Saturday, January 17, 2009

Keynesian Crapola: recession caused the recession

To say the recession was caused by diminished demand is to say that the recession was caused by the recession. The fact is, people are holding on to their cash because the economy is in recession and they are uncertain about the future. As we’ll see, it is exactly under these circumstances that people should be saving.

The idea that consumption needs to be stimulated is ridiculous on its face. Consumption is fun. It’s saving that takes effort. Not long ago the American people were scolded for consuming too much and saving too little. Now it’s the opposite. Will the scolds please make up their minds!

As noted, falling consumption is not the cause but rather the effect of recessions. So government-boosted demand, made possible by deficit spending and expansion of money and credit, can’t be the solution. Recessions follow ill-advised government policies that channel investment into unsustainable projects, that is, projects that conflict with economic reality, such as the government-created housing boom, which misdirected billions of dollars into finance and construction. The recession is the process of correcting the errors that government policy encouraged. This correction involves the liquidation of inappropriate projects and therefore unemployment. Resources have to be redirected to projects consistent with economic reality. But resources are not malleable Play-Doh. They are specific machines, tools, and materials in particular places whose adaptation to new projects (when possible) is not costless. Workers may need to be trained for new jobs.