6 economic policies the government must not pursue for a recovery to happen

Since the collapse of the United States economy in 2007 and 2008, the federal and state governments and the Federal Reserve have taken serious actions in order to stave off the inevitable crisis and to grow the economy. Well, the economy has not gotten better and the crisis will become a whole lot worse.

In the process of attempting to recover the financial system, bailout certain industries and encourage American consumers to spend, the U.S. has entered an abyss that will certainly not allow any escape: debt, deficits, a bloated government, inflation and bankruptcy.

Unfortunately, there are many politicians, Keynesian economists and pundits who are calling for greater economic stimulus, a larger quantitative easing, more spending and higher taxes to bring prosperity back to the country. Although it’s quite a cliché nowadays to say this, but the definition of insanity is doing the same thing repeatedly and expecting different results.

Perhaps David M. Walker, former comptroller general of the Government Accountability Office (GAO), had it right when he stated in an interview in 2009: “The most serious threat to the United States is not someone hiding in a cave in Afghanistan but our own fiscal irresponsibility.”

Of course, the nation’s economic disrepair isn’t something that happened overnight. It was decades of policies of low interest rates, sacrificing the future for the present, new and enhanced entitlement benefits and countless budget deficits.

Let’s look back to Henry Hazlitt’s “Economics in One Lesson” briefly. In the book, he compares two brothers who have just inherited $50,000 each.

One brother decides to go wild with his inheritance and spend a lot of money. He goes into restaurants and tips the entire staff, everyone likes him and they give him great service. Now Keynesians would believe this is great because the staff is getting more money. But what about the other brother?

Well, he is living a more subdued lifestyle by saving and investing. Again, Keynesians would believe this is terrible because he is not consuming anything and is hoarding all of his wealth.  As time goes on, the consuming brother lost all of his money and has no more money to pump into the economy. The brother who was fiscally prudent still has all of his wealth and more so and has also benefitted the economy long-term because of the money he had put into savings and investments at his bank helped create companies and jobs and has done a lot more for the economy than the other short-term quick fix.

This is a fantastic analogy to describe the present state of the U.S. economy.

Here are six economic policies the government must not pursue for a recovery to happen.

Inflate

Who benefits from inflation? As the freshly created money goes through the entire system, no one reaps the supposed rewards from inflation. If it was such a fantastic policy to pursue then how come the U.S. doesn’t print out $1 million for each citizen? The world has seen the effects of inflation: Zimbabwe, the Weimar Republic, Bolivia and elsewhere – sorry Paul Krugman, Hitler didn’t come to power because of sound money and gold.

A fiat hegemony currency is dangerous to any nation, especially to the U.S. because it has too many commitments to wars, social programs, international organizations and other measures that have cost the country greatly. In order to pay off these obligations, the Federal Reserve has to print more money and this devalues the currency.

The only people who benefit from this are the extremely wealthy, the military-industrial complex and politicians, but even that is only short-term. Once the U.S. dollar collapses they will be in as much trouble as the middle- and lower-income classes.

Ben Bernanke flying around in his helicopter will not generate wealth. If it did indeed do so then everyone would be rich right now, even the hippies in the Occupy movement.

Delay or prevent liquidation

Too big to fail. It’ll bankrupt Detroit. The end of America. There were a lot of fallacious arguments being espoused at the height of the 2007/2008 financial collapse. Instead of allowing businesses and industry to shut down and let the assets and property be allocated, the federal government decided to intervene and bailout the automobile industry and the big banks.

In a recession, the market indicates that the incompetent people should be taken over by the competent people. After the government decided to dole out hundreds of billions of dollars, what could have been a one or two-year recession turned into a depression.

Even the Federal Reserve got into the action by secretly shelling out $16 trillion to foreign financial institutions and central banks. For the entire list of entities that had been visited by Bernanke’s helicopter, click here.

Supplying cheap money to fat cats on Wall Street is obviously going to create a mess.

Peter Schiff, president of Euro Pacific Capital, once quipped: “If a kindergarten teacher gave her students pixie sticks and soda pop, then she leaves the classroom and comes back and sees all her students fighting, making a mess and acting crazy, who are you going to blame; the kindergarten students or the teacher?”

Keep wage rates up

When federal governments and central banks attempt to artificially manage wage rates in a sluggish economic climate it transforms into massive unemployment numbers. Right now, the unemployment rate isn’t 7.9 percent; it’s actually in the low- to mid-20s.

“Furthermore, in a deflation, when prices are falling, keeping the same rate of money wages means that real wage rates have been pushed higher. In the face of falling business demand, this greatly aggravates the unemployment problem,” stated Rothbard.

Keep prices up

The results of inflation are seen every single day, whether it’s at the grocery store, gas station or clothing retailer. By having prices above the levels permitted by the free market this leads to “unsalable surpluses” and any failing attempt at returning to pre-recession prosperity.

As the Federal Reserve continues to pump tens of billions of dollars into the economy each month, the consequences of these policies are visible and are directly related to the central bank’s monetary actions.

Subsidize unemployment

Proponents of unemployment benefits and welfare like to make the case that it doesn’t increase the jobless rates in a country. Usually a Keynesian economist, such as Robert Reich, pegs the question on national television: who doesn’t want to have a job?

Sure, Americans want to have a job, but if you can get paid to sit at home and do nothing, which option would you take? Rothbard even confirmed the notion that “any subsidization of unemployment (via unemployment ‘insurance,’ relief, etc.) will prolong unemployment indefinitely, and delay the shift of workers to the fields where jobs are available.”

Nobel laureate Milton Friedman provided examples of how the unemployed and long-term welfare recipients are subsidized in his book and television series “Free to Choose.” One British man remained unemployed for years because he received a certain amount each month and if he would have gotten a job then he would have earned only a few dollars more every month. So, why work?

Pro-consumption, anti-savings

The insistent monetary policy of low interest rates is one that damages the future, while trying to maintain the present. Low interest rates are a policy that exacerbates the idea that consumption generates wealth and savings damages any sort of economic recovery. In fact, quite the opposite is true: constant consumption creates debt and savings brings prosperity (see Hazlitt example above).

Meanwhile, the federal government promotes consumption through the domestic policies of food stamps, social assistance and relief payments – 128 million Americans receive some sort of remuneration from the federal government each month. It can also discourage productivity, investment and saving through the means of higher taxes, inflation and low interest rates. Of course, this leads to tremendous economic ramifications: no capital, no businesses, no jobs.

“Any increase in the relative size of government in the economy, therefore, shifts the societal consumption-investment ratio in favor of consumption, and prolongs the depression,” wrote Rothbard.

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