Economics in One Lesson

This short book, written by Henry Hazlitt, is one of the most concise yet easily comprehensible introduction to sound economics ever written. Hazlitt has the ability to take a commonly accepted idea and then to prompt the reader to think about that accepted idea, eventually showing that what may be commonly accepted is also thoroughly nonsensical. Though it was written in 1946, the vast majority of the fallacies which Hazlitt explodes are still commonly accepted today, and virtually everyone has something they need to learn from it.

Read it here: Economics in One Lesson.

Consumption and the Economy

It has become a highly entrenched orthodoxy in public opinion, public policy, and academia that consumption is fundamentally good for the economy. If the economy is not doing well, then it is because consumers are not doing their job well enough, and the solution is that consumption needs to be increased. If individuals are not willing to increase their consumption, then it falls to the government to increase its consumption by increasing expenditures; and typically deficits as well, because if the government were to pay for its increased consumption at the time through increased taxes, then that would further discourage individuals’ consumption. You can find this belief in people from Paul Krugman to George W. Bush. This orthodoxy is rooted in the General Theory of Employment, Interest and Money (which can be read online here), written by John Maynard Keynes, who is today considered the father of “modern economics.”

However, modern mainstream economics —more correctly known as the neoclassical synthesis, because it incorporates most of the formal structure of classical economics along with supposed Keynesian “insights” into how economies work on the macro level— has failed. It failed to predict this recession, and it has failed in trying to correct the flaws in the economy that have led to this recession. A major reason why it has failed is because of this view of consumption.

The crux of the debate over the nature of consumption is Say’s Law, often called the law of markets. In essence, Say’s Law states that the goods and services an individual supplies to the market also constitute that individual’s demand for other goods and services, or simply that people buy real goods and services and sell real goods and services in exchange for the ones that they buy. Your production determines how much you can consume, because the total amount of goods and services in the economy is simply the sum of the production of each individual. Money simply acts as a method of indirect exchange, but at the end of the day, it is real goods and services that are being produced, consumed, and exchanged. Money, and particularly changes in the quantity of money, can have interesting effects on the real economy, but we can never lose sight, as Keynes does, of the fundamentally “real” nature of the economy: the actual production and consumption of goods and services.

The major implication of Say’s Law is that there can never be a general “glut” or overproduction of all goods and services, or conversely, there can never be a lack of aggregate demand, or under-consumption: the reason being that the price mechanism of the market —where the actions of every individual in the market, through the goal of maximizing profit by buying in the cheapest market while selling in the dearest, result in prices that ensure an economic equilibrium— creates an equilibrium in which supply and demand are equal. The whole body of thought that is Keynesianism, however, rests on the belief that Say’s Law is false. Keynes’ reasoning for this belief was that he observed that, in the real world, prices could be “sticky,” or resistant to change. If some shock occurred in the economy that would encourage people to save more, such as a recession, and if prices for consumer goods did not fall in response to this change, then one could expect to see a general surplus of goods and services in the economy. Say’s Law assumes that prices can change.

However, there is one more important assumption that Say’s Law is based on, and that assumption is that the market in consideration is a free market, with the absence of government regulations, interventions, and special privileges for certain individuals or groups. The world in which Keynes was writing did not have a free market. For example, during the Great Depression, President Hoover quickly embarked after the stock market crash to ensure that wages would not fall, even though prices in the economy were falling all around. He met with business leaders and encouraged work sharing, all in the name of preventing wages from falling, because he believed, in a proto-Keynesian manner, that if wages were to fall because of the falling demand for businesses’ products, which was in turn a result of the falling demand for those products, then the fall in wages would cause a further decrease in demand and would result. This hypothetical scenario, where a small fall in demand could completely destroy the economy, is called a deflationary spiral. A deeply held belief in this possibility is a major way that Keynesians try to justify massive government spending and inflation in periods of economic turbulence. And so it came to be that through Hoover’s policies of propping up wages, and through the efforts of the unions through their special governmental privileges which enabled them to prop up, increase, and prevent their wages from falling, the economy ended up in a situation in which the price of labor was no longer easily changeable in a downward direction. The result in the deflationary economy of the depression was, as expect, a large surplus of labor, generally known as unemployment, which reached unprecedented levels during the Great Depression.

