How the Welfare State All but Guarantees Long Recessions

(Mises Institute)—Many economic pundits predict that the United States and much of the world is either in a recession or about to enter one, depending upon one’s definition of the term “recession.” This brief essay is not intended to be a comprehensive explanation of what causes such economic cycles but rather the proper way to end them as quickly as possible.

Disequilibrium in the Stages of Production

A recession is merely the name for economic dislocations. The stages of production are out of equilibrium. Resources have been allocated to the wrong end products or the wrong stages of production. Consumer preferences have changed, or resources have been allocated by political factors rather than market factors. It really doesn’t matter the cause because the solution is always the same. Get rid of any and all bottlenecks that hinder the reallocation of the factors of production to meet the legitimate desires of the market.

Increasing Private Purchasing Power

There is one huge problem—the welfare state. One, but not all, of the goals of the welfare state is to provide assistance to workers and even companies who find that their cash flow has slowed, as in the case of companies, or even stopped, as in the case of worker layoffs. Government-funded welfare is designed to provide temporary assistance. The problem is that other government outlays are not reduced. No, welfare spending has become “an entitlement” and is always added onto existing spending. This means that the government takes an even-larger bite out of the only economy that matters, the free market economy. Murray N. Rothbard explained that the only spending that matters is “private purchasing power.”

In Making Economic Sense, Rothbard says, “All government taxation and spending diminishes saving and consumption by genuine producers, for the benefit of a parasitic burden of consumption spending by nonproducers.”

He elaborates on the subject in his magnum opus, Man, Economy, and State with Power and Market: “In short, strictly, the government’s productivity is not simply zero, but negative, for it has imposed a loss in productivity upon society.”

Since increased government spending must, by definition, reduce “private purchasing power,” welfare spending hinders the ability of the economy to recover just when more “private purchasing power” is needed most. Resources that should have been reallocated to new products and services desired by the public are instead reduced, not increased! Not only that, but welfare payments tend to disincentivize businesses from taking actions needed to redeploy their capital and to reduce labor’s incentive and ability to relocate or acquire new skills.

End Welfare

The solution is simple but difficult to enact. End both corporate and individual welfare. What? Force businesses to close, and throw great portions of the population into destitution? This need not be the case. It is essential that barriers are removed from reallocating capital and labor to where they are needed most urgently.

Furthermore, just as capitalists must be responsible for the financial health of their companies by saving when times are good and always being sensitive to the needs of the market, labor needs to be just as responsible. Both capital and labor need to save for a rainy day. Capital needs to invest continuously into more-productive processes, and labor needs to invest in personal skills that will be needed in the future. Unfortunately, profits from successful companies are taxed away at a high rate, and labor is subject to propaganda that the state will provide. It is a recipe for long, long recessions. Compare the post–World War I Warren Harding depression with the Herbert Hoover/Franklin D. Roosevelt depression of ten years later. Few know about the Harding depression because it ended so quickly. Everyone has heard of the Hoover/Roosevelt Great Depression of the 1930s.

Harding reduced the federal budget. Hoover and Roosevelt increased the federal budget and placed increased regulatory barriers upon the free reallocation of capital and labor. Lord John Maynard Keynes added insult to injury by abandoning Say’s law that production must precede consumption, enshrining the myth of increasing aggregate demand via money printing, deficits be hanged!