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Growth will not end this depression

(4/5 | 5 votes)

Antonio España.- 07/08/2012

Imagine that you are laid low by a really strong flu. You’re running a high fever, have chills, feel dizzy, and your head and muscles ache terribly. Not a promising picture, indeed.

In this situation, Dr. Krugman happens to visit you and prescribes for you to do workout to get fit and strengthen your defenses. You immediately protest with the small voice that your sore throat permits: “Hey you, listen, I can barely move!”. And the Nobel laureate replies: "It's okay, don’t be a neocon, just have some pills and put yourself to run. You’ll see how eventually you will get better”.

Does that make any sense to you? Nevertheless, something like that is what growth advocates are prescribing to exit this crisis, as did American economist Paul Krugman this week during his visit to Spain to promote his new book “End This Depression Now!”. (Watch an interview with Krugman by El Confidencial here, or a debate between him and Professor Pedro Schwartz at the Rafael del Pino Foundation here).

The economy is in a double-dip recession, after a short relief: the Spanish risk premium shot well above 500 points by the end of the week; the Ibex index fell again below 7,000, to the values of 2003; unemployment is relentless and advancing towards 6 million –in spite of the good news this week-; we have a high deficit and no one excepts the government to reach the target of 5.3 percent this year; public debt is skyrocketing above 90 percent of gross domestic product, taking into account government guarantees; and in the private sector even deadbeat customers don’t dare to buy.

Yet there are still those who think that the solution is growth, which is simply a fancy way of asking for more government spending. Put it another way, what these eminent economists and politicians want to grow is... the state.

Artificial growth

Will growth kill the virus causing the Great Recession? I'm afraid not. As long as the uncertainty about financial institutions' balance sheets remains, the interbank market will stay closed and barred for Spanish banks, and the risk premium will continue through the roof as investors are smart enough to realize that politicians are trying to solve a debt problem with more debt.

This makes public debt financing increasingly unsustainable, while private debtors have enormous difficulties to refinance, let alone access new credit.

In this vein, endeavor to grow artificially moves us away from the goal of recovery. If you saw “Poltergeist” –a horror film produced by Steven Spielberg and released in 1982– perhaps you remember the scene in which the mother rushes to her daughter's room down a hallway that mysteriously grows longer as she attempts to run faster.

That's exactly what will happen to us if we keep insisting on growth at all costs –in fact, it is arguably what we have been doing since the bubble burst back in 2007.

So, what are our options then? As in the case of the flu, I'm afraid there is no other way than to "sweat out the fever.” Common wisdom tells us the truth about the duration of colds: with treatment they last seven days, without treatment, a week.

For an economy, the answer regarding the length of depressions is about the same, just leave the market process to do its job and correct the malinvestments incurred in the past.

Relieve the symptoms

Obviously, you may need to take something to relieve symptoms, especially in the case of the weakest. But do remember that just feeling better because of the effects of drugs, does not necessarily imply you are cured to go play a basketball game with friends.

If you do it, you risk ending up with a pneumonia relapse, and instead of seven days, recovery takes a whole month. Or even worse, the disease can become chronic and keep you for a few years or even for lifetime. That was what happened to the United States in the Great Depression, or to Japan in the lost decade.

Growth is not something that any government, central bank or supra-national administrative body may decide for itself -unless we live in a totalitarian system in a socialist economy, and not even that, as Mises demonstrated.

Economic growth is not an alternative course of action to end the depression, but a consequence of it. It is the result of consumption and investment decisions taken by all the agents that form part of the economy, based on their very own estimates and subjective judgments about the future.

Let markets lead to healthy growth

So, let’s not be obsessed with growth. Let’s not ask our politicians to increase the size of the government. Instead, let’s push them to put an end to state intervention –or, at least, to shrink government to a bare minimum, just the necessary to protect the most disadvantaged– and leave the forces of the unhampered free market to put us back in the healthy growth path, based on genuine savings, adequately channeled to sound investments.

We need to make them abandon the fatal conceit of believing that they are the ones who are going to solve a problem they themselves created in concert with the banks.

Thus, there is only one way out, which is to clear up the investment errors committed in the previous era of credit expansion, so that those who risked their money suffer losses according to their lack of vision –or prudence. Projects that will never be profitable need to be shut down, and resources freed to be employed for those uses that are really demanded by consumers.

Step by step, and not without difficulties, the market is making this adjustment and eventually will grow back.

As often stated by Spanish Professor Jesús Huerta de Soto, the market is dynamically very efficient, which means that it always ends up finding its course, despite the obstacles or impediments imposed by the state, imposing measures that operate just in the opposite direction.

The difference is time. What do you prefer: to suffer seven days with an intense flu and be standing in the eighth, or spend ten years with a chronic cold?

(4/5 | 5 votes)