If economic recovery is to be achieved, the first thing that must be done is to stop “stimulus packages” and undo as far as possible any that are already in progress. This is because their effect is to worsen the problem of loss of capital that is the underlying cause of the economic crisis in the first place.
Unfortunately, they are not likely to be stopped. When they are implemented, especially on the scale just passed by Congress, the effect is a decumulation of capital up to the point where scarcities of capital goods start to drive up prices.
Higher prices of consumers’ goods will result not only from scarcities of consumers’ goods but also from scarcities of capital goods further back in the process of production.
Thus a scarcity of steel sheet will not only raise the price of steel sheet, but will carry forward to the price of automobiles via the higher cost of producing automobiles that results from a rise in the price of steel sheet. Likewise, a scarcity of iron ore will carry forward to the price of steel sheet, which, again, will carry forward to the price of automobiles.
And, of course, the pattern will be the same throughout the economic system, in such further cases as oil and oil products, cotton and cotton products, wheat and wheat products, etc.
Once inventories become scarce in relation to the spending for goods, all of the funds that the government has been pouring into the economic system become capable of launching a major increase in prices. This rise in prices can take place even in the midst of mass unemployment. This is because the abundance of unemployed workers does nothing to mitigate the scarcity of capital goods that has occurred as the result of the attempts to stimulate employment.
The inflation of the money supply by the government results in continuing capital decumulation. In large part, this occurs as the result of the larger money supply raising business sales revenues immediately while it raises business costs only in the future. So long as this goes on, profits are artificially increased.
Despite the fact that most or all of the additional profits may be required simply in order to replace assets at higher prices, the additional profits are taxed as though they were genuine gains. This impairs the ability of firms to replace their assets. The destructive consequences of this phenomenon can be seen in the transformation of what was once America’s industrial heartland into the “Rust Belt” (that’s us here in Western PA).
At the same time regular year-in, year-out government budget deficits do their work of destruction. They cause a continuing diversion into consumption of savings and replacement allowances for fixed assets.
Generations of government budget deficits have sucked up trillions of dollars of what would have been capital funds and have gone a long way toward turning America into an industrial wasteland.
The blind rush into massive “stimulus packages” is the culmination of generations of economic ignorance transmitted from professor to student in the guise of advanced, revolutionary thinking – the “Keynesian revolution.”
The accelerating destruction of our economic system that we are now experiencing is the product of a prior destruction of economic thought. Our entire intellectual establishment has been the willing victim of a massive intellectual con job that goes under the name “Keynesianism.” And we are now paying the price.
I say willing victims because what other description can there be of those who hail as a genius the man who wrote, “Pyramid building, earthquakes, even wars may serve to increase wealth….”
That’s not misquoted, read it again. Now read and try making sense of it. That is the economic theory everyone in government and the media embraces. Think about that the next time you take anything Paul Krugman writes seriously.
Only a brave few, most notably Ludwig von Mises and Henry Hazlitt, stood apart from this madness, and for doing so, they were made intellectual pariahs. My overwhelming hope for this recession is that the American public will wake up and reject the harmful theories of Keynes that placed us in our current situation.