Friday Interview: Government Contributions to the Economic Collapse

Some people believe the recent economic collapse should lead to increased government regulation. They say unfettered free markets caused the problems that continue to plague the American economy. Robert Murphy, adjunct scholar at the Ludwig von Mises Institute, offers a different perspective. The author of both The Politically Incorrect Guide to Capitalism and The Politically Incorrect Guide to the Great Depression and the New Deal discussed the economy with Mitch Kokai for Carolina Journal Radio. (Click here to find a station near you or to learn about the weekly CJ Radio podcast.)

Kokai: A story line we heard, at least among some people in Washington, D.C., and at the state level as well, [is] that because of capitalism, and opening up free markets, and deregulation, we had this major economic slump. Is that the right way to look at it?

Murphy: No, I don’t think so. I mean, on the one hand, I’m an Austrian economist, subscribe to the Austrian School that Ron Paul and Peter Schiff allude to a lot in their public remarks. And I think that the basic cause of the housing bubble years was Alan Greenspan’s low interest rate policy. So it’s ironic that the people who want to blame the free market want to have it both ways. On the one hand, people want to say, yeah, the Fed needs to provide cheap liquidity to fix the market, and that’s what Greenspan did. So right there they’re implicitly admitting that we didn’t have a free market at that point. By their own admission, they’re saying Greenspan needed to come in and resuscitate the market after the dot-com crash.

So it was, I think, Greenspan’s low interest-rate policies in the early 2000s that fueled the housing bubble. And so when you pump a bubble by flooding the markets with cheap credit that’s basically printed out of thin air, well, then it’s not a surprise that you’re going to get a crash.

And then when the market crashed then, the government came in, and the media reminds us all the time. They say, “Not since the New Deal has the federal government intervened so heavily.” And so I think it’s sort of crazy to say that on the one hand the government sat back and did nothing and that’s why we had this awful, horrendous crisis, while they’re admitting that the government has done unprecedented things. Ironically, if you look at it, by the media’s own admission, the federal government intervened most heavily in U.S. economic history during the ’30s and today. And you say, “Well, when did we have the two worst crises in U.S. history?” And it’s during the ’30s and, I would argue, today. And so I think, just a clear-cut look at the evidence, Occam’s razor suggests that when the government intervenes it makes the economy worse.

Kokai: You mentioned the New Deal, and you’ve written an entire book on the Great Depression and New Deal. Some folks, I think, suspect that we had the big market crash in the late ’20s, Hoover didn’t do anything, that we had a lot of problems with our economy, and FDR came in with the New Deal and, along the line, some years beyond, we were in better shape. So we need to do something like a New Deal again. But your analysis would suggest something very different than that course of action.

Murphy: Right. Again I think it’s the exact opposite — that the conventional-wisdom interpretation of what happened in the ’30s I think is exactly backwards. So, first of all, just on the face of it, the conventional story, like you just said, is that Herbert Hoover was a laissez-faire guy. He sat back and just watched the economy implode, and that’s why we had the Great Depression. But on the face of it, that doesn’t make any sense. Because if Herbert Hoover was a noninterventionist guy, well, so were all the previous U.S. presidents.

So that sort of begs the question: Well, why did the Great Depression hit on Hoover’s watch if he did the same nonintervention that all previous U.S. presidents did? Right? Whereas, in my book, I show that, no, Hoover, far from being a laissez-faire guy, was actually the most interventionist in U.S. history up to that point. He didn’t want wages to fall. He had price supports for farms. He had the Reconstruction Finance Corporation that propped up banks and gave them a bunch of new loans. So actually what Hoover did was what you could call a “New Deal lite.” And that’s what I would argue fueled the early stages of the Great Depression. And then FDR comes along, implements the New Deal, and we have the most sluggish recovery in U.S. history.

So it’s odd to say that the New Deal rescued us from the Great Depression when the recovery from the ’29 stock market crash was the most sluggish, the worst, lingering depression in U.S. history. In other words, what more could the facts look like to prove that the New Deal was a failure than what the facts actually are? And by the same token today, this so far has been a very long, painful recession, and I think it’s going to continue. As the years pass and we’re still stuck in this downturned economy, I think we have to say, “At what point will we say that the Federal Reserve has not helped or that these interventions have not helped?”

Kokai: Given your analysis of the history and where things stand today, if we wanted to help the economy improve, would we expand government into other sectors and invest in stimulus and green jobs, or would we take some other course of action?

Murphy: As you can guess, I would say, no, the government shouldn’t get more involved. Again, just using common sense, it’s not fancy economics here. We know politicians are corrupt. We know that they’re a bunch of bumbling fools in terms of their official rationalizations for what they do. So the very idea that we’re going to fix things, make the economy leaner and more efficient, by letting more decisions get turned over to Washington politicians and bureaucrats, that’s just absurd on the face of it. And we know, again, that as the government intervenes more heavily, the economy becomes more and more sluggish.

So, no, I think what they should do is the federal government should slash its spending, should cut taxes, cut regulation, let the market determine what fuels should be used, let the market determine whether it should be solar power or gas-fired plants or what have you. Let the market determine those things. And as far as the Federal Reserve’s side, they should stop injecting new money. They should stop bailing out particular investment banks, and just mind their own business. If a company made bad decisions and they made a bunch of loans and they’re going to fail, well, then let them fail, and that will be a good lesson to everybody else to maybe not be so foolish in the future. As it is now, people know during a boom period you make your money, your investors keep it, and then when things blow up the taxpayer bails you out.

Kokai: What if people in D.C. hear what you have to say and say, “OK, Murphy, we hear you, but we disagree, and we’re going to keep doing what we’ve been doing.” What’s going to happen?

Murphy: Well, if they keep doing what they did in the ’30s, we shouldn’t be surprised if we have another Great Depression that lasts 10 years. And so far we’re a few years into it. People think, “Oh, we turned the corner.” But back in ’30 and ’31, they thought they had turned the corner, and things just kept getting worse and worse.

So I think that’s what’s going to happen, that they’re going to keep doing all these interventions, and all these crises are just going to keep mysteriously appearing, and they’re going to be baffled and say, “Man, the market economy is even worse than we thought.” And they’re going to put layer upon layer of more regulations — the new health care legislation, for example. I mean the worst thing you can do when economies are in the ground is promise hundreds of billions of new taxes, and yet that’s what they’re doing.

Kokai: Do you have any optimism that somewhere along the way people in America are going to say, “No, we don’t want this, we need to go back to a system where the government has a much smaller role in our lives”?

Murphy: I’m not optimistic in the sense of being able to stop this train right now. I think the economy already is on an unsustainable path, and we’re going to just have to grin and bear it for several years of having an awful economy. But I am optimistic that people really do seem to be interested in these ideas.

I am getting a much better hearing for the position of the Austrian School of free-market economics, a critique of the Federal Reserve. That kind of stuff, five years ago, it would only have been college students who happened to be interested in this school of thought that would e-mail me, and now I get calls from financial analyst reporters, things for mainstream publications. Because a lot of people are realizing that the guys on CNBC don’t know what they’re talking about, and when Ben Bernanke gets up and testifies before Congress, they know he’s either lying or he doesn’t know what he’s talking about.

And so I think there is this cynicism, and people are looking about for a different explanation, a different paradigm, and that’s where the Austrian School of ideas comes in. So I do think things are going to be bad, but people will at least know what happened, years from now.