Improving the economy not with government action but with government restraint

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

― Friedrich von Hayek

We often hear of someone’s plan to fix something in the economy that isn’t working to the satisfaction of some part of society. Someone will offer a “new design” to change some aspect of the economy to make it more fair, to better reward some group that supposedly is getting shafted. Most of the time the unwelcome result that needs to be altered is itself the result of some previous grand scheme to repair some earlier problem, and the present difficulty is simply the unforeseen consequences of that erstwhile bright idea.

Hayek foresaw that no person or group of persons has all the necessary knowledge about the free market at any given time to be able to successfully tinker with it to make it work better. A free market is the result of millions of people acting in their own self interest on a daily basis and making their own personal decisions of how they will interact with the market. This makes for a level of complexity that cannot be mastered by any government agency or committee of the best and brightest minds. In Hayek’s vision the proper results will always be those allowed to emerge automatically, on autopilot. He saw this emergent economy as the result of spontaneous order that comes into existence without design by anyone. What is needed is for government and all the busy bodies in it to stay out of the way and allow it to happen.

The role of government should be stand ready to enforce a rule of law to prevent anyone from manipulating aspects of the economy against others for their own benefit. Courts to enforce contracts, police to detect criminal mischief in the market and prosecutors to convict the miscreants.

The Forgotten Depression of 1920 is an excellent example of a free market’s self-correcting ability when left alone to work its wonders.

From the Ludwig von Mises Institute:

The economic situation in 1920 was grim. By that year unemployment had jumped from 4 percent to nearly 12 percent, and GNP declined 17 percent. No wonder, then, that Secretary of Commerce Herbert Hoover — falsely characterized as a supporter of laissez-faire economics — urged President Harding to consider an array of interventions to turn the economy around. Hoover was ignored.

Instead of “fiscal stimulus,” Harding cut the government’s budget nearly in half between 1920 and 1922. The rest of Harding’s approach was equally laissez-faire. Tax rates were slashed for all income groups. The national debt was reduced by one-third.

The Federal Reserve’s activity, moreover, was hardly noticeable. As one economic historian puts it, “Despite the severity of the contraction, the Fed did not move to use its powers to turn the money supply around and fight the contraction.”[2] By the late summer of 1921, signs of recovery were already visible. The following year, unemployment was back down to 6.7 percent and it was only 2.4 percent by 1923.

The depression of 1920 was followed by the great recovery of late 1921 because of a brilliant government policy of doing less rather than more.

By contrast the financial crisis of 2008 has been followed by a prolonged and weak recovery in spite of a massive government stimulus in 2009 and trillion dollar deficit spending every year since. The labor force participation rate is the lowest in decades, the number of long-term unemployed is staggering, the swollen numbers of those dependent on unemployment compensation, welfare and food stamps is alarming, a massive and atrocious health care law has distorted a large segment of the labor market with promise to do even more harm in coming years, and much of the former middle class have given up hope or ever achieving their former prosperity because of the economic conditions created by a president who came to office promising hope and change. He may as well have said that if you like your standard of living you can keep it.

The only way out is put the brakes on government as soon as possible.  It’s screwing everything up.