I think this is an awesome article by Robert Murphy (seen in the picture above) that both debunks Paul Krugman's Keynesian smoke-and-mirrors rhetoric and (more importantly) shows the Austrian economic model in action.
First, Murphy uses Krugman's own data to show the folly of defending the Fed:
How do you like that? By Krugman's own admission, the two worst panics occurred after the Fed was formed. And if we take Romer's numbers [...] and plug in a decline of 455 for the most recent recession (which Krugman himself says will be an understatement), we get that the average "output loss" (measured in the units Romer defines [...]) during recessions from the pre-Fed era was 158.1, while in the post-Fed era it was 356.4.
Does everyone see the significance of this? Krugman himself said that panics will always happen, and the question is how they are contained. Using Krugman's own source, we find that the establishment of the Fed generated (a) the two worst panics in US history and (b) a string of panics that were on average more than twice as bad as the average panic from the pre-Fed era.
Steve Horwitz does a good job explaining why Krugman's understanding of US banking history is flawed, because we didn't have laissez-faire banking in the late 1800s. But we don't even have to rely on such explanations for the matter at hand. Remember, these data weren't pulled from Krugman after a session of waterboarding. He volunteered them as if they were somehow supposed to embarrass the critics of the Fed. What would the numbers have to look like, for Krugman to have admitted, "Hmm, it seems like for once, empirical reality has turned against my Keynesian nostrums"? Would the post-Fed panics have to be three times as bad?
Next, Murphy provides empirical evidence supporting Austrian Theory of Business Cycle from the latest recession's statistics. In particular, this figure shows why we should not help economy in the times of a recession:
This period is when the bubble popped. When the collapse started happening. What do we see happening? We see the job markets starting to re-adjust for misallocation of resources (in this case, human resources) that had happened in the times of the bubble growth.
The long-term industries were over-invested (as Austrian Business Cycle Theory predicts) due to artificially low interest rates. Then the bubble popped -- and the self-adjustment by the market started happening. The short-term (service) industries started hiring, while the long-term (construction and manufacturing) industries started laying off.
Give it a year after the biggest peak of the market collapse (2008-2009), and things would have righted themselves out. This is what happened in the Unknown Depression of 1920 (when Woodrow Wilson had a stroke and did nothing to "help" the markets).
But then Obama's stimulus package and bailouts kicked it. They eased the effect on the long-term industries, but that is precisely the opposite from what we wanted to happen. We wanted the construction and manufacturing industries to fail, so that service industries could bid on their capital (including employees). We wanted the big banks to fail, so that smaller banks could buy their mortgages and hire their workers and re-negotiate with the mortgage holders. (Instead of bailing out the big banks Obama-style or allowing them to re-negotiate Romney-style.) Instead, we "softened the blow", which was maybe a good thing in the short term, but a really bad thing in the long term:
No comments:
Post a Comment