I had a conversation with an institutional asset manager on March 19th of this year about the course of the economy.  This accomplished finance professional expressed optimism that a recovery was inevitable citing (primarily) the dynamic ability of the U.S. economy to adapt to changed market conditions (his secondary source was the development of foreign markets).  I argued my perspective that the "so-called" recovery was an illusion created by deficit-financed spending which did nothing to resolve the economy's ongoing, fundamental problems.

The conversation stuck with me because I am an enthusiastic devotee to the concept of America's economic dynamism.  In fact, I believe that our flexibility and adaptability are the primary reason that the United States was the greatest wealth producing engine in human history.  We enjoy the highest quality of living on the planet today, even during these dismal times, precisely because we had its most dynamic economy.

By Design, Not Divinely Bestowed

America's dynamism, the source of our wealth and economic resiliency, is not a birthright.  It exists only because the economic, political and judicial systems erected by the country's founders (and largely kept intact since) reward creativity, hard work and thoughtful risk-taking.  Our economic system is productive because it allows capital (of any sort) to flow to its best use. 

But American economic adaptability is neither inherent or perpetual.  It may be shackled by sufficiently destructive public policy.

Manufacturing The Great Depression

The Great Depression was created out of an otherwise run-of-the-mill recession.  Misguided public policy, designed precisely to fix the economic downturn, tragically deepened and extended a recession into a prolonged depression.

Beginning in 1929, consecutive Presidents instituted proactive responses to the recession which inhibited flexibility, hobbled dynamism, reduced competitiveness and reinforced deflationary economic trends.

The list of economically destructive policies is extensive and includes:

• The Smoot-Hawley Act which implemented protectionist tariffs and reduced foreign trade precipitously.  Exports and imports fell by more than half. 

• The National Industrial Recovery Act, an unconstitutional keystone of FDR's New Deal, effectively froze the country's manufacturing capacity through command economy directives.  The effort to constrain "destructive competition"  reduced industrial production by 25% in the six months after the law passed.

• The federal imposition of a national minimum wage, which limited both the private sector's ability to adapt to altered economic conditions and to absorb the unemployed.

• The Social Security Act which increased taxes materially in 1937 creating a second acute downturn known as "The Roosevelt Recession"

The Cure for a Recession... Do Nothing

The typical recession in the United States lasts less than a year, because the private sector is ruthlessly efficient at reordering itself and reallocating capital productively.  Downturns are not resolved by Government edict, which in many cases have the effect of impeding recovery.  It is the freedom of millions of businesses and hundreds of millions of individuals to adapt quickly to changed economic conditions that ends recessions, in spite of Federally erected barriers.

The single worst way to resolve a recession is to have the Government attempt a proactive fix.

Point of Clarification: Stimulus is Not a Cure.  It Is a Temporary Pain Killer Which May Limit Economic Damage Only If Appropriate Conditions Exist

Keynesian Economics (which has been perverted by the current Administration) is not so much a cure for a recession as it is a bridge during which the economy adapts to changed market conditions within the context of a normal business cycle.  Stimulus affords the economy time to resolve problems responsible for underutilized productive capacity and begin to reabsorb dormant resources.  The intent of stimulus is to reduce the pain of recessions and to limit self-reinforcing economic damage.

In order for Keynesian Stimulus to worth though, a set of economic pre-conditions must exist.  At no point, to date, following the Housing Bubble have those circumstances prevailed.  Maynard never intended stimulus to be used in response to asset and credit bubbles, nor to prop up inflated economic activity resulting partially from public policy initiatives.

The implemented design of stimulus and the projects on which the money was spent were an inappropriate salve which has proven to be woefully insufficient.

• The structural impediments to a recovery are longer-lived than the design of implemented stimulus, leaving a debilitating gap where Government subsidized jobs evaporate prior to the malaise's resolution. 

• Stimulus money has also been misspent on projects with negative net present economic values which produce no durable employment benefits. 

Keynes would have never endorsed the accumulation of debt which was either destabilizing to the borrower, or was not going to repaid immediately upon recovery.  Obama's deficits are of an order of magnitude and a duration that cause more harm than good under any circumstances, and have no relationship to Keynesian Economics. 


"Part II: Barack Obama Has His Boot On the Neck of the U.S. Economy" to follow