Therefore, because the labor market is so important to the economy as a whole, given that most people rely on selling their labor to make an income and the fact that all goods and services require labor to be produced, the sabotage of the price mechanism in the labor market had drastic economic results. So what is the solution to such a problem? The answer is quite simple, and should have been to Keynes as well: it is that the government should stop restricting the movement of prices in the market and should stop enabling other organizations, such as labor unions, from doing the same. Keynes, however, a liberal of his day, did not want to attack the unions or prevent them from doing as they pleased, and so his proposed “solution” was to print money and use government spending to raise prices in the economy, which would then cause any wages that stayed constant to drop in real terms. Inflation would lower any prices that did not move up proportionately with the rate of inflation. The excess of labor caused by prices being too high would be reduced and employment restored.

Keynes’ “solution,” however, fails not only to address the underlying problem in the economy, but it also entails a course of action with a host of its own problems. While writing and arguing against what he considered the fallacies of the laissez-faire economists, he argued against the current economic policies present in the world, rather than actual free market economies, of which there were none. He fails to realize that a free market would in fact be stable and equalizing, where there could be no lack of aggregate demand because it would be in the interest of the individuals in the markets to lower their prices until they could sell all of their products. He inspired fear of deflation, and a love of inflation and government spending, all of which continue to damage our economies and our study of economics to this day. Consumption may be the final purpose of all economic activity, but saving and capital accumulation is a vital process to the production of consumer goods. Keynes not only thought that saving was unimportant, but destructive in itself; contradictory he could be on the subject, however. Many of today’s economists continue in this tradition: “consume more, save less, and the economy shall prosper” goes their mantra. We are, however, all the poorer in more sense than one because of this grand mistake.

Notes on Healthcare, Part I: Fundamentals and the ERC-GAC

Opinions and arguments in the recently renewed debate over healthcare have been quite strong, and thus the debate has been a heated one. One need merely look, for example, at Rep. Joe Wilson’s outburst of “you lie!” during Obama’s speech on healthcare, or at the thousands of people who have spoken out at “town hall meetings” to debate such issues. Republicans and Democrats, it seems, are entering into a confrontation greater than any in the last few years, even though everyone speaks of the need for “healthcare reform.”

So it may be surprising to think about how much alike our members of Congress really think on healthcare. Politicization has created a huge debate out of, relatively speaking, small differences. Just about everyone agrees on certain major points. Such issues on which there is general agreement include the desire for universal healthcare insurance, a demand for a general government program on healthcare, a want to continue the Medicare and Medicaid programs, a need to reform both of these programs to cut their costs while not benefits, a stipulation that insurance companies not discriminate on the basis of existing medical conditions, an agreement that health insurance “costs too much” and that the insurance companies make “too much profit,” an agreement that large amounts of regulation, bureaucratization, subsidization, and government involvement in healthcare are all needed in the industry. But most fundamentally, there is roughly a consensus that having a free market in the healthcare industry would fundamentally be wrong. Even most of the congressmen who often talk about free markets are not proposing a free market for the healthcare industry.

Why is this so? What is their reasoning for these different claims and this virtual consensus? This is what I want to start analyzing in this blog post, but this is a huge issue: several large books could be written on the subject with still plenty left over to consider. And so we must begin with a fundamental insight into the general nature of the anti-free market thought process. This insight is that the arguments against the free market in the healthcare industry focus on supposed “exceptions” that the healthcare industry has with regards to the proper working of a free market, thus requiring government intervention because of these exceptions. There are, of course, those socialists who reject markets all together, but those arguments get less support than those that speak of “exceptions” to the general rules of markets in the healthcare industry, and so I focus more on the “exception” supporters.

