Free Markets, Flexibility, and Economic Recovery

Last Friday I was honored to participate in a panel session devoted to discussing my book Foundations of Economics: A Christian View. Four reviewers presented their review of my book and then I responded to the reviewers. The lone financial practitioner on the panel asked that I discuss the long-term picture of US employment – since the recovery we have had has not been a jobs recovery. I responded by saying:

As long as the state continues to intervene in the economy, I am not overly optimistic. We should not expect the employment situation to improve very quickly as long as the state makes it more difficult, more risky, and less economically feasible to hire workers on the one hand, and also pay people not to work on the other.

If, however, the state does significantly reduce its presence in the economy by halting monetary inflation, cutting spending, and reducing business regulation, we would move toward a better outcome. There would be increased liquidation of malinvested capital. There could be increased unemployment in the short run, as increased lay-offs would be likely. If, however, markets for products and labor were kept flexible, workers would more quickly find their way into those occupations that are needed by successful entrepreneurs who are profitable precisely because they are producing what people want. In a free society, unemployment that results from a recession need not be prolonged and especially agonizing. If that does happen, it is a sure sign that the government is not allowing the market to function properly.

These remarks are presently being born out in Spain. Flexibility in labor markets is exactly what Spain needs notes business analyst, Mariano Guindal. One of the main reasons for rigid labor markets in Spain is unionism. He writes:

The unions have enjoyed a social prestige and power that was not seen anywhere else in Europe.They were very politicized and were very protectionist of those who had jobs, but they didn't think about the jobless.

Guindal's point that flexible, dynamic labor markets are important for any sort of real economic recovery echo's Joseph Salerno's reminder that "If we want want laborers and employers to come together to  discover and create value-productive jobs, then the prescription is simple:  leave labor markets alone and let them churn."

Bagus on Spain

It is no secret that the Spanish economy is in serious trouble. Just recently it was announced that it had taken a second dip into recession. Philipp Bagus, Professor of Economics at Universidad Ray Juan Carlos in Spain was recently interviewed on the RT network about the unpleasantness in Spain.

In this brief interview, Bagus provides insight on the real and negative consequences of decades of government intervention in the Spanish economy and the future of the Euro.

He also provides important clarification on the austerity question. Many Keynesians, such as Paul Krugman, have been claiming that Europe has tried fiscal austerity, the economies are in trouble, ergo Keynes was right QED. Bagus explains the important difference between true and phony austerity. True austerity requires a reduction of state presence in the economy, not higher taxes.

What Malinvestment Looks Like: Spanish Edition

The malinvestment in Spain falls mainly on the plain (or words to that effect). I have already blogged about photos, satellite and otherwise, documenting ghost towns and empty, sometimes only partially completed, and abandoned construction projects in Florida and China. These projects are what they are because their builders ran out of money and there were not enough potential buyers to make the projects salvageable.

Business Insider has a collection of satellite photos of new Spanish airports (one of which forced into bankruptcy) and several towns with eerily similar empty, sometimes partially completed, housing developments. One of the towns featured in the collection is Soto Del Henares, where more than 13,500 homes have been built while only 3,000 people live there. Prudent Investor kindly posted a 4-minute video tour of Soto Del Hanares back in April.

These photos and video are further testimony that money cannot buy prosperity. Those who think that merely boosting nominal spending will usher in economic expansion mistake GDP for the social economy. They are tangible evidence of what is wrought by artificial credit expansion: wasteful investment and capital consumption. They also provide an answer to those who wonder why an economy cannot adjust from malinvestment back to productive investment as fast and as easily as entrepreneurs can undertake the initial malinvestment. During inflationary booms, some capital is sunk into capital goods that are not easily convertible to other uses. These photos and video should be a lesson to us all.