When Economic Stabilizers Destabilize the Economy

Mainstream economists insist that recessions can only be cured by increasing government spending, a doctrine popularized by Keynes and his followers and defended even by prominent economists who have only half-jokingly suggested manufacturing crises to justify it. Murray Rothbard’s Austrian analysis turns this on its head, showing that government intervention prolongs downturns by further distorting the economy’s structure of production rather than allowing the market to correct the excesses of the prior boom.

The following article was originally published by the Mises Institute. The opinions expressed do not necessarily reflect those of Peter Schiff or SchiffGold.

One of the standard holy doctrines of modern macroeconomics is the claim that the only way to end a recession is to increase government spending. John Maynard Keynes formalized this doctrine in his infamous The General Theory of Employment, Interest, and Money and his disciples then spread the word in the halls of academe and government.

Nobel Prize-winning economist Paul Krugman put an exclamation point on this idea as he claimed during a broadcast on August 14, 2011, that the best way to pull the economy to full employment in the waning days of the Great Recession was to “prepare for an imaginary invasion of space invaders.” While his idea was tongue-in-cheek, he was serious about the need for ramping up government spending, as he believed that even creating whatever was necessary to fight space aliens—even if none of it was ever used—would be valuable to the economy because it would increase spending.