Understanding the Damage of Government Intervention

One of the most hotly debated issues today is probably government involvement in the economy. This is a point that I feel deserves some very careful examination. Now, I’m not an economist, or a statistician or anything else of the type. I’m just a guy who can use his own head, and wanted to lay out a few things for you to think about.

First, let’s assume we can agree that the turning point for economic policy was during the Great Depression with FDR’s “New Deal” policies. As such, I took an average of recession lengths and time between the start of recessions from before and after the Great Depression. Unfortunately, these numbers only tell part of the story.

First, the average length for a recession (then called “Panics”) prior to the Great Depression was actually 4.1 years, while post Great Depression was only 1.21 years. Obviously, this looks like a strike against truly free markets, right? Well, not so fast.

You see, the time between recessions prior to the Great Depression was an average of 13.4 years, while post FDR we had only 9.75 years. What’s more, during that time we had two huge wars that artificially propped up the market, namely World War II and Vietnam. This caused gaps of 24 years and 13 years respectively. These numbers skew the average a fair amount, obviously.

You see, I’ve never claimed that Keynesian ideas that government spending can get us out of a recession are actually wrong. They’re not. What my claim is, and has always been, is that the prosperity is artificial. The 24 year period post World War II was a result of debt spending to finance the war, yes, but also the lack of anyone’s ability to actually spend any money. Rationing was the norm in those days, and both adults in a household were typically bringing in money. The guys fighting the wars often had wives at home working in places like aircraft factories (my grandmother worked in a munitions plant for example). This forced savings, and permitted people to buy things like cars and houses in great amounts. It created an era of prosperity.

However, this prosperity was an illusion. Behind the scenes was massive debt, and 8 years after the war ended, we were slammed with yet another recession. This is similar to what happened during Vietnam, as more people were working to support the war, and large numbers of Americans were being drafted (and plenty were volunteering) to go to war, which kept even more people employed. Only this time, the war was barely over before we were smacked with yet another recession.

I should also, in the interest of fair disclosure, mention that I did not count the Long Depression.  The reason for that is that I don’t feel it was truly a recession.  Production actually increased fourfold during that period, which is hardly indicative of a recession.  Instead, prices went out of whack as the United States tried to get the US back on the gold standard, among other factors that were based outside of this country.

Recessions are a part of life.  Keynsian ideologies haven’t done a thing to prevent them from happening, and it is an ideology that requires that governments take on massive debt and tax the people to pay for it.  Since the numbers don’t show this to actually solve anything long term, why not let people keep their money and stimulate the economy that way.  It’s what this nation was founded on, so lets just step up and return to a true free market economy.

Government intervention doesn’t actually work, and it provides yet another way for Uncle Sam to take away our freedoms.  It’s time for this to end.

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2 Responses

  1. There are times in the above entry where the critique seems to be, Keynsian economics don’t prevent recessions, or provide no benefit at all. For example: “Keynsian ideologies haven’t done a thing to prevent (recessions)… the numbers don’t show this to actually solve anything long term…”

    Let’s make sure we’re on the same page. Keynsian economics are not designed to prevent recessions, but rather, to lessen their impact, or shorten their duration, or set the stage for a more robust recovery. They are NOT a long term solution to prevent recessions, they provide tools to deal with them.

    So for example, we have the 2008 stimulus package. It will employ thousands, provide more unemployment benefits, make infrastructure improvements that will benefit future generations, etc.

    This government intervention DOES work, it achieves the stated purpose. People will have jobs they otherwise wouldn’t have, lessening the recession’s impact on them. Perhaps you don’t like the cost, that is a subject of debate. But to say it doesn’t work at all is wrong.

    ***
    The post above asks: “why not let people keep their money and stimulate the economy that way.” Note that, the stimulus package has over $250 billion in tax cuts, I believe. Presumably, you have acknowledged this, and appropriately congratulated the President and Congress.

    But note that, a point of Keynsian economics is that “private sector decisions sometimes lead to inefficient macroeconomic outcomes.” See investments in mortgage-based securities as an example. The effect of these unregulated and bad decisions has been economic crisis at home and abroad.

    This is not to say government has all the answers. It is simply to acknowledge that the private sector doesn’t have all the answers either. The government has the benefit of hindsight and resources, and these can be helpful in the short term.

    ***
    RE: “Government intervention doesn’t actually work, and it provides yet another way for Uncle Sam to take away our freedoms.”

    Please explain how providing jobs, added employment benefits, infrastructure spending, etc, equals Uncle Sam taking away our freedoms.

    ***
    Regarding the general idea of letting recessions run their course without government intervention… what is your plan to convince Americans this is a good idea?

    Various research has shown that there is a relationship between the economic conditions and voting decisions in presidential elections. When the economy is bad, people tend to vote against incumbents or the incumbent’s party.

    Does this mean voters are blaming politicians for the state of the economy? Probably not. Rather, voters are probably reacting to the social crisis and dysfunction that results from lost jobs, homes, etc. People want and expect the government to deal with effects of this disturbed environment. They are holding public officials accountable if no action is taken by them.

    It is all well and good to say, recessions happen, grin and bear it, good times will come back sooner… or later.

    But if you want to win people’s hearts and minds with that philosophy, I’m curious to see how you sell this idea to the populace.

    ***
    Finally, here is the geo-political reality: the United States is too big to fail.

    Perhaps there was a time when we could afford to let the US suffer through a long recession or even depression, with no government intervention. Perhaps.

    But the US is now the leader of the free world. Other nations depend on our power and leadership. When the US coughs, other export based nations catch a cold or get the flu.

    The genii is out the bottle. We cannot afford an unregulated environment and uninvolved government which allows the free markets to cause the country to go into an economic tailspin. That means compromises, yes… in ways that extend beyond economic policy. But the alternatives are even less desirable… this government intervention should not be considered “good”, but rather, the lesser of several evils.

  2. First, let me thank you for the well thought out response. While I disagree with you to a great extent on several points, at least you know what you’re talking about…which is more that can be said about me in many instances.

    While I am pointing out that Keynsian economics doesn’t prevent recession, many people don’t realize that it’s not supposed to. That’s on me for not pointing that out. For the record, I’m not an economist though, so I’m doing my best.

    What my point was is simple. I was trying to show that while yes, it does shorted the length of the recession, they come about more frequently. In all honesty, that makes it a wash. In fact, when you take out the military industrial build up with World War II and Vietnam, they have much more frequently, which negates any real benefit.

    It’s my contention that a free market is superior simply because it’s free. Nothing more, nothing less. People lost jobs? Occasionally, those people start their own businesses and end up doing better as a result. Others want someone to solve the problems so they won’t have to. My position is to encourage the former and let latter figure it out on their own. Nothing more.

    While many argue that we can’t allow an “unregulated environment”, no one has yet to demonstrate why. We were far from an unregulated environment when this mess started after all, and one of the most prosperous economies is also the most free (Hong Kong), which is also free from a central bank (yet another root cause of many economic problems including the Great Depression).

    As for the government intervention being “the lesser of several evils”, I can’t accept that. The lesser of several evils is still evil.

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