One of the biggest so-called “exceptions” that healthcare poses deals with emergency medical care. The chain of reasoning goes something like this: Joe can’t afford health insurance because he’s too poor and it’s too expensive, or because he has some preexisting condition that causes the insurance companies to refuse to insure him. Joe then has to rely on emergency medical care for his healthcare. Emergency medical care is expensive, and Joe has no way to pay. Then because the emergency medical provider is taking on a large cost without remuneration from Joe, they have to raise their prices on all of their other, paying customers. Because the prices for healthcare go up, fewer people can afford them, and then there are more Joe’s out there who have to rely on emergency medical care and continue to drive up the costs, resulting in a vicious cycle. Let us call this vicious cycle the emergency room common-good abuse cycle, or the ERC-GAC.

The fallacy involved here is that this problem of free emergency medical service for those who cannot pay is a result of some market process. It is considered a “market failure” in a basic neo-classical analysis. This is particularly ironic given that many liberals/socialists constantly lambast businesses for callousness against the poor when it comes to making profits, because these liberals/socialist then turn around and blame the “free market” for providing free healthcare to those who can’t pay for it and then blaming the “free market” for the problems which result because of this. This is, of course, a problem resulting from government intervention in the healthcare industry, supported by the liberal/socialist sentiment that no one should be denied healthcare on the basis of ability to pay for it, as they see healthcare as a “right.” The government has passed laws that prevent hospitals and emergency rooms from turning away anyone in need, partially socializing emergency medical care, and now that this partial socialization is causing major problems in the industry, the liberals are proposing... why, more socialization of course!

In a free market, any hospital or emergency room that took in people who had no ability to pay and who are now expecting free medical care that then tried to turn around and pass those costs to its paying customers would be driven out of business by the competition of those hospitals who would not pass on other people’s costs to those with the ability to pay, and healthcare costs would stay low. The immediate objection that most people pose to this is that healthcare is a “right” and that no single person should ever be denied healthcare if they do not posses the ability to pay the full price for their healthcare. However, if there existed a free market in the healthcare industry, it would not mean that a large number of people, particularly the poor, would be unable to purchase healthcare. But due to reasons discussed further on, this would not be the case.

The second part of the ERCGAC has to do with insurance and people with preexisting conditions. This brings up the very important definition of the function of insurance, which is blatantly ignored in virtually any discussion on healthcare insurance. Insurance is something bought and sold in a market which guarantees the purchaser of the insurance policy to certain remuneration if a certain event happens to occur. The purpose, of course, is for people to reduce the amount of risk they take on in their life.

Market Power

When one thinks of a monopoly today, one thinks of large business or corporation that exercises total control of an industry while often exercising any means necessary to maintain that control. The common thoughts are that no one can stand up to a monopoly, take down a monopoly, and that the effects of a monopoly are destructive to the general welfare. The common conclusion is, therefore, that government should regulate or break up monopolies or companies with “too much” market power wherever they happen to arise. This is, however, a frightfully misguided chain of reasoning that ignores the mechanics of a free market, when such a market exists, that is.

In a free market, the ability of an individual, business, or corporation to compete on the market is not restricted by any government rules, regulations, obstructions, or inhibitions, and nor is any individual, business, or corporation allowed to use force to prevent or discourage others from competing (which is the government’s responsibility to prevent). And so if one thinks of a monopoly that uses practices such as intimidation, threats of physical violence, special government privileges, or bribery of public officials to maintain its monopolistic position, then one is either not thinking about a free market or is thinking about situations which should not exist in a free market and which the institutions present in a free market tend towards eliminating, though there is only so much that can effectively be done at any time to prevent criminal activity in any system.

However, many people will take their objections to monopolies farther and say that monopolies that fit the common conception of a coercive business or corporation that is unchallengeable and destructive to the general welfare will arise even in a free market where no direct force is used against competitors or potential competitors. Many of them therefore think that the government should intervene in these markets in order for the market to even be considered free in the first place. It is not true, however, that market power accumulated in a free market is either unchallengeable or destructive to the general welfare. To see why, one must have a proper understanding of the mechanics of a free market.

