'Automatic Stabilizers' Would Exacerbate the Pain of Recessions

A rich man once told me something that surprised me. He was once not rich.

Understand that his formerly deprived circumstances weren’t the surprise. The U.S. is happily dense with people who came up from nothing.

In this man’s case he explained to me the why behind his formerly challenged circumstances. He was blunt: “I was doing stupid things. Now I don’t do stupid things.”

Howard Marks arguably puts it more artfully. Paraphrasing the billionaire investor, the seeds of bad times are planted during the good times, and the seeds of good are planted during the bad.

During the good times it’s understandable that relative ease might lead to the development of bad habits and other ways of doing things not consistent with success. Considering lending and investing, the commitment of dollars to a venture is the shifting of resource access to a venture. When times are good, resources are logically abundant on the way to “easier” access to loans and investment. Translated, capital allocators grow a little bit lax. They reach.

In Marks’s case, he and his partners at Oaktree Capital have had a history of becoming pessimistic right when others in their midst are most optimistic. They sense lenders and investors reaching for yield as it were, and that’s right when they start raising money for future funds that will purchase at a discount the mistakes made during the good times.

Which brings us to a recent piece by Slate columnist Jordan Weissmann. Weissmann is giddy about “automatic stabilizers” from government that would allegedly soften the blow of recessions. He says they would “save” the economy from downturns. Basically, government spending would automatically increase during recessions to reduce the pain that they bring. Nancy Pelosi, Mitch McConnell, Donald Trump, Barack Obama, and the other surely brilliant personages who populate Washington could, if Weissmann’s enthusiasm is to be taken seriously, smooth out the difficult times. Washington as savior. Where have we heard that before….?

In Weissmann’s defense, he probably hasn’t thought very deeply about recessions. Because he hasn’t, they’re bad in his eyes. And politicians must protect us from what’s bad.

In truth, recessions are the surest sign of an economy that’s fixing itself. That recessions are a sign of an economy on the mend requires a brief digression. Specifically, the previous truth needs to be discussed in terms of the here and now. It’s not a recession.

What we’re experiencing now is a forced contraction care of politicians on the city, state and national level. Of the view that the answer to a virus was economic desperation, politicians chose to lock down the world’s most dynamic economy. You can’t make this up. How little they understood about history. Didn’t they know that economic growth has historically coincided with massive advances in the area of healthcare; advances that have elongated life and the quality of life all at once?

It’s a long or short way of saying that if a virus threatens, the only answer is freedom. Free people prosper, plus they produce information about how the virus is contracted, how it’s spread, etc. Politicians chose desperation, and one-size-fits-all solutions. Historians will marvel.

The main thing is that recessions are a healthy sign of the individuals and businesses that comprise what we call an economy fixing what they’ve previously done wrong. That’s not what’s happening right now. In the here and now individuals and businesses are to varying degrees fighting for their survival amid the taking of their right to prosper.

So while we’re not in the midst of recession, it cannot be stressed enough that “automatic stabilizers” would fail us whether we we’re fixing our own errors, or if we’re being suffocated by governmental force. In each instance government would be arrogating to itself more control of the economy’s limited resources.

Weissmann writes as though Pelosi, McConnell et al have some private stash of wealth that they can release into the economy in order to stimulate it. He's incorrect twice, though he surely means well.

For one, governments can only spend insofar as wealth has already been created. If anyone doubts this, look up annual national government spending in the U.S. versus Haiti, Peru, or Zimbabwe. Notice the disparity. It’s not because the politicians in the countries not the United States are austere individuals, or incredibly libertarian. They spend very little because there’s very little economic activity taking place in those countries for them to take a piece of. In the U.S., Democrats and Republicans can spend in size fashion precisely because they enjoy a piece of the world’s biggest economy.

Weissmann presumes that government spending creates economic growth. No, that’s naïve. He misses that the growth already occurred; hence the government spending. “Automatic stabilizers” are a consequence of growth that already happened. Weissmann is double counting. He assumes growth can be multiplied if McConnell, Trump et al will simply take it from us, and give it to someone else. If true, theft during recessions would be legalized.

Weissmann’s theorizing also presumes that consumption powers economic growth. No, consumption is the easy part. Investment is what powers growth. Abstinence. Unspent wealth flows to businesses that want to grow, and new economic ideas that cause our productivity to soar.

Which is why Weissmann’s solution to economic hardship would only succeed insofar as it would add to the hardship. Indeed, the Slate columnist is calling for Congress to be handed greater control of private wealth when the economy is weakest. Central planning as the fix! 

In Weissmann’s defense, he’s not alone. Nearly every economist buys into the double counting fantasy. Weissmann’s merely parroting them. Economists believe the silliest things.