Hayek on Handling Recession

Sam’s comment this morning was so good, I need to comment on it twice.

He’s right that there’s no need for vitriol at half the population. But he’s wrong in arguing that governments should be piling up debt during a recession:

However, it seems pretty clear that the human suffering mitigated by maintaining transfers through a recession drastically outweighs the suffering created by the govt taking on debt to be mostly paid by rich taxpayers of the future.

Nobel Prize winner Friedrich Hayek would disagree with him twice over.

First, it’s certainly true that young people have been involuntarily burdened with a humungous monetary debt just to keep this generation in … if not clover, then at least in the same hole they found themselves when the recession struck.  But there’s also an important sense in which this generation pays for these debts now.  As Hayek’s colleague Ludwig Von Mises points out “financing a war through loans does not shift the burden to the sons and grandsons.” That is to say, the real burden of required real resources for a war (or a war on welfare) “falls upon the living generation” and is “a method of distributing the burden among the citizens.”

A burden about whose justice we disagree.

Second, a recession (or depression) is actually the recovery phase after an unsustainable boom. It’s the period where all the misallocations and malinvestments are shaken out. You have no choice about the pain of an economic depression (or recession). But you do have a choice about how long the pain lasts.

When economic troubles strike, policymakers are eager to do something to try to help the citizenry. In this Learn Liberty video, Prof. Lawrence H. White argues that government doesn't necessarily know how to relieve economic woes, and in fact, often wastes and mismanages resources. Individuals in the market know better what they need in their circumstances, as economist Friedrich Hayek argued during the Great Depression. Relying on government to fix our economic woes instead of allowing individuals to make decisions for themselves means putting all of our eggs in one basket. Individual decisions in the market won't be mistake-free, but each individual mistake will be smaller and will correct more quickly. The unusually slow and painful recovery that we have seen in this recession point to problems with the "government should do something" view. What do you think might be the best way to handle economic difficulties? Why?