And so in order to understand these mechanics, let us first examine a situation in which there are no governmental barriers to competition and also in which there are proper governmental restrictions of the use of force and coercion. For example, no potential entrant in the market can be legally prevented from competing and no business can threaten the entrant with physical force, whether initiated from the business or from the government on the business’s behalf. This is the free market. Now let us suppose that we have a certain industry, and in this industry, let us say that there is a particular firm with a large amount of market power: for example, suppose it has a market share of 80%, meaning that this particular firm sells 80% of the good or service that the industry it is a part of produces. In essence, this firm is a monopoly. Let it also be stated, however, that a company with a high market share does not necessarily decide to raise prices to a monopolistic level, for reasons which should become clear after reading this.

Now, this monopoly can change the price at which it sells its good or service, just like all businesses can. However, because this business has market power, when it changes its prices, the effect is not the same as when a business without market power changes its prices. In a very highly competitive market, when one business raises its prices, consumers can immediately just buy that same good or service from another business for a lower price, and thus by raising its price, that one business has lost money because it has lost all of or nearly all of its sales. When a certain business has a large amount of market power, then the effect is not nearly so powerful, and sometimes a business can profit by raising its prices because the increased amount of profit from its sales outweigh the total loss in the quantity sold. It is for this reason that most people learn in introductory economics that monopolies are “inefficient” compared to a perfectly competitive market, and it is for this reason that market power often makes companies who have it very profitable.

But it is this very profit that works to check the power of a monopoly. Let us say that our supposed business with an 80% market share is raising its prices and also making a lot more profit than it was before it decided to raise its prices. A standard, classical, Econ 101 analysis of monopoly would call this inefficient, because the higher price would discourage potential buyers that the monopoly could have produced for. However, in a free market, competition is free to all comers, and thus, if the monopoly has impacted the market price for a good or service, the monopoly has suddenly created a huge profit potential for potential entrants in their particular market. This potential profit then enables people to get the funds to start their own businesses in the monopoly’s industry and then the new competition drives the price back down to its efficient level. If the price for the good or service in this particular industry is too low, then the lack of profits will drive certain businesses out of the industry letting the remaining ones which were more efficient raise their prices back to where they can continue to make enough money to maintain their businesses.

There is however, still yet another objection to the postulate that a free market can properly deal with monopolies simply through the market process. This particular fallacy is what I call the shortsighted market fallacy with respect to market power (I have never heard anyone else give a name for this fallacy, so I took the liberty for efficiency’s sake), which goes something like this: if competitors try to enter a market in which a monopoly has raised prices higher than they should be, then the monopoly will be able to lower its prices below what prices should be so that none of the competitors can then profit, and will therefore go out of business. Then, because the monopoly has more resources and is more established than the newcomers, it will outlast them, and then the monopoly can raise its prices once again to a higher price than they should be at (the price that “should” exist in the market is determined by an inordinate number of factors, but it is always the price that a free market price tends towards. Simply consider it the “market price”).

This fallacy rests on several false assumptions. The first is that speculators in the market will not react to a large temporal inequality of prices. In other words, when the monopoly lowers its prices below a sustainable level, people who fall for the shortsighted market fallacy do not take into account the huge amount of profit to be made from buying large quantities of what the monopoly produces and then selling these quantities after the monopoly raises the prices back to the very high levels. There are huge gains to be made from taking advantage of this inequality of prices. “Buy in the cheapest market, sell in the dearest” has always been one of the easiest ways to make a profit. This weakens the power of the monopoly by first dramatically increasing its sales when its selling at a price that it cannot sustain and then again by creating a competitive market after the price goes back up, because the price cannot go back to where the monopoly wants it because the speculators begin selling the good the monopoly produces. The other false assumption that this fallacy lies on is that, after the price goes back up to an artificially high monopoly level, the same process of threatened competition resumes because the same profit motive is created. And so for these two reasons, I call this fallacy the shortsighted market fallacy, as it does not take into account the other actions that the supposed actions of the monopoly create and it does not take into account the continuation of time.

Therefore, it cannot accurately be contested that government methods of “anti-trust” are necessary, beneficial, or necessary to call a market “free.” Nor can a free market be opposed on the grounds that monopolies would take it over and destroy the general welfare of the economy. The free market is the best way to handle the issue of prices and market power, because competition will always monitor it and cause it to constantly tend towards the efficient level. And it should also be seen that a company, even with a large market share, will not usually try to raise prices to monopoly levels, even though still pursuing the benefits of selling a large quantity of a good to the market and the efficiency benefits that come from economies of scale.

