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Commonwealth Foundation


Government Intervention Prolongs Recessions

by Elizabeth Bryan
 

Recessions are a tough time for all–many lose their jobs, family incomes shrink, and budgets are squeezed. But recessions are natural and, in the long-run, foster a stronger economy. It is important that policymakers recognize the ups and downs of the economy, and the lessons from past recessions, so as to not over-react to the current downturn and the political pressure to "do something."

A recession exposes poor management and waste in the business world by clearing out poorly performing and overextended segments of the economy, while simultaneously rewarding sustainable business models that serve consumers. Recessions are a healthy correction needed to re-establish a sound economy.

According to the National Bureau of Economic Research, the United States has survived over 30 recessions since 1854. American recessions have declined both in length and severity. On average, from 1919-2001 recessions endured for 13 fiscal quarters while the average recession since 1960 has shortened to 10.5 quarters. Even the time between recessions is expanding, but all of these trends could be reversed if a recent pattern–increased government intervention–continues.

Severe recessions occurred in 1836, 1907, and 1921. The government intervened in none of them, and, as a result, each recession lasted no longer than a year. Contrast this with the proactive response to the 1929 panic. President Herbert Hoover promoted heavy government intervention by supporting the Smoot-Hawley tariff, establishing federal agencies like the Reconstruction Finance Corporation to grant massive loans to banks, and enacting taxes on items like checks. In real dollars, the federal budget almost doubled during Hoover's tenure in the White House.

FDR's New Deal had many faces–beginning with successful strategies like cutting federal spending and expansionary monetary policy. But later polices, including new spending on federal work programs and tax hikes, undermined economic recovery. In 1939, FDR's treasury secretary, Henry Morgenthau, said, "We are spending more money than we have ever spent before and it does not work. . . after eight years of this administration we have just as much unemployment as when we started and an enormous debt to boot." If history is any indicator, recent bailouts and stimulus packages are destined to fail as well.

State lawmakers should study history and understand that government intervention hampers the recovery of the economy and supplants the private sector, while placing an enormous burden on future generations. In short, when government tries to create or retain jobs that consumers have deemed unnecessary, it inhibits both short- and long-term growth.

The success of our economy is built on the process of creative destruction. This is the process of innovation, where better business models replace older ones to the benefit of the consumer. Take the case of the LP record, 8-track, the cassette tape, the Laserdisc, the CD, and now MP3 players and iPods; each product was replaced by something better. It would be ridiculous to ask government to subsidize all 8-track producers to save jobs, or because they are "too big to fail." No amount of taxpayer money could make the 8-track viable in the era of MP3s. Yet somehow politicians think bailouts and government management of GM will return the automaker to past success–rather than allow Toyota, Ford, or other firms, which better serve consumers' needs, to thrive.

Only consumers can keep businesses accountable, ensuring they are not wasting valuable resources on products people don't value. Government intervention undermines the power of the consumer. Economist Pete Leeson puts it this way, "Under this system, when producers use resources in ways that are consistent with our wants, they earn profits. When they don't, they earn losses."

Recessions create opportunities for brave entrepreneurs, who use resources from failed businesses to create value. CNN, Proctor and Gamble, FedEx, and The Jim Henson Company were all founded during a recession, when new endeavors are often more feasible then finding an open job.

With the passage of the federal stimulus bill, we are guaranteed a longer, more painful recession. By attempting to quickly end a recession with increased spending, Governor Rendell and President Obama are repeating the failed policies of Hoover, FDR, and George W. Bush. We can only hope Pennsylvania's economy rebounds sooner, not later, in spite of massive government intervention.
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Elizabeth Bryan is a research associate at the Commonwealth Foundation (www.CommonwealthFoundation.org), a public policy education and research institute located in Harrisburg.

Permission to reprint is hereby granted provided the author and affiliation are cited.

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This email was sent to lhenry@lincolninstitute.org by info@commonwealthfoundation.org.


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