How Government Impedes Recovery

By Robert Higgs for the Mises Institute

Before 1929, the US government did not systematically attempt to moderate or reverse general business contractions. Recovery usually came about spontaneously within the market system within a year or two. Exceptions to this rule, especially the protracted slump of the mid-1890s, reflected major uncertainties about the government’s adherence to the gold standard and about its possible interference in the market system as urged by Populists and others. Beginning with the Hoover administration and running to the present, however, the federal government has attempted by a great variety of measures to smooth the boom-bust cycle.

These measures, which run the gamut from “pump-priming” expenditures to protectionism to changes in taxes and regulations to forced reorganizations of broad sectors of the economy, share three qualities: they focus on the attainment of visible benefits while more or less disregarding unseen burdens and other negative consequences; they focus on ostensibly beneficial short-term changes while more or less disregarding harmful longer-term effects; and they represent actions founded on the pretense of knowledge — top-down impositions by central planners who use the government’s coercive power to make the general public act in accordance with the ruling elite’s one-size-fits-all designs.

During the 1930s, these actions began with the Hoover administration’s interference with the wage rates offered by major employers; attempts to keep up farm commodity prices; increases in public-works spending; approval of the Smoot-Hawley tariff bill; creation of the Reconstruction Finance Corporation to prop up banks and other firms; sponsorship of steep tax increases; and many other measures. The Roosevelt administration went much further by taking the country off the gold standard; cartelizing the entire industrial economy; semicartelizing agriculture; further increasing taxes; greatly extending the scope of federal regulations, especially in banking, securities markets, and labor markets, among many others; engaging the federal government directly in the production and marketing of electricity; and intervening in many other ways. Notwithstanding all of these ostensibly anti-Depression measures, full recovery had not been achieved when the New Deal petered out in the late 1930s.

The George W. Bush and Obama administrations seemingly looked to the New Deal as a model of how to respond to a perceived economic emergency. Bush undertook stimulus programs and, more important, the Troubled Assets Relief Program as well as a host of bailouts, takeovers, and other interventions in financial markets by the Treasury and the Fed. Obama upped the ante by gaining enactment of a massive “stimulus” program, taking over GM and Chrysler, and continuing to use the Fed and the Treasury to flood the economy with liquidity in hopes of stimulating lending and consumer spending. Notwithstanding the welter of government antirecession actions during the past three years, the economy continues to wallow far short of complete recovery, with high unemployment, depressed private investment, and tepid growth of real output, at most.

The webinar to be presented on September 16, via the Mises Academy, will deal with these topics, drawing on examples from the Great Depression and the present recession to show how the government’s antislump actions and programs have the effect overwhelmingly of slowing, rather than speeding, recovery. By propping up de facto bankrupt banks and other firms and malinvestments (especially in housing) that should be liquidated, interfering with the operation of the price system, and creating regime uncertainty, the government’s antislump activity tends to make slumps deeper and longer than they would be if the government followed the traditional pre-1929 policy of letting the economy repair itself.

Robert Higgs is senior fellow in political economy for the Independent Institute and editor of The Independent Review. He is the 2007 recipient of the Gary G. Schlarbaum Prize for Lifetime Achievement in the Cause of Liberty.

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One Response to How Government Impedes Recovery

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