Wednesday, 14 July 2010

Hannan on Austrian economics and a return to reality

Daniel Hannan is going from strength to strength. On Monday he offered a review of How an Economy Grows and Why it Crashes, by the Brothers Schiff:
As economics drifted away from common understanding, it drifted away from common sense. All sorts of ideas seemed utterly implausible, but were backed up by impressive graphs and long words. Non-initiates became nervous about questioning the sacerdotal figures who guarded the discipline.

You don’t think governments can spend their way out of recessions? You’re revealing your ignorance! You doubt the wisdom of deliberately manipulating interest rates to favour debt and punish thrift? Go and study some more! You fret that governments can make money worthless because they have taken away its intrinsic value? Go back to the Middle Ages!

As a general rule, if experts cannot explain an idea simply, we should be suspicious. The Schiffs explain their model very simply indeed, which is what makes it so convincing. If you feel that you want to get a decent grasp of free market economics, but you don’t have the time to tackle the complete works of Mises and Rothbard, this book is the perfect place to start. And if you find the Schiff thesis compelling, have a look at the Cobden Centre, which is working to apply Austrian economics to British political conditions.
Today Hannan writes:
It may not be in the coalition government’s gift to prevent a double-dip recession. Indeed, the attempt could well do more harm than good.

Let’s remind ourselves of what caused this crisis. Interest rates were held too low for too long. Credit was made artificially cheap. Borrowers were rewarded and savers penalised. Debt, public and private, reached unsustainable levels.

The sub-prime crisis was – or, rather, ought to have been – a market correction. Such corrections are never pleasant. People who had borrowed on the back of what they thought would be constantly rising property prices found themselves unable to meet their debts. Banks which had made bad loans were vulnerable. So were banks which had bought other banks’ debts. And so, indeed, were unrelated industries which had been kept buoyant by the false sense of prosperity of those who believed their houses were magical piggy-banks.

A return to reality is, in these circumstances, the least bad option. A recession forces a more sober reallocation of capital. It allows a recovery to begin on solid foundations. Yes, hangovers are nasty; but they cannot be indefinitely deferred by remaining sozzled.
If you haven't already seen it, now's a good point to watch the Hayek vs Keynes rap, Fear the Boom and the Bust:

Following Keynes, Gordon Brown
determinedly sought to reinflate the bubble, to prop up house prices, and to keep people spending capital they didn’t have. As the latest ONS figures show, government expenditure is the only thing keeping Britain technically out of the recession.

But governments don’t have any money of their own. Everything they spend, they have to raise in tax – or, as in present circumstances, in a form of postponed tax called borrowing.
Here I'd recommend Bastiat, who saw the folly in such tax and spend policies as far back as 1850, when he wrote his masterpiece That Which is Seen, and That Which is Not Seen:
When James B. gives a hundred pence to a Government officer, for a really useful service, it is exactly the same as when he gives a hundred sous to a shoemaker for a pair of shoes.

But when James B. gives a hundred sous to a Government officer, and receives nothing for them unless it be annoyances, he might as well give them to a thief. It is nonsense to say that the Government officer will spend these hundred sous to the great profit of national labour; the thief would do the same; and so would James B., if he had not been stopped on the road by the extra-legal parasite, nor by the lawful sponger.
Hannan concludes:
Now comes the reckoning. It will be horrid for everyone – not just, as some commentators seem to think, those working in the public sector. Almost all of us will suffer from higher taxes, devalued savings and lower real wages. But facing these things honestly and immediately is the best course for a coalition that aims to govern for four years. Running away was always a cowardly option; now, it has ceased to be an option at all.
I recommend the whole article.

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