Taxing Your Free Choice: The Proposal for a Soda Tax

With obesity levels in the United States steadily rising and with the national desire for a healthcare plan that will reform healthcare and cut costs while expanding benefits and insurance to more of the population, President Obama and leaders in the Senate are considering a new tax on sugary soft drinks. The potential goals for such an excise tax would be to discourage the consumption of sugary drinks, make the population healthier by fighting obesity, and to help pay for a potential healthcare plan that could possibly cost between $750 billion and 1$ trillion. The logic works like this: taxing a certain good raises its price, and taxing a certain good relative to other goods will, all other things equal, lower the quantity demanded of that certain good. And so if the government were to place an excise tax on soda, the amount of soda Americans consume would most likely decrease, which could result in health benefits, assuming that the decrease in consumption in soda is not offset by some increase in a different unhealthy eating habit. Then, if the tax were enacted, it would raise revenue for the government, which could be put towards paying for increases in government healthcare. It is certainly a simple enough plan.

However, there is one serious problem with this proposal, and that is that there is no justification for forcibly punishing people’s decisions about themselves and what they decide to eat or drink. This excise tax would be economically destructive because any thing that changes people’s decisions from what they would do in the absence of coercion makes them worse off, assuming that the activity being decided on doesn’t adversely affect third parties. What people decide to eat or drink doesn’t place any costs on other people in a free market. People are free both to decide what they consume and other people are free from possible negative affects of those people’s decisions.

But this brings us to another problem: healthcare. When the government “provides” healthcare by taxing the people and then paying benefits to other people, the condition on which freedom works in this regard is suddenly destroyed, because someone’s decisions about the foods and drinks they consume can suddenly cost everyone in society because they will end up paying for the increased healthcare costs someone with unhealthy habits through their taxes. Suddenly, there is a reason for everyone to have an interest in controlling what everyone else does. No longer will freedom of choice be beneficial to those who live healthy lifestyles because they will pay for the poor choices of others. And so the freedom of people to decide what they want to consume based on the costs to their health their decisions can cause will be restricted. This is just one of the many costs of government-provided healthcare.

In a free market, the costs of unhealthy decisions are born by the individuals who make the decisions, and thus they have the freedom of making the decision themselves by weighing the costs and benefits of each possible decision being considered, and then choosing the best course of action. If an individual wants to consume large amounts of soda and sugary drinks and to bear the costs of poor health from high caloric consumption among others, then they are better off if their decision is not affected and they are allowed to consume large amounts of soda and sugary drinks, because they have determined that the most beneficial course of action and anything that changes their decision forcibly such as discouraging that through an excise tax on soda is putting them into a situation in which all of their potential decisions are worse off than the decision they could have made in the absence of that tax.

There is also the issue of insurance. One might think that through insurance, the costs of someone’s decisions that pertain to their health could be placed on others through the way that everyone pays into insurance and then the costs are born by the insurance company as a whole, paid for by the premiums of everyone who wants coverage. However, this is not so, because those who place higher costs than others on the insurance company are made to pay for their decisions through higher premiums. The purpose of insurance provision is to provide security from risk, not to socialize someone’s personal costs, and that’s how it works in a free market, through if the government gets its way by making it illegal for insurance companies to discriminate on the basis of pre-existing conditions, insurance could be turned into a method of partial socialization. Discrimination is not a bad thing when it applies to pricing for insurance, because it’s discriminatory pricing that protects our individual freedom when it comes to health decisions.

So it should be clear to just about anyone that the soda tax is not a straightforward way to fix the healthcare problem, but a problem in itself as a threat to economic welfare and freedom in general. Healthcare has its problems, and these problems have their solutions, put this particular proposal is not one of those solutions, simply another problem.

