Why the Prolonged Slump?

With Friday's dismal jobs report showing a paltry 54,000 increase in nonfarm payroll employment in May A good question is "Why the Prolonged Slump?"

First, the Federal Reserve's easy-money policies after the dot-com crash, in conjunction with other government policies, fuelled the housing bubble. Many economists (not just Austrians) have now come around to this explanation, but Austrians economist have been saying this for a long time. In addition to Peter Schiff's famous showdowns, the Mises Institute's own Mark Thornton wrote incredibly prescient columns as early as 2004 on the issue.

Now in the standard Austrian theory of the business cycle, the question is not "How do we get out of a recession?" Rather, the question is "How do we avoid the boom?" According to the Mises-Hayek theory, the preceding boom makes the corrective bust inevitable. The goal, therefore, is not to keep the boom going, but to avoid it in the first place, rendering the bust unnecessary. 

Did you catch that? In order to avoid a bust, we must avoid the boom. 

Therefore, given that there had been a massive housing bubble for years, by 2007 it was unavoidable that the US economy was in store for a massive bust. However, even though Austrians thought a recession was inevitable, the length of the recession and the strength of the ensuing recovery could definitely be influenced by policy. You can blame Obama and  Helicopter Ben for our recent policies. Many people point out the depression of 1920-21, you know the greatest depression you have never heard of, which gave way to the Roaring 20's, a time of great economic expansion. At the onset of the down turn the Fed raised interest rates aggressively, instead of lowering them, and the federal government slashed spending instead of opening up the spigot as they did during our most recent downturn. Prices fell, we had massive deflation, but the system was allowed to clean itself by allowing mark. 

After the stock bubble burst in 1929, another Fed fueled bubble, the Hoover administration decided to intervene with government programs, that were later dwarfed by the Roosevelt administration.  Just like in Japan, the government intervention does not allow the market to cleanse itself and reset, so we have ongoing problems. Rather than a quick break, some choose a slow drawn out affair in order to increase the power of a federal government and to place a soft tyranny upon the people. 

In summary, the best thing for the Fed and government to do during a slump is get out of the way. Let interest rates signal the actual state of savings and investment demand, and let prices, including the price of labor, fall in order to clear the markets. Lets face it, malinvestments were made during the boom years, and they need to be liquidated. People who made entrepreneurial errors need to suffer the consequences of those decisions. If the politicians really want to "do something," they should cut spending and taxes, returning those resources back to the private sector, which is already on the ropes.