Stimulus: A History of Folly

“The cycle of decay and renewal is as much a part of capitalism as it is of the forest floor.” But, in the 1930’s, “something in the normal regenerative process was missing. There was no decisive recovery from the business-cycle bottom. People had lost their speculative courage, and the more government legislated and taxed, the more that credit sulked.”

Government intervention in the economy not only doesn't work, it never has. We learned this painful lesson last during the stagflation of the 1970's, and in subsequent years, when Reagan followed the advice of Milton Friedman ("Free to Choose") and radically cut tax rates, deregulated the economy, and provided for a stable financial system, it was thought we would never go down this rat hole again. We were wrong. Following is a definitive proof. Be sure to follow the linked full article...T

...In fact, stimulus may be precisely the wrong metaphor. Rather than getting jazzed up, we need to be calmed down and to take the time to learn from the Great Depression, a time when government did too much, not too little. Amity Shlaes makes the argument in The Forgotten Man, her book about the Great Depression, that the constant experimenting and meddling of the New Deal froze investors and business operators in fear: “Businesses decided to wait Roosevelt out, hold on to their cash, and invest in future years.”

Despite the warnings of Keynes, the experience of the past half-century indicates that today’s low interest rates will start having a positive effect, though it still will take many months. Meanwhile, left alone, what Hayek called “spontaneous order” will find its way forward. Using a different metaphor, James Grant, in his history of credit, Money of the Mind, wrote, “The cycle of decay and renewal is as much a part of capitalism as it is of the forest floor.” But, in the 1930’s, “something in the normal regenerative process was missing. There was no decisive recovery from the business-cycle bottom. People had lost their speculative courage, and the more government legislated and taxed, the more that credit sulked.”...
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