20 February 2009

Business Cycles

Some of you may be wondering why the government is so interested in "stimulating" the economy to keep growth positive.

Let me tell you -- it's NOT to make the economy stronger OR to protect workers.

It's to help companies and protect jobs.

The trouble with such policies is that they protect the status quo, which includes mispricing, misallocation of resources (capital, labor, materials) and mistaken notions of what works and does not work.

In other words, the "stimulus" impedes the natural ebb and flow of the business cycle and prevents the creative destruction that defines real capitalism.

From everything that I read and hear, I have come to three conclusions:
  1. The banking system is in crisis and DOES need to be rescued/nationalized
  2. Few people know what financial instruments are worth, and we will not get anywhere until those instruments are traded and marked to market.
  3. Everything else (stimulus, mortgage purchases, bailouts, etc.) are a waste of OUR money, excuse for corruption AND non-solution to our problems.
I say all these things as a micro-economist who understands incentives. I am no macro-economist, but I think that there are other, better ways to restore confidence and tame the animal spirits that are causing havoc in markets.

Oh -- and one more important thing: Many politicians are being told to "do something." Such a request -- combined with their natural tendency to command and control -- underpins the terrible ideas that are coming out of DC.

Bottom Line: It's time to have a little humility (we can't do anything), let the cycle run (we're gonna lose a lot of $$), and concentrate on protecting people (not jobs or businesses) until the market finds its feet again.

7 comments:

Fixed Carbon said...

What do macroeconomists say?

Fixed Carbon said...

David: Been thinking more about this post. Does your opposition to much of the stimulus package place you in the economic position of Mises and Hayek, and against that of Keynes?

Jerry said...

David --- Explain how you distinguish between "protecting workers" but "not protecting jobs".

Four Mound Farm said...

Here's a macro view from a bottom feeder that gets laid off in three weeks from today: Why are they talking tax cuts? They should be talking welfare, food stamps, universal healthcare, and housing vouchers to prevent a massive wave of homelessness, disease, and destitution from sweeping the nation. Instead its a great big corporate pork feeding frenzy that will continue to line the pockets of the fat cats and starve the rest of us. Only the infrastructure funding makes any sense, the rest might as well be a giant bonfire of money. The Bush Administration set an example of corruption that somehow became business as usual and I think it may have damaged our country beyond repair. America will lose its middle class, and be handed over to the uber-wealthy at bargain basement prices. People are going to be very down and out, both financially and emotionally. To add insult to injury, TV went dark--an omen? (Poor people can't afford digital flat screen TVs and satellite service.) And this boom and bust cycle has happened over and over in history. They used to call them Panics. And people are going to panic. My grandad killed himself over the commodities market crash of 1929 having lost all of his citrus and avocado orchards in what was then rural Pasadena. Supply and demand economics is a civilized veneer over the law of the jungle. We are expendable fodder the large predators, so we can at least make ourselves taste bad. Maybe it's good TV is gone out here in the rural areas--no news is better than the news has been lately...

Fixed Carbon said...

Wow, Four Mound, you and Rick Santinelli, of a piece!

David Zetland said...

@FC -- I am a fan of Hayek and not of Keynes, yes. (Keynes was right about animal spirits.)

@Jerry -- should be protect *people* with things that 4FM mentions (income support, retraining, etc.)

@4FM -- exactly.

Four Mound Farm said...

Sorry about the rant. I had a week. Layoff coming, TV (PBS is all we watch) goes dark, and then my mom died Saturday night.
I don't believe in ranting on blogs. It's not productive and nobody learns anything. That's why I like Aguanomics. It's very educational for someone like me to read stuff way over my head and try to sort it out, and there are no ravers and ranters to distract the discourse.