Obama Threatens Economy with Protectionism

Last Friday, President Obama made the decision to place a three-year tariff on imported tires for cars and light trucks from China, starting at 35%. The decision was prompted by a complaint from United Steelworkers and it is supported by the A.F.L.-C.I.O, the largest organization of unions in the United States. There is, however, absolutely no excuse for placing barriers on trade, particularly when the world economy has been shaky due to the financial crisis. Labor unions are just about the only organizations supporting such tariffs, arguing that the tariff will increase production of tires in the United States and will protect or create American jobs.

Tariffs, though they are often supported in the name of jobs, always have the effects of destroying trade, specialization, international cooperation, and ultimately economic wealth for all nations. The extent to which they “create jobs” is really their effect of creating a need for more work to produce the same amount of goods and services as the economy was producing before the tariff was enacted. This creates waste, inefficiency, and poverty, while also being entirely unnecessary and counterproductive with respect to employment levels; and when one considers the fact that tariffs are often responded to with retaliatory tariffs from other countries, the effects often end up being much more devastating than one would predict from the enactment of a single tariff. Such “trade wars” can devastate the world economy or make existing economic problems even worse, such as the one which occurred after the Smoot-Hawley Tariff was passed in the US in 1930 during the Great Depression. In response to the current act, for example, China has made threats that it might respond with retaliatory tariffs on chicken and auto parts. If a trade war were to break out between the US and China, it would probably be the end of the modern economy and would truly bring about another Great Depression.

The reason why tariffs result in lower economic productivity and welfare is that they reduce trade by placing additional costs, added by the government enforcing the tariff, on trading certain goods or services between certain countries. When trade is reduced, economic welfare follows because trade is the basis of virtually all of the wealth that we enjoy in our modern economy. Trade increases when specialization through the division of labor increases, because when two individuals specialize in certain productive activities, they become more productive than they could if they could not specialize and had to produce more of what they needed for themselves. And once two individuals are more productive through specialization, trade enables them to have the variety of goods and services they desire while also benefiting from the increased production acquired through specialization. In addition, David Ricardo’s Theory of Comparative Advantage shows how an individual or country can gain from trade even when much less productive overall than a potential trading partner.

However, this still leaves the question of employment unanswered. Even if we know that economic productivity is higher with unrestricted trade, that doesn’t necessarily mean that it is desirable if it means high unemployment and no gains for a significant part of the population. However, the causes of unemployment are separate and unrelated to how much trade occurs in the world economy. Long-term unemployment is caused by restrictions imposed by the government on the movement of labor in the economy, and cyclical unemployment, which accompanies recessions and depression, is caused by government distortions in the economy’s structure of production, which eventually have to correct, causing many people to be unemployed. There is no reason, however, why these unemployed people should be so for long. Like all goods and services, the supply of labor in the world is limited, and uses for it unlimited, as human wants are not bounded. Therefore, a market emerges for the exchange of labor. In this labor market, there is both the supply of labor and demand for that labor. And also like other markets, the price of labor adjusts to clear the market, because consumers of labor (the firms) have an interest in using more labor, while providers of labor have an interest in selling their labor. No one benefits from being unemployed when they want to sell their labor, and the price paid for labor adjusts so that producers can fully utilize the available amount of labor. If there is a large surplus of labor, or unemployment, then the price of labor is too high for producers to value employing more labor, and if there is a shortage of labor, then producers raise prices for labor to attract workers to their businesses. Regardless of trade, so long as people value goods and services that require labor (and all of them do), there will be a market for labor and there will be pricing system, which can ensure full employment. And so the labor unions have no ground for claiming that tariffs are needed to “protect jobs.” The argument is absurd on its face. Their real interest in supporting these tariffs is because the workers who work in industries that get special tariffs on the goods they work to produce can benefit at the expense of all of the consumers of the product the tariff is on.

However, there is yet another fatal flaw in the arguments in support of this tire tariff. Even if the United States enacts a tariff against China, that does not mean that suddenly American companies and workers will get more of the market for tires, the reason being that there are many other countries other than China that would be willing to produce tires for less of a cost than the United States: Brazil or India, for example. And so there would be absolutely no benefits, not even the supposed benefit of protecting American jobs.

