RALEIGH – I’ve always had a high tolerance for pain.
I’m the kid who used to saunter into the house after romping through the woods with my brothers, only to have my mom ask me why my legs were covered with scratches and blood. I hadn’t noticed. And I’m the adult who disdains the telltale, painful signs that I may be overdoing it in yard work or heavy lifting, only to find my muscles sore and useless the next day.
Still, the few times I’ve been in truly blinding pain, I’ve welcomed the application of appropriate pharmaceuticals. When you need them, you need them. But it’s important to remember that numbing the pain for a while is not the same as curing the underlying malady.
Veronique de Rugy, an economist at George Mason University’s Mercatus Center, has devised a useful analogy to explain the causes of recession and the failures of government stimulus. It begins by comparing the onset of an economic downturn to a bodily injury.
Some people believe that recessions are utterly irrational and unpredictable events. In truth, however, the boom-and-bust cycle is a natural consequence of rapid growth driven by factors such as artificially low interest rates or the sudden spread of new technologies. During boom times, while there are very real gains in economic productivity and value, some of the decisions producers and consumers make turn out to be unwise. They pursue promising leads that don’t pan out, invest too much in one idea at the expense of another, or take on unsustainable debt loads.
These unwise decisions create very real problems that have to be fixed through painful adjustments. Recessions aren’t some kind of mass psychosis that can be overcome by happy talk. To return to de Rugy’s analogy, it is as if you have played a great game of basketball, making some great shots and snagging key rebounds, but then zigged when you should have zagged and end up on the floor with an injury.
“Imagine that I break my arm, but instead of getting a cast I take a big shot of morphine,” she writes. “The drug will make me feel better, but it won’t fix my arm. When the effect wears off, the pain will come back. And instead of being restored to their proper position, my bones will remain out of place, perhaps solidifying there, which will surely mean chronic pain in the long run.”
The point here is that recessions are collections of economic injuries that must be treated. People are employed in businesses that are no longer viable. They have purchased homes or other assets they can no longer afford. Or they are invested in securities that can no longer promise a competitive rate of return. There are no shortcuts. You can’t talk or wish these problems away. You have to work your way out of them.
Unfortunately, far too many politicians are willing to promise you that they can, indeed, substitute happy talk or wishful thinking for the difficult work of economic adjustment. What they really plan to do is take other people’s money and offer it to you in jobless benefits, giveaways, make-work jobs, or other schemes to create the illusion of recovery without having to make the wrenching changes necessary for a true recovery. Because they can’t conjure up resources out of thin air – even monetary inflation is really just a form of taxation, as governments use the printing press to devalue people’s savings and assets – stimulus programs don’t create much new value.
In fact, the best-available data suggest that when governments borrow or levy taxes to finance stimulus spending, they delay and constrain economic recovery rather than hastening or strengthening it. Stimulus schemes transfer resources from relatively productive uses to relatively unproductive ones, while giving households and businesses ample reason to doubt the long-term fiscal stability of the governments perpetrating them.
“Stimulus spending is like morphine,” de Rugy argues. “It might feel good in the short term for the beneficiaries of the money, but it doesn’t help repair the economy. And it causes more damage if it gets in the way of a proper recovery.”
The best treatment for a recession is for governments to set their own broken bones – by cutting low-priority spending and balancing governmental budgets – and otherwise stay out of the way. The treatment hurts. But it’s necessary. And the politicians urging us to pop pills rather than undergo it are the political equivalent of quacks. Ignore them.
Hood is president of the John Locke Foundation.