"It profits me but little that a vigilant authority always protects the tranquillity of my pleasures and constantly averts all dangers from my path, without my care or concern, if this same authority is the absolute master of my liberty and my life."

--Alexis de Tocqueville, Democracy in America

Tuesday, June 28, 2011

First... Do No Harm

The Hippocratic oath doctors take includes the proscription, "first, do no harm."   The idea is that, if you don't know what to do, doing nothing may be the best course.   That's a hard lesson to learn for anyone, but it seems especially hard to do in the nexus between politics and economics.   Whenever there's an economic downturn, the public clamors for politicians to "do something."   And politicians inevitably do "do something," and the somethings they do often make matters worse.   The most recent example is obvious:   Barack Obama's failed stimulus, a trillion-dollar "something" that made the American economy worse, not better.

On the topic of "doing nothing" as a strategy, here is another interesting article about what Warren Harding did (or, rather, didn't do) in the early 1920s to avoid a deep recession/depression, written from the perspective of Austrian economics.   (It's from the Ludwig von Mises Institute website.)   The recipe (so hard for current politicians) was largely to do nothing and let the market cycle work itself out, with government providing only a stable backdrop of consistent policies.
If the Austrian view is correct — and I believe the theoretical and empirical evidence strongly indicates that it is — then the best approach to recovery would be close to the opposite of these Keynesian strategies. The government budget should be cut, not increased, thereby releasing resources that private actors can use to realign the capital structure.

The money supply should not be increased. Bailouts merely freeze entrepreneurial error in place, instead of allowing the redistribution of resources into the hands of parties better able to provide for consumer demands in light of entrepreneurs' new understanding of real conditions. Emergency lending to troubled firms perpetuates the misallocation of resources and extends favoritism to firms engaged in unsustainable activities at the expense of sound firms prepared to put those resources to more appropriate uses.

This recipe of government austerity is precisely what Harding called for in his 1921 inaugural address.

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