Hi all,
I'm new to Austrian economics, and am wondering if anyone can explain to me the Austrian explanation for the recession dragging on and unemployment remaining so high. Is it because of the sudden leftward shift of the government that is causing business uncertainty, or something else? I'm assuming the government has everything to do with the problem, I just can't figure out what policies have caused the recession to drag on like it is.
Also, if possible, does anyone know of a blog post explaining the recession's dragging on? I'd love to read one.
Thanks much
What the Austrians call regime uncertainty is certainly an important part of the issue. However, perhaps more important is the trouble with malinvestment - investment into the wrong lines of production, which leads to capital losses.
In the boom period of the business cycle, people consume more - even while new, unsustainable investment projects are started. Sustainable projects initially require, that investors reduce their consumption and channel their savings into new projects. But during a boom induced by a central bank, there hasn't been real savings to fund the new investments. That's why the boom is unsustainable, but also explains why consumption increases at the same time as investment in new projects. This is impossible in the long run, but possible in the short run. What happens is neglect of maintenance on critical intermediate goods. A modern economy is very complex, and it can take years for an unsustainable structure to become recognized as such.
During the recession following the artificial boom period, resources need to get rearranged; certain projects need to be abandoned; and critical intermediate goods need to be replenished since they were ignored during the boom. It takes time for all the different types of materials, tools, and equipment to be furnished to resume normal growth. During that transition, the contribution of the labor of some people is so low that it's not worth it to hire them (especially with minimum-wage laws and other regulations). The result is unemployment. (This is from Murphy's article "The Important of Capital Theory", which includes also the 'sushi economy' example, a good simplified explanation of the Austrian Business Cycly Theory.)
There should be many more blog posts and articles around here on the topic. :)
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The state is subsidizing companies that destroy wealth.
The previous post gave a great explanation of the business cycle theory but didn't really address you question of the recession continueinng to drag on after the bust has taken place.
From my understandings of following Austrian economists such as Peter Schiff, although I am nowhere near as good as Mr. Schiff at explaining it I will give a try, the reason it is draggin on is because the government stimuli, continuing to divert capital into unproductive areas and propping up failed businesses, whereas a free market would be diverting the capital elsewhere. As kind of explained above.
An example of such, the government is continuing to keep labor employed at places such as the automobile companies, which intern reduces the labor force available for other productive areas such as mining, Which causes them to compete for labor, intern driving up the price a business must pay its labor. Just think of it as simple supply and demand of labor. Stimulus dramatically affects the supply and demand of the labor force, while diverting the capital into unproductive areas the market would not have allocated it. So basically, it goes back to the malinvestment principle stated above.
And meanwhile, the central bank has interest rates at 0%. So nobody is saving, and without savings, and with money printed at will, there is no credit rating, if you will, for business plans. So instead of the most productive and proffitable adventures being funding, having the first access to capital, labor, and such, a lot of bad business plans get capital, and the market thinks these businesses will still be around to buy goods, etc....when in reallity, once the stimulus wheres off, every prediction to makes goods and sell to these companies was also malinvestment created by central planning.
Like I said, I'm not the best at explaining things, but hope it helps ya.
Caley McKibbin:The state is subsidizing companies that destroy wealth.
This
tinsley6: the reason it is draggin on is because the government stimuli, continuing to divert capital into unproductive areas and propping up failed businesses, whereas a free market would be diverting the capital elsewhere.
And this.
We are post business cycle. We need to allow unproductive capital and labor to move to more productive sectors of the economy.
if you like listening to audio: check these out
search the media section for Tom Dilorenzo ( what NOT to do in a recession) and Tom Woods ( the depression of 1920) I believe these titles are close to accurate.
also there are a bunch of articles on this site - just nose around.. after learning a lot over the years here - it all seems so obvious - but more frustrating viewing the actions of politicians
previous recessions/depressions with no gov. involvement were usually over within a year.
the "great depression" lasted 15 years because of non stop government intervention. it did not end until AFTER WW2 and government spending shrank tremendously.
peter schiff is not for everyone and he missed the european melt down - but he is sound on on economics - and easy to listen to
Be responsible, ease suffering; spay or neuter your pets.
We must get them to understand that government solutions are the problem!
filc: Caley McKibbin:The state is subsidizing companies that destroy wealth. This tinsley6: the reason it is draggin on is because the government stimuli, continuing to divert capital into unproductive areas and propping up failed businesses, whereas a free market would be diverting the capital elsewhere. And this. We are post business cycle. We need to allow unproductive capital and labor to move to more productive sectors of the economy.
The only thing I can see in need of Keynesian subsidy in these times is the educational establishment. An education and field experience is as vital to employers as an indicator of labor potential as market figures are to investors.
cognitivist:The only thing I can see in need of Keynesian subsidy in these times is the educational establishment. An education and field experience is as vital to employers as an indicator of labor potential as market figures are to investors.
What?
A) we've had subsidized education. Thats why tuition skyrockets every year consistently. IT's essentially the equivilent of the housing bubble, formed the exact same way.
B) As a consequence of A we are producing educational programs that don't mirror the needs of the economy. For example, why are people getting political science degrees when engineering jobs, like IT for example are at a 4% un-employment even now during our recession?