The tariff on tires, or tariffs of any kind for that matter, have no benefits and can end up costing a lot, mostly to consumers. Free trade and a free market would maximize economic welfare and ensure full employment for all people in all nations, where protectionism breeds poverty and want for nations. Obama’s move against trade has set the nation back economically in the midst of a recession and has damaged trade relations with China, all to please the unions, who themselves hurt the economy and cause unemployment. The damage could be prevented, but to hope for such an outcome would be optimistic to the point of foolishness.

Is the Recession Over?

While Bernanke might want the recession to be over more than just about anyone else, it's only by the government's skewed methods of measuring such things that the economy appears to be getting better. In reality, we are still very deep in recession, and are very likely to stay here for quite a while because of the government’s attempts to create an artificial recovery through interventionist, Keynesian methods which involve government stimulus plans, government spending, and government restrictions on the market.

The first thing wrong with their determination of whether the economy is in a recession or experiencing economic growth is that they only look at whether or not economic growth is positive or negative. Had the economy not gone into recession, economic growth would be much higher than just the fraction of a percent that is expected in the near future. But the government, through the NBER, will claim that the recession is over the moment that GDP starts to increase by any amount. Whatever this small percentage gain will be, it won’t be anything like pre-recessionary levels, and it only makes sense if we consider a recession over once its effects are gone, which should mean a return to full productivity.

The second thing wrong with this determination is GDP itself. Gross domestic product is a very poor measure of economic welfare, particularly because it includes government spending. So naturally, if the government simply passes a large "stimulus bill," then GDP will increase, all other things equal. However, this spending doesn't actually increase economic output or improve the economy, and therefore does nothing to help the economy recover from a recession. In fact, it accomplishes the opposite. By spending money for the purpose of spending money, valuable resources in the economy are wasted and the structure of the market is prevented from changing to fit consumer demand, making certain aspects of the recession illiquid and thus prolonging the economic pain. And of course, any money the government spends is money the government must eventually take from taxpayers, making everyone other than the government and those who gain its favor worse off.

There is, however, one thing which typically frustrates the government's attempts to cover up a recession, and that is unemployment. Although the government has a faulty measuring system for unemployment to make the figures look better (reported currently at 9.6%, it is most likely around 16%. For example, if the economy is so bad that people give up on finding jobs, then that causes unemployment to go down by the government’s determination), and although government spending bills typically have provisions to use the government money spent to create jobs, the effect of trying to freeze the economy in the position it was in by propping up failed businesses and jobs by reducing the hours workers actually work is to perpetuate a non-equilibrium in the economy which means massive unemployment. Until a recession liquidates the whole of the malinvestments made during the economic “boom,” businesses won’t start growing and raising the employment level. In Europe, where interventionist measures have been taken farther, the unemployment problem is even worse than here in the US.

For the recession to be over, government bailouts need to stop, restrictions on labor mobility need to be destroyed, the Fed has to stop trying to keep the interest rate at zero, the government has to stop spending money like they’re going to pay with everything with the printing press, and of course, the printing presses at the Federal Bureau of Engraving and Printing need to be shut down for a good long time.

A Brief Introduction

Greetings. My name is Eric Perkerson; I am a first-year student at the University of Georgia in Athens; I am an economics major and am a follower of the Austrian School of Economics, which supports a very laissez-faire approach to economic policy. I discovered this school of thought just over a year ago, right before the financial crisis hit, and the financial crisis confirmed to me that the Austrian School had a better understanding of how the real-world economy works, as Austrian Business Cycle Theory predicted the crisis. The most well known Austrian economists today are Ron Paul and Peter Schiff. The best source of information that I have found to date on Austrian economics is the Ludwig von Mises Institute, which has hundreds of articles on recent events, journals, academic papers, and just about every book ever written from the Austrian perspective. And so on this blog, I hope to educate people and promote public policy based on the Austrian School of Economics, while both commenting on recent events in politics and in the economy and while also discussing economics in general. Hopefully, you will continue to read until you begin to accept this rational approach to economic problems. And with this brief introduction, we begin......