Three blind mice. Three blind mice. See how they run.

There are three schools of thought concerning recessions and the business cycle:

  • Keynesian thought is that recessions are bad and should be fought vigorously with low interest rates and deficit government spending, even on make-work projects, to “prime the pump” and stimulate economic growth.

  • Monetarist thought is that recessions are bad and should be fought vigorously with consistent and predictable money supply growth irrespective of interest rates or government spending.

  • Austrian thought is that recessions are normal and a natural part of the business cycle. In a boom, investment and production tends to get out of alignment with consumer preferences so that a retrenchment is beneficial as well as necessary.

U.S. economic policy is entirely dominated by Keynesian and Monetarist thinking. Alan Greenspan and Ben Bernanke “successfully” steered the U.S. through more than twenty years with only two relatively short and shallow recessions by keeping interest rates artificially low and the money supply growing at a rate that was probably at least double the rate needed to match economic and population growth.

Low interest rates produced low saving rates. With little savings in the U.S., we turned to China and the Gulf States of the Middle East to finance our government deficits. At the same time we neglected our factories, preferring to purchase imported goods, and paying for them with plentiful paper dollars. We thought we could have capitalism without capital, without production, and without risk of failure.

These policies led to the development of an economy based more on consumption and less on production. This is a sure route to excessive debt, much of it used to finance imports.

Keynesian and Monetarist policies can make an economy grow when it otherwise would not. However, preventing recessions is like trying to only breathe in. The U.S. economy is collectively exhaling now and will for some time.

Where will we go from here? The pursuit of Keynesian and Monetarist policies following a collapse will bring stagnation. Witness the eighteen years of stagnation in Japan since its stock market bubble burst in 1989. Stocks there have recently touched a twenty year low.

We’ve seen this movie before. Government spending did not end the unemployment problem in the 1930’s – all it did was to create an enormous debt. That was the opinion of Henry Morgenthau, Treasury Secretary under Franklin Roosevelt.

Economic theories are blind. They operate based not on the stated intent of bureaucrats, but on the incentives inherent within them. Austrian economic theory is like tough-love. In return for pain in the short run, it will yield prosperity in the long run, especially when combined with sound money.

Bureaucrats and congressmen get their perks and raises; we are the blind mice whose tails are cut off.

What do you think?

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2 responses to “Three blind mice. Three blind mice. See how they run.

  1. Dennis Grimski

    Interesting article. Without knowing the formal names, I concur with the monetary response “options” noted, and firmly believe in the less popular “Austrian” school of thought. At this time, under the Monetarist option, all the USA is racking up is a huge debt to China, so when we do finally crash, we’ll never be able to pay our debt. I guess we should all go out an buy Rossetta Stone Software, and learn to speak Chinese, because in 15 years, it will be our official language. Gary, from where do these three (3) school option names originate, and why?

  2. Gary, thanks for the article. I agree that recessions are a natural occurance, and actually need to happen when economic forces push in that direction.

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