When Left Alone, Economies Never Fall Into Recession

Hoping to get his economic stimulus plan passed, President Obama has warned Americans that “If we don’t move swiftly to put this plan in motion, our economic crisis could become a national catastrophe.” Translated, bread lines are in our future absent help from Washington.

The problem here is that what Obama assumes is a logical impossibility. Economies, despite protests otherwise from economic thinkers on both sides of the political spectrum, never recess on their own. More realistically, if left alone, economies can only grow. That is the case because productive work effort is what constitutes economic growth, and given the human need for food and shelter, people will always work in order to insure the existence of both.

But since Obama is stridently of the view that the world’s richest and most innovative economy can’t grow without federal assistance, a thought experiment is in order. What if Congress and the Obama administration took a six-month vacation and simply did nothing?

This would surely bother some Republicans who strongly feel that tax cuts are the tonic for what ails us. The notion is an appealing one given that taxes are merely a price put on work effort. At the same time, the U.S. economy has grown smartly with marginal rates much higher than they are at present, so to suggest that more tax cuts make keeping Congress in business a necessity seems a bit dramatic.

Furthermore, a do-nothing, vacationing Congress also could not raise taxes. So while work penalties wouldn’t fall, the cost of work also wouldn’t rise. This certainty in and of itself would be a big boost to future economic activity.

Republicans also seek to pass a measure that would reduce mortgage lending rates alongside a tax deduction on home purchases. For this alone a Congress on vacation would be a huge improvement. Indeed, home ownership is already heavily subsidized, and more federal help would simply drive more money into property, and away from the entrepreneurial economy. It would also lock even more Americans into specific regions of the country at a time when worker mobility is essential for a resumption of growth.

Democrats seek an extension of unemployment benefits, but if Congress weren’t in session, an impoverishing change like this couldn’t pass. Non-passage would offer the economy a huge economic boost owing to the economic reality that jobless benefits make it easier for workers on the sidelines to avoid looking for work altogether. Productive work effort once again is economic growth, so a reduction in the subsidies that allow Americans not to work would be hugely stimulative.

There would also be no trillion dollar stimulus package. It can’t be stressed enough that as the government creates no wealth, any efforts by it to stimulate certain aspects of the U.S. economy mean that it is depressing other parts. Rather than taxing or borrowing a trillion dollars and reducing U.S. wages in the process, there would be an extra trillion dollars in private hands that entrepreneurs and business could bid for in order to create real wealth that would not be distributed by our vacationing legislators.

The “Buy America” provision in the stimulus bill which has attracted support from both parties, but that properly scares investors to death, would die a quick death. Subsidies are merely tariffs by a different name, and as they’re at their core a tax on work, another governmental barrier to true productivity would fall by the wayside.

The disaster that is TARP would be put on hold, meaning the gun-shy zombie banks in our midst would fail only to be purchased by new owners whose future lending decisions would not be compromised by the stupendous lending failures of the past. In one fell swoop, our flagging banking system would achieve renewed health absent Washington meddling that has greatly weakened it.

And with our federal minders not seeking to create disorder through greater controls on lending rates, new capital would reach the loan markets thanks to the intrepid among us eagerly taking advantage of high rates of return wrought by what some deem a “credit crunch.” A slumbering Washington would translate to a boost in business confidence such that lenders would more likely be paid back thanks to a better business environment all around. Successful loans at high rates for first movers would create a natural loan environment that would ultimately attract more profit-seeking capital, thus bringing down interest rates in the process.

As for the dollar, with Treasury Secretary Tim Geithner hopefully well out of pocket, he could no longer make irresponsible comments about China that have proven time and again so bad for the greenback. Absent devaluationist commentary from Geithner, investors might comfortably bid up the dollar such that it would move out of inflationary territory. This would offer the economy a huge boost in that a stronger currency would reorient investment away from hard assets, and back into the wage/entrepreneurial economy.

So President Obama says we face catastrophe absent help from Washington? Far from it. Economies once again never fall into recession; instead they are pushed into slowdowns by governments that create wedges between work and reward. In short, the single best tonic for our economy is not tax cuts or tax increases, not housing or unemployment subsidies, not heavy spending or China jawboning, but a far humbler Washington that simply does nothing. Left alone, there’s nothing individuals working free of government oversight can’t achieve. The answer to our economic ills is for Washington to simply leave us alone.