1819, when the federal government’s
only act was to ease terms of payment for its own land
debtors. President Van Buren also set a staunch laissez-faire
course, in the Panic of 1837. Subsequent federal governments followed
a similar path, the chief sinners being state governments
which periodically permitted insolvent banks to continue in operation
without paying their obligations.1 In the 1920–1921 depression,
government intervened to a greater extent, but wage rates
were permitted to fall, and government expenditures and taxes
were reduced. And this depression was over in one year—in what
Dr. Benjamin M. Anderson has called “our last natural recovery to
full employment.”
Laissez-faire, then, was the policy dictated both by sound theory
and by historical precedent. But in 1929, the sound course was
rudely brushed aside. Led by President Hoover, the government
embarked on what Anderson has accurately called the “Hoover
New Deal.” For if we define “New Deal” as an antidepression program
marked by extensive governmental economic planning and
intervention—including bolstering of wage rates and prices,
expansion of credit, propping up of weak firms, and increased government
spending (e.g., subsidies to unemployment and public
works)—Herbert Clark Hoover must be considered the founder of
the New Deal in America. Hoover, from the very start of the
depression, set his course unerringly toward the violation of all the
laissez-faire canons. As a consequence, he left office with the economy
at the depths of an unprecedented depression, with no recovery
in sight after three and a half years, and with unemployment at
the terrible and unprecedented rate of 25 percent of the labor
force.

Again, "Propping up wage rates creates mass
unemployment, and bolstering prices perpetuates and creates
unsold surpluses." This is basically because a recession is fundamentally a monetary phenomenon. Because of the default of loans to banks after a prolonged period of inflation, money simply disappears from the economy. Prices of everything drops. If the government holds wage levels artificially high, when they should fall along with consumer prices, businesses become unable to make profits, or even pay all their employees.

"Any propping up of shaky positions postpones liquidation and aggravates
unsound conditions." Businesses, even banks, that have been managed poorly in ways that could work under inflation, but are otherwise uneconomical, need to close, and their workers and capital diverted to more productive endeavors. The bailouts today keep banks that granted too many subprime loans open, so they can repeat their mistakes, instead of letting them close so that depositors are unmotivated to move their money to more sound banks which could begin the job of rebuilding the economy. What we have now is the equivalent of trying to re-inflate a baloon that has already popped.

Hoover’s role as founder of a revolutionary program of government
planning to combat depression has been unjustly neglected
by historians. Franklin D. Roosevelt, in large part, merely elaborated
the policies laid down by his predecessor. To scoff atHoover’s tragic failure to cure the depression as a typical example of laissez-faire is drastically to misread the historical record. The Hoover rout must be set down as a failure of government planning and not of the free market.

Chapter 11 of Rothbard's book, "The Hoover New Deal of 1932", describes Hoover's interventions in the market:

Measures such as Federal and state and local public works, worksharing,
maintaining wage rates (“a large majority have maintained
wages at high levels” as before), curtailment of immigration, and
the National Credit Corporation, Hoover declared, have served
these purposes and fostered recovery. Now, Hoover urged more
drastic action, and he presented the following program:
(1) Establish a Reconstruction Finance Corporation, which would use Treasury funds to lend to banks, industries, agricultural credit agencies, and local governments;
(2) Broaden the eligibility requirement for discounting at the Fed;
(3) Create a Home Loan Bank discount system to revive construction and employment measures which had beenwarmly endorsed by a National Housing Conference recently convened by Hoover for that purpose;
(4) Expand government aid to Federal Land Banks;
(5) Set up a Public Works Administration to coordinate and expand Federal public works;
(6) Legalize Hoover’s order restricting immigration;
(7) Do something to weaken “destructive competition” (i.e., competition) in natural resource use;
(8) Grant direct loans of $300 million to States for relief;
(9) Reform the bankruptcy laws (i.e., weaken protection for the creditor).

Hoover also displayed anxiety to “protect railroads from unregulated competition,” and to bolster the bankrupt railroad lines. In addition, he called for sharing-the-work programs to save several millions from unemployment.

 

[Francesca R]

I know. It would be a great idea to disallow bank lending and tie all currencies to gold, huh? That would help this credit crunch on its way and render futile all these pesky bailouts.

 

[SaulOhio]

I know. It would be a great idea to disallow bank lending and tie all currencies to gold, huh? That would help this credit crunch on its way and render futile all these pesky bailouts.

The bailouts are already futile.

And lending would still be allowed. Banks would simply not be allowed to pretend they still have the money they have loaned out.

And you have not said anything about the facts or logic of Murray Rothbard's or my arguments.

You are just expressing disapproval of the consequences of the conclusions. There is a name for that fallacy. Its called an appeal to consequences.

Before, you or someone argued that "gold bugs" argue for a gold standard because they own gold and the re-establishment of a gold standard would increase the value of their gold and make them rich. Might I also argue that the opponents of a gold standard may be bankers who get rich from fractional reserve banking? Its easy money, and if you make a mistake and lose money, you can just borrow from the Fed or get Congress to vote you a bailout.

Neither of those arguments are valid, either.

And neither is an accusation of spinning conspiracy theories.

So how about we just stick to argung about the facts?

 

[GreyICE]

Shoot people until morale improves.

 

[trvlr2]

Nay,nay, GreyIce-that would be against the forum rules to advocate shooting. I propose flogging, at least ten economists and bankers per week, until morale improves. Starting at the top, of course.

 

[Francesca R]

You are just expressing disapproval of the consequences of the conclusions.

Bingo.

There is a name for that fallacy. Its called an appeal to consequences.

Invalid. It's not that you couldn't do a gold standard, because it has been tried. It is that the known consequences are such that the idea is resolutely out of favour. Everywhere. And those who argue for a return to it are seemingly blind to unintended consequences, or magic them away with their theories.

Before, you or someone argued that "gold bugs" argue for a gold standard because they own gold and the re-establishment of a gold standard would increase the value of their gold and make them rich.

I never said that so your retraction would be welcome.

 

[SaulOhio]

Bingo.
Invalid. It's not that you couldn't do a gold standard, because it has been tried. It is that the known consequences are such that the idea is resolutely out of favour. Everywhere. And those who argue for a return to it are seemingly blind to unintended consequences, or magic them away with their theories.

What were the supposed bad consequences? It would probably be easy to demonstrate that the problems there were when we did have a gold standard were caused by other interventions in the market, such as wars, war spending, debasement of specie by the government (Roman Empire), and fractional reserve banking.

I never said that so your retraction would be welcome.

Someone did. I did say "you or someone". If its not you, then I apologize for suggesting it might have been you. But I don;t think you objected to that line of argument at the time...

 

[plumjam]

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