Highlights: Mises called the production errors malinvestment. These errors happen systemically because of fractional reserve banks loan money into existence that is not backed by savings. That misleads producers into thinking that there are more real savings available than society wishes to save. Producers then make both the wrong mix of capital goods of different orders, and the wrong proportion of capital goods in relation to consumption goods. When there is malinvestment there must be a recession, for the following reason: there were never enough real resources to complete all of the capital projects that were started during the boom. The firms that started these projects either over-estimated the demand for their output, or, under-estimated their costs. Somewhere along the way, firms will discover that they cannot obtain all of the factors they need at a price below their costs. They cannot make profits. Many of them fail... Anything that prevents wages or asset prices or capital market prices from falling moves markets away from clearing. In the modern world, one of the main barriers to recovery is Keynesian stimulus. Stimulus tries to create more demand without creating more supply. We know from Say’s Law that this is doomed to fail because supply and only supply constitutes the demand for other goods. What stimulus is really trying to do is to inflate the fake price system of the boom so that more expenditures can occur at the fake prices producing more of the wrong things for which there was never a real demand in the first place. And that cannot work because it was the breakdown of production under the fake prices that caused the boom to end. For a real recovery to occur, production must be reorganized along the lines of consumer demand... Following Hoover was FDR, who made things even worse. One of the New Deal agencies, the National Recovery Administration, employed agents to scour the country looking for stores that were lowering their prices. From Jim Powell’s FDR’s Folly: How Roosevelt and his New Deal Prolonged the Great Depression: There were some 1,400 NRA compliance enforcers at fifty-four state and branch offices. They were empowered to recommend fines up to $500 and imprisonment for up to six months for each violation. On December 11, 1933, for instance, the NRA launched its biggest crackdown summoning about 150 dry cleaners to Washington for alleged discounting... Given the work of Hutt and Higgs in explaining why a recession persists with no recovery, here is a list of factors causing price inflexibility and regime uncertain in today’s economy: 1) Capital market price floors, like the Greenspan-Bernanke put and QE which prevent the markets for capital goods from clearing. 2) Bailouts of Wall Street, which are another form of price floors, and keep the incompetent management teams in place. 3) The nationalization of the mortgage market, another form of capital market price floors and house price floors, which removes the largest sector of credit markets from the domain of economic calculation. 4) Obamacare. Besides the direct costs for taxpayers, the bill introduces massive incentive changes in labor markets, the implications of which are still not clear. 5) Economist Casey Mulligan documents extensive changes in labor market incentives in his book The Redistribution Recession. He argues that these changes have created a huge implicit tax on income for the unemployed contemplating an offer of paid work. 6) The pending default of most pension plans including Social Security, the medical welfare state, US states, counties, and cities. How the default will be paid for is creating great uncertainty. 7) Uncertainty created by the threat of wealth taxation and bail-ins, as outlined in an IMF paper. 8) The surveillance of all financial transactions and expanded reporting requirements for the assets of wealthy investors As Hayek said, the more the state centrally plans, the more difficult it becomes for the individual to plan. Economic growth is not something that just happens. It requires saving. It requires investment and capital accumulation. And it requires the real market process. It is not a delicate flower but it requires some degree of legal stability and property rights. And when you get in the way of these things, the capital accumulation stops and the economy stagnates.
Posted on: Fri, 28 Feb 2014 21:44:57 +0000
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