Saturday, July 4, 2015


Four consecutive months of negative GDP growth have caused the usual suspects to begin fretting about a possible recession with the all too predictable calls for stimulus spending and interest rate cuts. Certainly the Notley government's tax hikes in the midst of the falling oil price turmoil has put a damper on the previously energetic oil and gas sector but worries about the Canadian economy are unfounded and the cure suggested by establishment economists would certainly be worse than the disease.

GDP doesn't matter. The problem with GDP is that it measures government spending as if it were productive. If the government were to hire ten bureaucrats to sit in a room and play cards then the GDP would go up. If these same bureaucrats were to be fired then GDP would go down. In fact it can be even worse than this because those bureaucrats may not simply be employed at nothing they could be actively employed in creating barriers to the production of wealth. The impetus regulation of industry was large firms seeking to impose high fixed costs on their industry in order to hobble small competitors. An official who is employed in imposing regulatory hurdles on industry not only fails to add to the wealth of a nation but actually retards it's creation, and yet the GDP statistic counts this person's salary as if wealth were being created.

Statistics are only useful to would be central planners overcome with hubris. The only planning that a market economy needs is accomplished by entrepreneurs with the aid of the price system. Through the effortless adjustment of prices on the basis of supply and demand entrepreneurs are able to best allocate scarce resources towards their most efficacious ends. Individuals who advocate for interest rate cuts to combat a fall in GDP do so because they still subscribe to the long discredited Keynesian explanation of the business cycle. Keeping interest rates artificially low creates a false prosperity by encouraging uneconomic investments in capital goods industries. Ideally interest rates would be set by the market, as a function of the degree of consumer savings, instead of through the machinations of central bankers. Most likely interest rates are far below their optimal level and should be raised but the only way to know for sure is to remove state intervention in the money supply entirely (which, incidentally, would put an end to the boom-bust business cycle which has plagued the western world since the advent of central banking).

Stimulus spending is an equally ineffective tool for combating a recession. The trough is actually the healthy phase of the business cycle, as malinvestments in capital goods industries are liquidated and resources are reallocated along the basis of consumer demand. There is no need for government intervention and efforts to 'fix' the recession will only lead to it's worsening (hence why the great depression was so great but no one has ever heard of the depression of 1920-21). The problem is not a failure of aggregate demand or a glut of over production; indeed Saye's law disproved the very notion of over production quite some time ago as supply of x constitutes demand for y. Government spending is bad for the economy. When the spending decisions in an area of the economy are determined by bureaucrats, as is the case in any of the industries that the state has monopolized, such as infrastructure or education, then you will necessarily have resources allocated not on the basis of consumer demand but instead the spending will be the consumptive decisions of the bureaucrats in charge. There is simply no rationale for allowing an individual or a team of individuals to make the decision for how much of what should go where when the price system can do a much better job. There is no way for a planner to compete with the elegant and simple solution of the price system and there is also the tremendous benefit that the latter plan of attack can be accomplished in an entirely voluntary fashion free from the use of coercion which characterizes taxation. It is wrong to use force in order to get your way, a basic moral principle which we should all be ever conscious of.

There's really no way to tell under the present system how many roads should be built, and where, or how many teachers should be hired, how large classrooms should be, precisely what methods of education should be used, and so on and so forth. What we are left with is simply guesses made by plodding officials, a pale shadow of what could be accomplished through the use of markets.

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