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Missed Fortune – Spending Our Way Out of a Recession

Posted on | November 18, 2011

Milton Friedman has been called “The Economist of the Century” by Fortune magazine.  Newsweek has referred to him as “one of the nation’s outstanding economists, distinguished for remarkable analytical powers and technical virtuosity.  He is unfailingly enlightening, independent, courageous, penetrating and, above all, stimulating.”

In Friedman’s book “Capitalism & Freedom” he makes some very astute observations about how governments try to fix slumping economies.  Friedman writes:

“The idea may be accepted by none, but the government programs undertaken in its name, like some of those intended to prime the pump, are still with us and, indeed, account for ever-growing government expenditures.

 When private expenditures decline for any reason, it is said that governmental expenditures should rise to keep total expenditures stable.  Conversely, when private expenditures rise, governmental expenditures should decline. 

 Unfortunately, the balance wheel is unbalanced.  Each recession, however minor, sends a shudder through politically sensitive legislators and administrators with their ever-present fear that perhaps it is the harbinger of another 1929 to 1933 depression.   So they hasten to enact federal spending programs of one kind or another. 

Many of the programs do not, in fact, come into effect until after the recession has passed.  Hence, insofar as they do affect total expenditures, they tend to exacerbate the succeeding expansion rather than to mitigate the recession.  The haste with which spending programs are approved is not matched by an equal haste to repeal them or to eliminate others when the recession is past and expansion is underway. On the contrary, it is then argued that a healthy expansion must not be jeopardized by cuts in governmental expenditures.  The chief harm done by the Balance Wheel Theory is therefore not that it has failed to offset recessions, and not that it has introduced an inflationary bias into governmental policy, but that it has continually fostered an expansion in the range of governmental activities at the federal level and prevented a reduction in the burden of federal taxes.”

In other words, the door swings open wider and wider.  Even though Milton Friedman penned these words in the 1960s, they have great relevance in our day to our current economic woes and the response of our federal government.

Even if Congress were to stop or slow down the runaway spending, we are left with some tough economic decisions.  On top of that, we’re nearly $5 trillion further in debt than we were in 2007 when Nancy Pelosi vowed “No new deficit spending.”

This is one of the glaring differences between how we, as consumers, handle debt versus how Congress handles it.  If our outgo exceeds our income, we have no choice but to decrease our expenditures or expand our income, or both.  Somehow, Congress seems to be immune to either of these approaches.  Instead of tightening their belts and slowing or eliminating this runaway spending, Congress chooses to increase it.   This serves to prolong the recession rather than letting the correction run its course.

When governmental spending continues to ramp up, we face a far greater likelihood of higher taxes and inflation.  This means that there’s never been a better time to become schooled in the Missed Fortune strategies, to weather the storm and its aftermath.

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