How to Cure the Recession

Absolutely timely report by The Reason Foundation on just why Keynesian economic practices do not work.

As I’ve articulated before, the United States is following the exact same mistakes Japan made throughout the 1990s, now infamously nicknamed “The Lost Decade.”  Housing bubbles, government intervention into the marketplace, and bailouts and stimulus (”shovel ready”) spending plans tried over and over and over again throughout both the 1990s and now the 2000s did nothing to solve the economic malaise Japan found itself in.

At no point did Japan actually consider free market principles, not unlike what we are doing today.

The Japanese government did not take a cue from the mistakes the US had made decades earlier in 1929–mistakes that turned a recession into a full blown depression lasting the entirety of the 1930s and continued on even after Europe began to experience sustained growth prior to the outbreak of WWII.

One of the great take-aways from this report is encapsulated in the following paragraph:

“The fact is that Congress lacks the expertise to run a bank or create viable business plans for any sector of the economy. Furthermore, lawmakers incentives are to serve their constituencies or better their own personal political careers. This potentially puts them directly at odds with the businesses they are trying to manage. The more the government is involved in directing business activity, the less likely those firms will succeed in maintaining long-term growth.”

The report accurately shows how government intervention got us here, but doesn’t quite capture the entire breadth of the adverse impact of public sector policies on the private sector.  If I may, it misses how both President Bush and Senator McCain tried to arrest the problems at Fannie Mae and Freddie Mac in 2002 and again in 2005.  More compelling to note is that the government’s intervention into the free commerce of free people’s in the following sectors are the true cause of the current global recession:

  • Energy production (resulted in tight supplies and record energy costs/prices)
  • Housing (Community Reinvestment Act and subsequent additions resulted in forcing banks and financials to issue toxic loans known as sub-prime mortgages; caused a demand bubble and an aberration in equity/capital; failure to issue loans to sub prime customers resulted in heavy government fines or litigation by “community organizers” such as ACORN)

Financial Institutions (Fannie Mae and Freddie Mac would bundle the toxic loans and sell them off all over the world; FNM/FDM would guarantee toxic loans made by banks and financials, further exacerbating the problem)We are now following in Japan’s footsteps, making the same exact mistakes and the result will be stagflation and low growth/recession for the entirety of the Obama years (hopefully only 4) and beyond unless and until:

  • Those policies that caused the problem to begin with are repealed
  • We start to adopt free market, pro-growth GDP principles and policies that will spur the investment/entrepreneurial class into to ventures, job growth, and wealth creation.

I have advocated before and continue to do so now.  If we adopt the following policies, the recession will end within 1 quarter of economic activity:

  • Make the Bush Tax Cuts permanent; they expire next year and all of us face the largest tax increase in history in one year’s time
  • Eliminate any and all barriers to trade; pass all pending free trade agreements (FTA).  FTAs open up foreign markets to our exports
  • Eliminate subsidies, they are an interference in the market and are an aberration to price.  US consumers pay more for goods and services thanks to subsidies
  • Eliminate all taxes on small businesses and corporate America.  This will provide more capital to those businesses
  • Change the tax code.  Let us move away from a Karl Marx proposed proportional tax rate to a free-market friendly flat tax; it will spur massive investment, savings, and help create wealth
  • Eliminate Excise and “sin” taxes; they represent a disparate impact on the poor who do not have the disposable income that many of means do. 
  • Eliminate Federal gas taxes.  The states should levy these taxes, not the Fed.  The Fed does nothing to produce oil and gas and they take almost twice the amount in taxation that the producers receive themselves (gas companies earn 9 cents on a gallon of gas; the Fed earns approximately 14 cents and produces nothing!).
  • Eliminate as many government regulations as is possible.  The private sector pays over $1 Trillion in compliance costs every year–now that’s a true stimulus!
  • Eliminate all barriers to energy production; this all started thanks to restrictive supplies to oil/gas.  We are beholden on imports for our energy, which is the largest element of our trade deficit
  • Repeal the Community Reinvestment Act
  • End Fannie Mae and Freddie Mac
  • Cut government spending.  Place a moratorium on all pork barrel spending until such time as the budget is balanced.  While the rest of the country is laying off or firing employees, Congress hasn’t laid off or eliminated not one single position.  The government grows while the private sector contracts.  Unbelievable!
  • Increase interest rates back to a respectable level, 5%.  Loosening the money supply only encourages more ill advised lending, time to tighten it up and bring value back to the dollar.  It may have been the only thing the Fed could do since Congress refused to pass tax cuts, but enough is indeed enough.  At this point low interest rates are counter productive.

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