State subsidized anything will suffer from calculation issues. IF you subsidize education your going to produce education that does not match the needs of industry.
filc:A) we've had subsidized education. Thats why tuition skyrockets every year consistently. IT's essentially the equivilent of the housing bubble, formed the exact same way.
To say nothing of retention rates in higher education, or the growth in the number of low-tuition vocational schools? IT argument is a strawman.
filc:B) As a consequence of A we are producing educational programs that don't mirror the needs of the economy. For example, why are people getting political science degrees when engineering jobs, like IT for example are at a 4% un-employment even now during our recession?
Because you cannot choose student's preferences for them. If "A" set of preferences are misallocated relative to national demand, provide more tuitional subsidy for "B" set of preferences that are more desirable and more profitable.
Affirmative action for capitalists.
I don't follow you. My point is as follows.
You said we needed influx of spending in education.
My counter-argument is thats exactly what we've already done. As a result we've experienced a boom in demand for secondary education, which has consistently hiked up tuition prices on a yearly basis. As a result we are producing education that does not correlate with industry needs which is a problem you originally raised, not me.
The educational tuition bubble and types of degrees that are getting pumped out is a classic example of the business cycle. It's a clear disruption of economic calculation.
Thanks for the replies thus far. A liberal friend of mine recently made this argument:
"Also, why do big businesses need a tax-break when most are making record profits and not hiring and/or passing it on to the consumer? Why should we give them free money? http://donklephant.com/2010/07/15/corporations-holding-1-8-trillion-in-profits/ Take the source with a grain of salt, but the point remans and the data is valid."
What would be the best response? The only answer I had for him was regime uncertainty. But I don't think that addresses it completely.
Low interest rates, the governments "quantitative easy". The usual.
Tax breaks for everyone! No special privileges for corporations.
Also, I wouldn't be afraid of corporate profits. If you took all their profits and redistributed them to the masses, what would happen? The price of consumer services would simply be bid up. There's more money chasing a fixed number of goods. Fixed untill the market can produce more of them by reallocating capital from whatever rich dudes were spending them on and converting them to produce mass consumer goods.
I don't know about you, but I think that oil rigs, processor fabs, and uber expensive alcohol etc etc translate very poorly into making mass consumer goods. In short, what redistributionists are trying to do is change the structure of distribution while pretending that the all factors of production are homogenous.
But really, what consumer goods are in shortage? Food? no. Clothes? no. Shleter? no (well in some places w rent control). Healthcare. Yeah.
Oh well you can't increase the supply of that anyway because the AMA limits how many doctorbs there can be. Guess you have to finally realize that if someone is a government granted monopoly, increasing the minimum wage or capping profits does not change anything that was fundamentally wrong with the picture before. The structure of production remains the same. Thats why they call it re-distribution not increased-distribution of wealth.
filc:You said we needed influx of spending in education.
No, what I meant to say was that one of the only sectors actually deserving a subsidy by this current regime is education. I shouldn't have called it Keynesian, that was just slap-happiness.
But what you're saying is that the act of subsidizing education highly exacerbates the cost of attendance. I think that is a mischaracterization of the situation. Yes, it affects it, but I don't attribute most of the cause to that. Why not?
Take into consideration the inflation-adjusted figures universities and vocational establishments use to calculate various elements of their instructors' employment and cost-of-attendance for students. Then examine expenditures related to energy costs; marketing; food & associated costs. Property taxes, et al. The same retardation in the rising standard of living relative to the costs of average being-here-ness (employment, housing, energy, food, etc.) within the US economy affects both workers and corporate entities in all of the aforementioned necessities' sectors as well as the educational establishment as a corporate entity. Combine that with the decline in Federal grants as a proportion of the educational financial aid system and you have a perfect storm for smaller returns to students.
And for anecdotal substantiation, I recently had to save 2 paychecks' worth of money in a dead-end job to attend the next semester of my vocational school. Not only is that ridiculously painful on my budget, but the only reason it worked out was because I had a friend helping me. I do not currently have the skills to get hired at a job that pays more than minimum wage. My background is in a factory and in retail. I'm sure many others could say the same.
Thanks for the replies thus far. A liberal friend of mine recently made this argument: "Also, why do big businesses need a tax-break when most are making record profits and not hiring and/or passing it on to the consumer? Why should we give them free money? http://donklephant.com/2010/07/15/corporations-holding-1-8-trillion-in-profits/ Take the source with a grain of salt, but the point remans and the data is valid." What would be the best response? The only answer I had for him was regime uncertainty. But I don't think that addresses it completely.
Not a bad point, but one should carefully separate the issues. Regime uncertainty can and really does drive companies to hire less people - which is one of the signs of less investment. It also causes them to hold more cash (like an increased uncertainty would cause most people to stick to more cash on hand).
And that SOME companies make huge profits is something quite different - if, say, bailouts save some major banks, which were supposed to fail, but the smaller banks keep failing, their customers will flock to the ones that have survived... and big banks become even bigger. Same goes for politically connected companies and those, that profit from the many kinds of new regulations.