The Real Solution to the Coming Economic Crisis

My previous article demonstrated how the free market solves a boom-bust crisis and is the only solution, its effectiveness depending upon the magnitude of the crisis and, more importantly, how much the government intervenes in response. The bigger the problem created by the Fed, the greater the crisis and the more government intervenes, and the slower the economy recovers.

Here we consider how the market works most effectively, with the efficiency of the process maximized by policy restraint. Like most illnesses, recessions can be “cured” with rest, hydration, nutrition, and fresh air, rather than major surgeries and dangerous medications.

The solution begins with getting rid of the initial monetary causes and allowing market participants, especially entrepreneurs, to adjust to the new conditions. Entrepreneurs will reallocate resources according to current consumer preferences and away from the previous policy allocations. There is no easy, straightforward market playbook for an individual entrepreneur to consult. Should a pizza restaurant stay open one hour later or use in-house delivery drivers? The owner could figure it out, but policy makers would have no idea of where to even begin to answer such questions.

Consequently, policy makers approach the problem with a high level of ignorance. Their policy “tools” are simplistic, nonspecific, and almost uniformly counterproductive. Therefore, any attempt at policy mitigation will only worsen and lengthen the negative impacts of the crisis. As Murray N. Rothbard concluded, “Government hampering aggravates and perpetuates the depression.”

However, the bureaucratic mind of public officials goes “warbling back to the fire” of more government intervention, and this is the big danger. They have no ideas or policy tools that work. The costs they impose and the agony they create are pain they do not endure themselves, creating huge burdens and destroying resources in the process.

Public officials might be lauded for their efforts to “do something” to address the crisis, but their efforts only undermine corrective and recovery efforts. FDR’s manic “New Deal” of government intervention in the Great Depression actually was a decade of dismal failure leading to catastrophe. Hence, we need to understand the crisis and the correct solution in order to avoid economic disaster.

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