Confidence Follows Correction

Mario Rizzo at the Freeman has a fantastic piece up.  I suggest you read all of it, but here is an excerpt.

Recessions are not simply crises of confidence or of insufficient demand (due to increases in the demand to hold money). They also have their allocational—or microeconomic—aspects. I suggest that these systemic distortions have an important role in creating the aggregate phenomena we are witnessing. To treat these distortions and their cure as relatively unimportant is a mistake. Lasting investor and consumer confidence follows the correction of the underlying causative distortions and does not precede them. In fact, the dominant macroeconomic policy framework does not leave room for correcting distortions at all because its basic theme is to restore, prop up, and maintain the current direction of resources.

The hastily approved macroeconomic schemes of the Bush and Obama administrations will not succeed in promoting lasting recovery because they ignore the microeconomic fundamentals. The direction of spending and hence resource allocation they generate are fragile—they are not consistent with the preferences of consumers, savers, and investors. Therefore, once the putatively temporary stimulus is complete, the corrective forces that are now trying to undo previous resource misallocations will reassert themselves.

Emphasis is mine.

The key point he illustrates is Keynesians and Macroeconomists focus too much trying to fix something they can not possibly know enough about to fix. The knowledge is dispersed among all of us acting in our own interests, putting resources to their best use. There is no way a central planner can know how to use all of these resources, nor do they really care. They simply want to prop up the result, ignoring the sustainability.

This is why instead of propping up failing companies, we need to allow them to fail, and allow their resources to be reallocated freely to uses that produce profit (success!).  I don’t want to minimize how confusing all of the financial stuff that was going on – I don’t get it, and Macroeconomists do.  Clearly to me, the solution lies not in propping up a failing industry, but instead allowing it to collapse and emerge stronger.  Let those who chose not to participate in the schemes, those who planned, lived beneath their means, bought what they could afford, and remained solvent enjoy the fruits of those choices and thrive.

Link via Cafe Hayek

About Paul Stagg

Husband, lifter, MBA in Baltimore, MD. Will post about Powerlifting, politics, Classical Liberalism, Economics, building wealth, self improvement, productivity, heavy music, wine, food, beer, and almost anything else. View all posts by Paul Stagg

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