Can the Government Control the Business Cycle?
Everyone knows that politicians tend to be less than honest. I think another common characteristic is that they try to extend their influence beyond their range. This may not be a bad thing. As they rise to power, so does their level of influence.
One thing that the politicians attempt to control with limited success (at best) is the economy. Yes, it’s true that by choosing good economic policy the government can enable businesses to thrive and succeed. However, there is a limit to how much they can do. Beyond a certain point, the politicians do more damage than good.
This is an age old problem: Can the government really control the economy? Can it eliminate booms and busts while enabling smooth growth? The best explanation I have seen of the problem is this rap video. Both sides are sure that they are correct.
It is interesting to note that we may never have a really good answer to this problem. At least not for a long time. There are too many factors affecting an economy to measure the result of one economic policy. And, there are way too many people willing to distort the truth in order to take credit for a good economy or lay blame for a poor one.
Personally, I think the government can control the cycle of boom and bust to some extent. Interestingly, when it fails, it will fail catastrophically. Like driving a car too fast through a turn, everything is fine until it is too late. At that point the car skids off the road and there is nothing you can do.
The current attempt to pump up the economy and avert the next stage of the business cycle is doomed to failure, in my opinion. I think that if you fight the impossible, it just makes the crash bigger. You can push it off into the future (which is what politicians do with most problems), but it only makes the problem bigger.
The biggest lesson that we can learn from the attempts to control the business cycle is that we cannot really control it. However, we can understand it and see what is happening. The government is setting the stage for massive inflation (although they say that inflation is nearly zero). We cannot control the level of inflation.
The big thing that we can control is our response to it. While most people sit around and watch TV and believe what the government is telling them, we can do something different. We can invest in assets that will rise as the dollar falls. This includes gold, silver, commodities, Chinese money, and Indian money.
Our destiny is our own choice, regardless of what the government does. In 10 or 20 years, millions of people will lament that they got wiped out by some financial collapse. Don’t be one of them!
Check this post for more information about the business cycle.
Related posts:
- The End of the Business Cycle
- The Price of Gold Takes Off
- Big Ideas Beat Big Government And Big Business
- Gold and the S&P 500: What is the Future Price of Gold?
- Government: Is The Next Bubble Already Forming?
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I'm George Ulmer. Matt and I started this blog and launched the Online Investing AI business. Our goal is to develop the technology to allow anyone to retire after working for 10 years.
is one of my favorite financial books of all time. It's an allegory about a guy who has a terrible job, and how he overcomes challenges to achieve his dreams.
I loved the rap video. It was a great way to make economics interesting.
I don’t think the government is qualified for controlling anything, including the economy. They can’t control federal spending or even pay their own personal taxes and debts. The Fed and Treasury are thinly disguised advocates for the private banking industry. And, the banking industry is more interested in looting than financing.
In my opinion, there are two reasons government econmists haven’t been able to moderate the economy.
First, they don’t have the courage to slow the economy when it is obviously overheating. Greenspan brought up the “irrational exuberance” before the tech crash and he was soundly criticised. He also mentioned the “frothy” real estate prices “low-hagning fruit” problem for hedge funds. Once again, he was ignored becaue no one had the wisdon or courage to pull back.
Second, the massive amount of public debt and spending is keeping the government from making the tough choices. Entitlements are soaking up an increasing amount of the federal budget and it is burdening the economy to the point where hiring is becoming difficult. The stimulus and easing aren’t go to help the economy as long as we are on this unsustainable path.
I agree that it may not be such a great idea for the government to control too much. That’s a good point about courage. It takes courage for a politician to go against what he perceives as popular opinion. Maybe our political system has deteriorated to the point where elected officials lack courage. Or maybe it’s a natural by-product of having elections every few years.
they don’t have the courage to slow the economy when it is obviously overheating.
This is the key to all our trouble, in my eyes.
Politicians are never going to make hard choices. It goes against their nature. It is not what they do. Politicians are followers, not leaders.
I think middle-class investors need to educate themselves re what works and share with each other what they learn. People think this cannot be done because it has never been done before. But we never had the internet available to us before as a tool for working around the politicians and the people who will tell us anything to sell us junk.
When the economy is permitted to overheat, we are the ones who pay the price in the end. So we should be taking the responsibility for seeing that this never happens again into our own hands.
By the way, I linked to the same Hayek/Keynes rap video in a column that I wrote titled “Keynesianism Goes Conservative” that will appear at the http://www.DeathBy1000Papercuts.com site tomorrow. My view is that the good aspects of both major economic theories need to be integrated into a new model that actually works.
Rob
Hi Rob,
Thanks for your thoughtful comment. Wasn’t there a once-upon-a-time when politicians were leaders? What about in the future?
I love your idea about middle-class investors working together. It sounds like a finance community that would actually help its members.
George