Published: January 26, 2009 03:32 pm      

STUMPTALK: Insights into Reaganomics and depressions

There is a preponderance of commentary in the media comparing the current financial crisis to The Great Depression of 1930. The comparison is a stretch since the current recession ranks only the fifth severest in history. A more accurate comparison is the depression of 1981-83, a severe depression followed very swiftly after the recession of 1979-80. Critics mistakenly labeled it the “Reagan Depression,” which was more revealing of their partisan politics than their allegiance to the truth.

Reagan began with a fanfare of allegedly budget and tax cuts to stave off the crisis he inherited. Bush, when taking office in 2001 with a recession in full bloom, also enacted massive tax cuts which prevented a greater economic decline and sparked a modest prosperity. But then, foreign policy aside, Bush, like Reagan, stopped the recovery in its tracks by military adventurism, e.g., invasion of Afghanistan and Reagan’s military buildup. Remember LBJ’s “Guns and Butter” disaster?

An illusion of prosperity ensued, e.g., the Dot Com bubble, the housing boom, an inflated stock market, and subsidized mortgages. Pundit, polls and the public thought the boom would never end. Then in 2006-08, the bubble burst caught everyone by complete surprise. Hogwash! Austrian economists saw this coming a far back as 1997.

An examination of Reaganomics and depressions is in order which reveals government’s good intention but ineptitude in solving problems. Probably no one had a better perspective on the Reagan presidency than the late professor Murray N. Rothbard:

“Reaganomics – a blend of monetarism (The Chicago School headed by Milton Friedman) and fiscal Keynesianism swathed in classical liberal and supply-side rhetoric – in no way could solve the problem of inflationary depression or the business cycle. But one problem is that supply-siders, while calling for large income tax cuts, advocate keeping up current level of government expenditures.

“The Reagan administration knew that inflationary expectations had to be reversed, but where they miscalculated was relying on propaganda without substance. Indeed, Reaganomics was a razzle-dazzle of showmanship about taxes and spending, behind which the Monetarists, in control of the Fed and the Treasury Department, were supposed to gradually reduce the rate of money growth; the razzle-dazzle was suppose to reverse inflation without forcing the pain of recession or depression on the economy.

“The Friedmanites have never understood the Austrians insight on the necessity of a recession to liquidate the unsound investments of the inflationary boom. As a result, the attempt of the Friedmanite gradualism to fine-tune the economy without recession went the way of the similar Keynesian fine-tuning. Consequently, Friedmanite fine-tuning brought us temporary "disinflation," accompanied by another severe depression. Friedmanite gradualism will never permit a sharp enough recession to clear out the debt.”

What’s the solution? The only way out of this mess, says Rothbard, is to “slam on the brakes,” to stop the monetary inflation in its tracks. Then, the inevitable recession will be sharp but short and swift, and the free-market, allowed its head, will return to a sound recovery in a remarkably brief time. The depression, then far from an evil scourge, is the necessary and beneficial return of the economy to normal after the distortions imposed by the boom. The boom, then, requires a “bust.”

The Austrian policy of rapid adjustment may seem harsh to the public but is actually comfortable and moderate compared with the hell of permanent inflation, stagnation, high unemployment, and inflationary depression that the Keynesian and Friedman neo-Keynesians have got us into.

For 75 years we have been told in text books and economic journals, that government has the tools with which it can “fine-tune” the economy to abolish the business cycle and insure permanent prosperity. Obviously it doesn’t. The assumption is that business cycles in general, and depressions in particular, arise from the depths of the free-market, capitalist economy. A vast army of people to this day consider capitalism is permanently on trial, and when their monetary fixes fail to save capitalism from another depression, this army will turn to socialism as the final answer.

The Keynesians that dominate government don’t have a clue to what causes business cycles; they confuse it with ordinary business fluctuations and then invent all kinds of contrivances that multiply spreading through the economy like a virus. The explanation will not be found by referring to specific or even general business fluctuations. Keynesianism can’t explain why there is a sudden general cluster of business errors. How then did all the country’s astute businessmen, trained to make sound forecasts, come to make such errors together, all suddenly revealed at the same time? Recessions and depressions are a failure not of capitalism but of a hyperactive state.

What does the future hold? Austrian economists have shown conclusively that Keynesianism is intellectually bankrupt, and here we are treated to the spectacle of veteran Keynesians calling for tax increases during a severe recession. If a new administration follows the Austrian Laissez-faire prescription, an economic recovery could happen before 2009 ends. But if Obama relies on Keynesian inflationary stimulus bailouts, the economy will likely slide into a deep depression, lingering for a decade, as it did in the 1930s.

The 1920 recession had adjusted itself within a year. There was no reason why the 1929 recession should have taken longer, for the American economy was fundamentally strong. If allowed to adjust itself, as it would have done by the end of 1930, confidence would have returned and the world slump need never have occurred.

Stumptalk is published weekly in the Crossville Chronicle. The opinions expressed in this column are not necessarily those of the Chronicle publisher, editor or staff. Phil Billington serves as coordinator of this column. He may be reached at stumptalk@charter.net.