The Great Divergence

[kandrathe]

But demand is down across the board. Consumers are not increasing spending. They're not even holding spending flat. They're squirrelling away as much cash as they can, in bills, bonds, and gold. And that, unlike the Austrian scenario, is not going to lead to automatic recovery, since if everyone is betting on tomorrow, there's nobody betting on today. Thus, investment stagnates until the outlook improves, leading to a further flight to safety, leading to yet more stagnation. Snap goes the trap.

I agree that consumers do not increase spending into the bust cycle. I don't remember that being apart of the theory. With today's modern communications, when something pops, everybody quits buying, and they all run for cover within the same month or week.

I worked for a manufacturing firm once that based spending decisions (like raises, and hiring) on their 18 month forecasts which were surprisingly accurate. So they ran for cover about a year and a half before the recession would hit.

The controversial parts of the ABC from what I recall (esp. as evoked by Rothbard, and Von Mises) were that monetary expansion distorts the structure of production in an unsustainable way, that it explains the "sudden general cluster of business errors.", that it provides the best explanation for why downturns hit the capital goods sectors especially hard, and that it is the only way to explain the existence of inflationary depressions (or "stagflation"). These controversial parts are not supported as Friedman observed by a careful examination of history. There are inconsistencies, which is why I wouldn't place myself as a die hard Von Mises devotee, but I believe that the Austrians have made great contributions to understanding our economy. In going back to look at Von Mises explanations, he identifies a period of low interest rates with the boom, and a period of re-adjustment with the bust. Barring other assumptions, he does not predict an increase in employment during the boom, or a decrease during the bust. And, you are correct in that it would predict an increase in output during the bust. That is not supported by our observations of recession activity.

Again, while I would prefer for the government to keep their hands off as much as is possible, when times are bad, and people are hurting and struggling, they expect their government to come to their aid. The Austrian advice of allowing the economy to heal itself is politically suicidal, and allows for pains too great for people to bear. So, the second best approach from my ultra libertarian perspective would be for the government to encourage the economy in ways that do not distort it. Any unnatural distortion will need to readjust itself eventually. For example, building a a great pyramid for our great ruler Barack Obama. We'd temporarily employ a massive number of people, increase the consumption of quarried stone, and there would be an upsurge in economic activity supporting the building site and the builders. But, at the end of it, we'd have a bunch of people skilled in pyramid building who are again unemployed, the market for stone would return to its normal level, and all the businesses that sprang up to support the building, and builders would lose their customers. Much of the "shovel ready projects" that were funded by the first stimulus were just like the pyramid built for Obama. They had little economic purpose, they temporarily employed some people, and provided some local economic relief, but once completed had no sustained improvement. The Obama hand out of $400 to single workers, and $800 to working couples was quickly spent on the mortgage or rent, and normal monthly expenses as was the bulk of the 100 weeks of unemployment. People continued to buy mostly what they were required to buy, only for many now they were paid for by federal deficit spending.

If your going to be progressive, then you'd get together with your like minded ideologues and envision what the future should look like, and then use your stimulus money to enable that as the easiest path. Obama talked big about "green jobs", but where is the grand plan? How about high speed trains connecting all of the US major cities? A public and private partnership of railroads, and unions should be able to make that happen.

Or, as I suggested, break ground on 100's of new nuclear power plants, and actually make the tough decision to build the spent fuel recovery facility in Yucca mountain. We'd get short term stimulus engaging many builders, etc. Then we'd get increases employment supplying and running the plants, and reprocessing the fuel. We'd decrease our reliance on foreign oil, and the domestic use of coal. We'd take our money out of the hands of our opponents, like Hugo Chavez. Then, there is the increased supply of power, which would reduce the costs of production, and increase America's competitiveness, and profitability. If we really want to compete globally, we'd make arrangements with the southern states to create some open immigration zones (ever wonder why there are border checks north of San Deigo?) where American industry can employ anyone from any nation who shows up for work.

P.S. I would definitely put economic theory into non-linear equations.