Today Mish reports on the state of the Eurozone's continued progress towards collapse. He does a good job of bulletizing the problems in Italy and Spain. The whole Eurozone is done for when these two economies collapse simply because of the size of them. But Mish's bottom line comes off as so stark, unfeeling and even heartless that it bears explanation. He writes,
"Correct ApproachThe correct approach is to reduce taxes and make it easier for businesses to fire workers. Logic dictates that if it's difficult or impossible to fire workers, businesses will not hire them in the first place."
The first thing to note is that Mish is making these statements from the viewpoint of an social economist, not from a political perspective. Governments cannot do the right thing in these cases because it will necessitate admitting they have been running a Ponzi scheme all along. Mish is not a politician and is thus free to tell the simple truth and it is a truth that would lead to the quickest healing with the least amount of damage possible.
If your 747 jetliner is out of fuel and guaranteed to crash you can continue to delude yourself (and your passengers) that it is save-able. You can conjure up all manner of (impossible) strategies for soft landings and you can imagine airplane-sized safety nets all over the place in the form of soft water, soft pastures, etc. But none of these things are real. 747s do not glide well at all. When power is lost, they basically fall out of the sky. Your best bet is to put on whatever parachutes are available and then jump out. That there are not enough parachutes for everyone onboard is a given but those people were basically dead men walking the minute the fuel ran out. They were just in the wrong place at the wrong time. Avoiding the admission of this does not change the fact.
And so it is with the economy. Continuing to try to prop up the collapsing Ponzi is not going to save it. It will simply mean less people escape with their skins. Since government is running this Ponzi, all of Mish's proposals for damage reduction center around getting government out of the cockpit and away from the controls. After all, the pilots that got us into this mess should not be the ones we count on to get us out. They have already proven that they are either criminals or criminally incompetent.
Mish's first suggestion of tax reduction needs more explanation since he was not explicit this time. Mish wants government to not only not raise taxes, he wants them reduced. But he does not want this to happen at the expense of expanding debt. The only other option is for government to downsize, and to do so rapidly. Of course, this is not a panecea and will initially result in a much weaker economy because the governement spends a lot of money into the economy. But over the long run it will make the economy much stronger because money spent by government is often wasted.
Why? Because money that is not earned by the sweat of your brow is easy to piss away through fraud, waste, abuse and corruption. If people are free to keep their money they will eventually spend it on things they think makes sense to themselves. People will spend their money eventually because we are all dying and you can't take it with you. This is why we do not need Keynesian intervention by government (e.g. the debt based spending of public money when the public itself has decided to save instead).
Mish's next suggestion is to let the free market determine wages and employment levels. If there is a need for labor then companies will hire not because they want to but because if they don't they will not produce enough output to be competitive. They will hire out of their own desire to grow and to prosper. But if there is no need for employees yet intrusive government madates that employees be kept on anyway, or it mandates what they must be paid, then companies will hunker down under the oppressive hand of government. They will take fewer risks because they will not want to be punished by government requirements not to lay people off or orders not to reduce their salaries should it turn out that the risk didn't pay off.
Mish's bottom line: governments should stay the heck out of the operation of the free market because when governments begin to control everything they do what's best for themselves, not for the people. This causes distortions, bubbles and problems which even more interference will only make worse. Of course, this is not just Mish's opinion; it is a basic tenet of Austrian School economics.
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2 comments:
Why is money spent by government often wasted? Because government is made of people and we just do not take care of what we don't own the same way as of what we own of our own. Or does anyone take as much care of a rental as of his vehicle or put as much thought choosing a rental as his vehicle?
And, yes, ease of laying off means that the cost of mistakes in business decisions is low, therefore leading businesses to be more entrepreneurial than otherwise.
Though Austrian economics states the same, it only does so because it regards human activity as imbued with common sense, a trait that we the people have plenty of and that the government totally lacks.
"common sense, a trait that we the people have plenty of and that the government totally lacks."
I can't let that comment pass because it is just wrong! Do not mistake bad decision outcome as being the result of lack of common sense! The real culprit is that government looks out for itself before it looks out for the people. People are a renewable resource to bureaucrats. That's how we are viewed behind closed doors and that's how we are treated when you stop listening to rhetoric and propaganda and instead do the analysis with a clear head. Government has the common sense of a very smart criminal/con man. It's the morals that come with checks and balances that governments lack, not common sense.
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