Can an America that is Extremely Unserious Rebuild Its Economy?

A serious political discussion at the federal level would center on structural problems of war and peace, debt and the dollar, and entitlements. But America in 2022 is a deeply unserious country.

Does the U.S. just not have the political will to face the truth about its economy?

During the Great Depression, Treasury Secretary Andrew Mellon famously told President Herbert Hoover to "liquidate labor, liquidate stocks, liquidate farmers, and liquidate real estate." This meant that the government shouldn't step in to help any industry. Even back then, this was hard to sell, but Hoover gave in to politics and did the opposite, which hurt the US economy a lot and for no good reason for decades.

Mellon's reply to Hoover is less often quoted. He said that liquidation would "purge the rottenness out of the system," which would make "people work harder" and "live a more moral life."

Mellon had spent most of his life in a time when America didn't have a central bank, so he saw economic recessions not as bad things to avoid but as necessary ways to fix problems. But he also knew the human cost of a period of fake economic prosperity. America's economic mess can only be fixed by hard work and personal sacrifice, one person at a time and town by town. In the 1930s, millions of Americans learned the hard way that fiscal and monetary policy would not give them anything for free.
Opinion | Building a Better, Fairer Nation - The New York Times
In 2022, it's hard to imagine Janet Yellen calling for the bank to be shut down or telling Americans to be better people. Nobody votes for austerity or personal responsibility, and any politician, bureaucrat, or central banker who even suggests it today is doomed.

Still, this myth about austerity keeps going around, saying that the federal government and central bank are too tight-fisted during economic crises and don't do enough to help. Consider something Paul Krugman said in 2011 that seems to have been said with a straight face: "One thing is clear: Mellon-style liquidationism is now the official G.O.P. doctrine." Keep in mind that he wrote this a few years after the most "extraordinary" monetary intervention in the history of the world, which ended with the US Fed buying several trillion dollars' worth of Treasury debt from the "market"! But it's never enough for Krugman.

The recent rough midterm elections showed that America is not a very serious place. Serious political talk at the federal level would be about big issues like war and peace, the dollar and debt, and entitlements. But these problems can't be fixed without real cuts and real pain. So instead, we worry about whether or not Donald Trump should be allowed to use Twitter. We argue more about things like flu viruses, guns, transgenderism, the climate, and abortion, which the federal government has no control over, than about the material standard of living we'll leave our grandchildren.

This is only possible because millions of Americans, maybe even most, don't believe in economics. They either don't think there are economic laws or think that laws, regulations, or actions by the central bank can change economics. And there are a lot of economists who don't agree with this. The profession doesn't do itself any good when it cheers for politics and gives interventionism an intellectual cover. People tend to want to believe things that aren't true, but economics should help Americans get over their political fantasies.

Let's face it: the US is not a free market economy because, despite what we say, we don't really believe in markets. Most Americans and almost all of the political, media, academic, corporate, and banking elites think that fiscal and monetary stimulus, not production and saving, is what drives our economy.

So, what would a serious America do to stop our economy from going in a terrible direction? This may seem like an academic or rhetorical question, but it's important to lay out the real steps needed to build a real economy instead of a fake one that depends on monetary or fiscal interventionism. As Dr. Mark Thornton said recently, these steps may be simple in theory, but they are way out of reach for politicians today: a wholesale adoption of laissez-faire economic doctrine by national politicians; immediate deep tax and regulatory reductions; immediate sharp reductions in government spending at every level (leaving federal spending well below federal revenue); rigorous entitlement cuts, using some combination of means testing and raising age eligibility for both Social Security and Medicare; rigorous defense spending cuts of at least 50 percent, combined with a radically reduced US military footprint overseas; cessation of new debt issuance by the US Treasury; cessation of active monetary “policy” by the Federal Reserve Bank, meaning no intervention with respect to the money supply, interest rates, or credit and debt markets (including US Treasurys); a radical reduction in the Fed’s balance sheet by letting existing Treasurys mature and roll off; an entirely hands-off approach allowing the US dollar to float freely relative to other currencies and commodities; an express policy against bailouts or subsidies of any kind to any industry or company, regardless of the severity of an economic downturn; allowing troubled industries or companies, no matter how big, to fail—through bankruptcy and asset sales; investor losses; and firing boards, management, and employees when restructuring is possible; actively encouraging business and individuals to save (through market/floating interest rates); elimination of any price ceilings or floors on prices, wages, and profits; elimination of any unemployment subsidies to individuals, along with abolition of minimum wage laws; and finally, the immediate sale of federal land and other assets to reduce debt service on the $31 trillion in Treasury obligations and to restore worldwide confidence in the US economy.
This is what a real austerity plan looks like, ladies and gentlemen. The fact that these actions are politically impossible, or "no-gos," shows how much politics rules the American economy. The job that is supposed to explain why there is no such thing as a free lunch instead mostly serves the state and its bosses. But this can't be fixed by politics, and we can't get out of trouble by voting. The best way to move forward is for states and cities to try to build regional economies that are less vulnerable to Uncle Sam's wars, borrowing, spending, and devaluing.
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