The Economy Needs a Recession (Video)

John Tamny, Political Economy Editor at Forbes, spoke to the Austrian Economics Research Conference about the roots of the Great Depression, the financial crisis, and the Great Recession. He explained how most modern economists ignore important economic fundamentals, or simply misunderstand them. For example, contrary to popular belief, governments cannot stimulate demand by simply spending more. He also focused on the beauty of recessions, which allow an economy to cleanse itself of bad business practices. Like Peter Schiff, Tamny argues that the US needs to experience a painful, but necessary recession sooner than later to truly heal its economy.

Highlights from Tamny’s speech:

“While most economists don’t understand this, government spending is very definitely a tax. You’ll hear this a lot today, but governments have no resources. They can only spend insofar as they extract the resources that we produce first in the real economy. Then there’s regulation. Let’s be very blunt here: regulations do not work. If anyone doubts this, all they need to do is look at the banking sector back in 2008. It was easily the most regulated sector in the United States, yet those charged with overseeing the banks did not have a clue about the problems within them…

“We are an economy of individuals, and as individuals we are free traders… [Floating money] creates all sorts of distortions and disfigurements in the economy, what von Mises referred to as ‘malinvestment’ when money is floating around in value…

“If you talk to most [economists], they say the answer to our present malaise is simple: governments must spend with abandon to get demand up in our economy. That is our fix. The problem with such a belief is manyfold. Number one, once again, governments have no resources, so they must extract resources from entrepreneurs and businesses eager to grow. Second thing is that the last thing a government would need or want to do is stimulate demand. The reason for that is simple. As individuals, we are wired to demand things…

“Also, contrary to popular opinion today, which says governments must devalue the currency during times of economic hardship, back then the dollar’s integrity as 1/20th of an ounce of gold was maintained. This was essential too… And so with the federal government essentially doing less than nothing back in the early 20’s, the US economy took off…

“Recessions, despite what we’re told, and despite their near-term pain, are in fact beautiful. Nothing could be more beautiful than a recession. A recession is a signal of an economy cleansing itself, of an economy cleansing out all the bad business practices, all the misuses of labor, all the malinvestment, all the bad businesses that were holding it down in the first place. That’s why when recessions are left alone, there’s always an economic rebound, because the recession is in fact the cure…

“Franklin Delano Roosevelt promised Congress in 1934 a $7 billion budget deficit. I realize that number is quaint now, back then obviously it was rather large. The idea was to stimulate the economy, get demand up. It failed impressively… [Stimulus] presumes at its core that you can grow your own economy by rewarding indolence, all the while penalizing enterprise…

“In 1933, rather than protect the dollar, FDR’s Treasury devalued it from 1/20th of an ounce of gold to to 1/35th of an ounce of gold. This ultimately sent a chilling message to investors that if they took a risk, any returns that they’re lucky enough to get would come back in devalued dollars…

“I think what most people agree on about the financial crisis is that housing had something to do with it. But from there the misinformation begins. For one, what has to be stressed is that housing, despite what economists and politicians like to say, [mainstream economists] like to say that housing is a stimulant. Housing is not a stimulant. When you buy a house, your purchase of it is not going to make you more productive. It’s not going to open up foreign markets for you. It’s not going to lead to cancer cures that elongate life… Housing is consumption. When it started to boom in the early 2000s, this was a very negative economic signal of something amiss… The question then becomes, what caused this rush into housing, this slow growth of housing boom?… To me, what caused this rush into housing was something much more basic and, in fact, more Austrian. Where I place the blame is the Bush Treasury. Presidents always get the dollar they want, and they transmit it through the US Treasury. The Bush administration wanted a weak dollar, and as von Mises always explained, particularly with human action, when currencies are being devalued, there’s a flight into the real. In our case, there was a flight into the hard assets least valuable to the dollar’s devaluation…

“[Back in 2008] The US economy desperately needed failure, and when it needed it most, the Bush administration and the Bernanke Fed robbed it of it. Silicon Valley is not the richest part of the United States because all of tis businesses succeed. Silicon Valley is the richest precisely because most of its startups fail. With failure you get perfection. Entrepreneurs will do what not to do in the future. Bad managers are replaced by better ones. Poor businesses and business capital are starved of capital so the good ones can receive capital in abundance…

“Whatever you think of Obamacare, you cannot deny that it’s making it more expensive for businesses to hire workers. Considering 99 weeks of unemployment benefits, the reality is that incentives matter.”

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