DIGG THIS

The downturn is following a path so predictable, day by day, that people who comprehend the business cycle don’t even need to read the news. You can intuit what will happen next because it’s happening like a textbook case — even as it is reported with a continued sense of surprise.

Press reporting on the downturn has been like reports from a committee that knows nothing about gravity, but which has nonetheless been assigned to watch what happens when you drop objects from high places.

They keep filing surprised reports about how the objects fall — what a bizarre and unwelcome turn of events — and then they conjure up ways to keep this from happening through some outside intervention. They recommend bailouts, spending, programs, controls, and inflation.

You just want to get their attention and explain: what you are observing is part of the structure of reality itself, and there is nothing you can do to stop it. You can cover your eyes, put up fancy mirrors, turn somersaults, speculate and talk and decry all you want. But in the end, the downturn is a necessary and inevitable response to the previous boom. It must be allowed to continue on its course.

Most recently, for example, we have seen an uptick in the unemployment rate, now at 6.7% according to official statistics. Here we have the human face of recession. It is also the inevitable response to the boom. The people over-employed in bubbled-up industries are led from failing sectors into viable ones — with a serious transition cost. Wages adjust downward and people move from uneconomic undertakings to more economically viable ones.

What is enough to make a person crazy is how all this is reported as something correctable, as if they all constituted marching orders for Washington. A bank is failing? Someone had better bail it out! Home prices are falling? Spend trillions to boost them. People are losing jobs? Make work for them or subsidize their unemployment to make it last longer.

On unemployment in particular, this is the issue that led to many calamities in the 20th century. The problem itself is largely artificial in the sense that it has been created by the boom-bust cycle, which itself is a consequence of the central bank’s loose money policy. In every society with sound money, there is no problem with unemployment. This is because, as Mises wrote, in a free market, all unemployment is purely voluntary.

What do we mean by this? It is a feature of the world itself. We live in a world of scarcity so there is always and everywhere work to do. Economically useful work pays a return of wages and salaries, which act as compensation for the opportunity costs of work over leisure and reflect the value of the work to overall output. Because there is always work to do at some price, unemployment is not a feature of the market economy, and this is one reason we only begin to note the existence of long periods of unemployment in the 20th century. The attempt to "cure" the problem has only reinforced it.

But in economies with business cycles, it is not only capital that is misdirected toward sectors where it doesn’t belong. Labor chases bubbles created by subsidized credit. When those bubbles pop, the jobs are eliminated. There are ripple effects too that flow from sector to sector. A widespread shifting takes places.

There is no reason to assume that labor is less able than capital to shift from one production line to another. But when there are labor unions, minimum wage floors, mandated benefits, and other interventions, these shifts can take longer than they should, and that’s when we begin to see high unemployment that lasts and lasts.

The surest way to guarantee that the problem grows worse is to attempt to fix it by means of unemployment insurance, government spending, jobs programs, and the like. All of these interventions delay the necessary adjustment and prolong the crisis.

Vedder and Gallaway devoted many years of study to questions of unemployment in the 20th century, and ended up proving with a mass of historical detail that the entire problem is due to the attempt to fix the problem. Their results are reported in their book Out of Work — a work which should have put an end to labor-based interventions forever.

Sadly, the political class cares nothing about facts and logic, so they barrel ahead with the cheers of the media to repeat all the mistakes of the past. The bottom line is that these people can create all the unemployment they want so long as they continue to try to "do something" about it. The public goes along because the entire subject is among the most alarming and scary of all economic concerns. Surely there is something that the political class can do!

If we are really sincere about not wanting to repeat the 1930s, the political classes should do nothing but cut taxes and free the labor market, but otherwise do nothing to "help" the problem. Just as objects fall when you drop them, so markets must adjust during recessions.

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