Posted by
john on Thursday, November 20, 2008 11:59:51 PM
I'm not referring specifically to the stock market action of today (although that is depressing enough). I'm referring to the thesis of the estimable and ever-youthful (this guy must be a relative of Dick Clark) Arthur Laffer. His new book is entitled "The End of Prosperity". I have just obtained a copy of same, and will review it here in the near future. However, Dr. Laffer outlined his thesis in a recent opinion piece in the WSJ.
Importantly, Dr. Laffer begins his WSJ piece ("The Age of Prosperity is Over") by restating a most fundamental, but too often ignored point: "Financial panics, if left alone, rarely cause much damage to the real economy, output, employment, or production. Asset values fall sharply and wipe out those who borrowed and lent too much, thereby redistributing wealth from the foolish to the prudent." Translation: a free and unfettered marketplace will, even in troubled times, brilliantly redirect capital away from inefficient holders and uses, toward newer and more efficient uses and processes. Thus, recessions actually accomplish a salutary function: they prune deadwood from the economic tree, and separate fools from their money. This is the process by which a dynamic modern economy sets the stage for the deployment of new technologies, thus creating every-higher living standards.
If you can't quite buy this, ask yourself whether it makes sense to loan money to borrowers with a history of non-repayment; or to prop up dying industries endlessly, a la pre-Thatcher Britain, or Detroit (whatever happened to British Steel, British automakers, British motorcycles, etc.?). If you need a case study in throwing good money after bad, study what's happened to Detroit over the last 40 years. As Dr. Laffer put it: "Giving more money to people when they fail and taking more money away from people when they work doesn't increase work. And the stock market knows it."
What does this mean for prosperity? "The government doesn't create anything: it just redistributes. Whenever the government bails someone out of trouble, they always put someone else in trouble, plus of course a toll for the troll (Washington)." Thus, if you like the way Washington runs the Post Office, Fannie Mae, Freddie Mac, etc., you're gonna love what they do for Wall Street and Detroit. I ask you, dear readers, what will this do for the recovery?