In his timely new book Meltdown: A Free- Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse, economic historian and best-selling author Thomas Woods does for macroeconomics what Henry Hazlitt did for microeconomics in his classic Economics in One Lesson.
Woods observes in the opening chapter that:
Since the fall of 2008, as the stock market plummeted, companies folded, and economic fear and uncertainty began to spread, Americans have been bombarded with a predictable and relentless refrain: the free-market economy has failed. The remedy? According to Barack Obama, the late Bush Administration, Republicans and Democrats in Congress, and the mainstream media, it’s more regulation, more government intervention, more spending, more money creation, and more debt. To add insult to injury, the very people who devised the policies that produced the mess are now posing as the wise public servants who will show us the way out.
…. And of course, that same government failure is being used to justify further increases in government power. The talking heads have been about their usual business of giving the wrong answers to every important question, but this time most of them haven’t even been asking the right questions. Where did all the excess risk, leverage, and debt, not to mention the housing bubble itself, come from?
Woods locates the principal source of the crisis in the mismanagement of the money supply by the Federal Reserve Bank. By inflating the money supply, the Federal Reserve induced credit expansion, leading to an unrealistic real estate housing boom based on lending out mortgages to unqualified customers via quasi governmental agencies such Freddie Mac and Fanny Mae (whose activities were themselves the result of social engineering legislation by both Democratic and Republican congressmen). How better might our current economic collapse be handled? Woods points to the “forgotten” Depression of 1920 -1921, when the government did, well, almost nothing:
Not surprisingly, many modern economists who have studied the depression have been have been unable to explain how the recovery could have been so swift and sweeping even though the federal government and the Federal Reserve refrained from employing any of the macroeconomic tools—public works spending, government deficits, inflationary monetary policy—that conventional wisdom recommends as the solutions to economic slowdowns…
‘In 1920–21,’ says Benjamin Anderson, ‘we took our losses, we readjusted our financial structure, we endured our depression, and in August 1921 we started up again…The rally in business production and employment that started in August 1921 was soundly based on a drastic cleaning up of credit weakness, a drastic reduction in the costs of production, and on the free play of private enterprise. It was not based on governmental policy designed to make business good.’ The federal government did not run unbalanced budgets and prime the pump through increased expenditures. Rather, there prevailed the old-fashioned view that government should keep spending and taxation low and reduce the public debt.
This astringently laissez-faire solution reflects Woods’ affiliation with the Austrian school of economics, and in fact he is a senior fellow at the Ludwig von Mises Institute (in Auburn, AL), named for one of its foremost economic theorists. The Austrian school champions laissez-faire economic practice based largely on the extreme difficulty — amounting to a practical impossibility — of bureaucratic and centralized entities such as governments to successfully devise economic approaches and solutions, since they can never fully penetrate to the multitudinous sources of economic activity in individual human motivations and decisions. Thus the ungainly activities of governmental attempts to correct markets and regulate industries are at best doomed to failure and at worst likely to make things worse.
The primary economic nemesis of the Austrians was the British economist John Maynard Keynes, whose theories were influential in a deeply damaging way during the Great Depression, in the form of big government spending, high taxation, inflation, and make-work programs. The failure of such policies to end the Great Depression largely discredited Keynesianism and the success of the Reagan years in following the supply-side theories of Arthur Laffer and colleagues more in line with Friedman and Mises appeared to finish Keynes off until the surprising resurrection of his theories in the current disastrous “priming the pump” economic policies of Presidents Bush and Obama.
What is Woods’ program to address the current crisis?
He proposes the following measures to escape “the phony, capital consuming kind of prosperity] that comes from artificial credit expansion or Keynesian ‘stimulus’…”
1. Let firms go bankrupt. (A firm does not disappear when it declares bankruptcy. Its capital equipment and its assets continue to exist. But they pass out of hands of those who have failed to employ them in ways that best satisfy the public and into the hands of those more likely to do a capable job.)
2. Abolish Fannie and Freddie Mac. (Government engineering promoting home ownerships to those could not afford them has been one of the major causes of the current deep downturn)
3. Stop the bailouts and cut government spending. Subsidizing the inefficient corporations only prolongs their death agony and using taxpayer’s money to do so is immoral. (Out of control spending only produces higher prices, taxes. borrowing and passes on the debt to future generations)
4. End government manipulation of money. (Is a system that has caused the dollar to lose 95% of its value really the best of all possible systems?)
5. Put the Fed on the table. (The Fed is responsible for elevating moral hazard into a permanent feature of banking.)
6. End the monopoly money. (Some people have called for a return to the gold standard to replace fiat money, or even “privatize money.” Maintaining a stable currency without a commodity standard is like maintaining morality with shifting Ten Commandments. )
In the seven chapters of his well-documented and footnoted book, Woods explains in detail why he favors the above reforms and more.
We shall see in the years ahead whether the Keynesian nostrums proffered by Bush /Obama for economic recovery “work.” History and common sense tell us they won’t. Therein lies an opportunity to return to the economic wisdom of the Founding Fathers and the Constitution for the common good, limited government prosperity, and freedom of us all as families and persons. As Dr. Woods said recently:
People are ready to listen to reasonable, previously neglected ideas, especially if the people who hold them managed to predict the current crisis — as indeed the economists of the Austrian School did. It’s up to us to bring them these ideas.
Mission accomplished in this essential book. Take time to read it and argue with it. Woods is a powerful persuader. I, for one, would like to see a televised debate between Paul Krugman and Thomas Woods on these crucial questions. Let the public decide.
