The Bear’s Lair: The rapid dynamism of free markets

In August 2020, under President Donald Trump, the U.S. unemployment rate fell in one month from 10.2% to 8.4%. Under President Barack Obama, the U.S. unemployment rate peaked at 10.0% in October 2009; it then took 27 months, until January 2012, to fall to 8.4%. That is not a commentary on the relative competence of the two Presidents concerned; it is a commentary on the relative efficacy of their economic policies. The free market moves very quickly indeed to restore full employment when disruption has occurred; the regulated and micro-managed socialist market may never restore full employment at all.

The nineteenth and early twentieth century were filled with deep recessions that solved themselves very quickly, with no help from government:

  • In 1819, Britain suffered a deep recession when Lord Liverpool took the country back onto the Gold Standard at the pre-1797 parity, because this required a price deflation of a full 40%. However, in the event the recession began after the Prince Regent’s speech to parliament in January 1819 and was already lifting by the time of the “special session” of Parliament that passed the “Six Acts” in November/December of that year. Only the 15 unfortunate victims of the “Peterloo Massacre” were permanently affected by it. Even at the time, voices spoke against the government’s Gold Standard policy, notably the radical Whig Henry Brougham and the self-dealing foreign exchange trader Nathan Mayer Rothschild, both of whom argued that Gold Standard resumption would be ruinous. It wasn’t.
  • In December 1825, the British banking system came close to collapse. Again, the Liverpool government in 1826 put in protections against a repeat of the problem but did nothing to bail out the banks or the economy. The result was a short, sharp recession, that was well into recovery by September 1826.
  • Like the two British recessions above, the Panic of 1819 in the United States was short and sharp, with little remedial action being taken and a fast recovery. The following Panic, that of 1837, was much more serious, however, because the Andrew Jackson administration had de-chartered the Second Bank of the United States, collapsing the U.S. banking system, which relied on the Second Bank to ensure Mississippi bank banknotes were accepted in Pennsylvania at close to par, rather than at a 30-40% discount. With the country’s common currency abolished (there being now no nationally-issued banknotes) and a shortage of gold and silver, the depression lasted until 1843. The moral of which is that governments cannot usefully alleviate lengthy depressions, but they can sure as hell cause them.
  • Moving closer to living memory, the 1920-21 U.S. recession was ended quickly by Andrew Mellon’s preferred method of “liquidate, liquidate, liquidate.” Then the 1929 recession became the Great Depression because Presidents Herbert Hoover and Franklin Roosevelt did exactly the opposite, using Keynesian methods to prop up uneconomic companies, inordinately increasing tariffs and taxes and imposing regulations that severely dampened new business formation.
  • In Britain in 1929-31 the economy was depressed by an overvalued Gold Standard sterling parity, a refusal to match other countries’ tariffs and excessive government spending. Since the Labour government would not cut spending, the markets forced Britain off the gold standard, whereupon a new National government instituted modest Imperial Preference tariffs by the Ottawa Agreement. The depression disappeared as if by magic, except in a few specific areas such as Jarrow’s shipbuilding (in deep depression because world trade had halved).

The Great Depression and its interminable length, together with Maynard Keynes’ theories of “stimulus,” have ensured that governments now meddle incessantly whenever their economies fall from full employment. This has resulted in much slower economic recoveries than we previously enjoyed. The prime example of this was the recovery from the 2007-09 financial crisis, which was hindered not helped by artificially low interest rates and incessant regulatory meddling by the Obama administration, particularly in finance and energy. As a result of these poor policies, we had an appallingly sluggish economic recovery, in which it took 27 months to reduce unemployment from its peak of 10.0% in October 2009 to 8.3% in January 2012 (the first month below August 2020’s 8.4% figure). The true cost of that failure showed up years later in the surge of opiate deaths among working class men who had despaired of ever finding work.

This time around, the drop from 10.2% to 8.4% unemployment was accomplished in just one month. That is a tribute to President Trump’s free-market instincts and to the ending at July 31 of the $600 per week subsidy to unemployment claimants. Going forward, we are likely to get further economic bad news — there is far too much dozy investment that has been created by funny money, all of which must be liquidated. However, we can at least be confident that with Trump in office, the recovery from any “double dip” will likewise be swift, and there will be no Roosevelt-Obama “lost decade” of unemployment and waste. We can also rejoice that we are starting from 8.4% unemployment, not 10% — the difference represents millions of people whose lives have NOT been wrecked by the follies of government.

The policies that make the economy operate optimally are those that gave Britain the Industrial Revolution. Government must be as small as possible, with a currency whose value is stable from decade to decade – which in practice means a Gold Standard or maybe a robot Paul Volcker at the Fed, with an inflation target of zero, not 2%. Real interest rates will fall out from monetary policy but should generally be positive but not too heavily so – between 2% and 5% per annum above inflation for risk-free long-term paper will work fine and will ensure that productivity growth is optimized, since dozy unproductive investment will be discouraged. That interest rate and monetary framework will generally set favorable conditions for middle-class saving, perhaps the most important factor in generating new business formation, the key element of growth. Add rock-solid property rights, a flat income tax with no exemptions, a simple and transparent legal system and minimalist government regulation, and we’re good to go.

It really is not difficult; it simply gets messed up by democratic politicians seeking to offer handouts to the electorate, when neither the politicians nor the electorate really grasp free-market basics. Ayn Rand was right in “Atlas Shrugged” – in a sensible system you would write this stuff into the Constitution, to stop politicians making a mess of it. By all means have democracy; but have the basics of free market economics written into some unalterable underlying law, so they are not subject to uninformed popular debate.

In the world we unfortunately live in, we have President Trump, and maybe after January President Joe Biden. Whichever of them we choose on November 3, we are unlikely to get a sensible Fed policy until we are forced into one by economic disaster. We are also likely to get a further downturn in the economy. However, at least if we keep President Trump we will have a good chance of rectifying any such disaster fairly quickly. With President Biden, judging by the Obama record, there will be no such assurance – Democrats are inveterate economic meddlers.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)