In the first column of this three-part series, I discussed the relative value of money. Last month, we looked at the effects of changes in value, such as inflation and deflation. Now, let’s look at how the government attempts to manipulate the economy.
In 1923, German bondholders were paid in money that was nearly worthless. They probably didn’t care that it was the money that “went broke” from rampant inflation and that it was not the government’s fault. Our government often attempts to manipulate the economy to prevent a similar disaster.
Government meddling actually began as European settlers moved west. Land was plentiful, regulation was minimal and economic ties were local. Towns were established to supply materials and tools to farmers and ranchers in exchange for the food they produced. However, there was no nationwide system to connect the decentralized economies.
The building of the railroads made that connection possible, but the heavy capital investment required government incentives to support private interests. Similar to what happens when you expand your own business, excess capacity was created that took years to absorb. Eventually, the railroads also returned a profit to their investors.
Railroads expedited the movement of people and goods, driving urbanization, and the industrial revolution established a manufacturing base that created jobs for city dwellers. “Big Business” was born, and more capitalization improved the economy. The banking industry grew to support both capital investment and consumer credit, beginning with mortgages.
The expansion of credit affects inflation rates. These rates were highest during World War I (nearly 9 percent) and in the 1970s (just over 7 percent), after Nixon imposed price controls. The lowest rates (averaging 2–3 percent) occurred during the 1950s, ’60s and ’90s. During the 1940s (World War II) and the 1980s (the Reagan years), they hovered around 5–6 percent. The 1920s were flat, and there was actual deflation of just below 2 percent during the Great Depression. So, inflation accompanies a booming economy.
Are government policies actually helpful to the economy? Murray Rothbard, author of “America’s Great Depression,” blames Herbert Hoover’s “interventional” policies for the boom that led to the 1929 market crash and the Great Depression. Franklin Roosevelt’s New Deal often is credited with ending the Great Depression, but economists argue that World War II actually was the stimulus for the upswing that continued through the 1950s. Both were funded by the government, so the question is moot. Remember, though, that both increased the national debt.
Richard Nixon imposed wage and price controls in 1971, and spiraling prices followed. Then, shortages of livestock feed (from a Peruvian anchovy fishery failure in 1972) and oil (from the OPEC-driven crisis in 1973) combined with the price controls increased industrial production costs and created long lines and panic. Inflation was followed by stagflation, and proposed solutions ranged from increasing production and energy efficiency or finding replacements for scarce resources to adjustments in monetary policies.
In 1981 and 1982, tight money policies of the Federal Reserve reversed the direction of the upward spiral of inflation that actually began with World War II. Interest rates tend to be higher (compared with the rate of inflation), in spite of weak economic conditions, because the Federal Reserve’s primary goal is fighting inflation.
If this sounds confusing, it is. In fact, it is nearly impossible to determine whether any government manipulation of prices, interest rates, supply or employment really is useful. Free market advocates argue for fewer restrictions and allowance for business failures resulting from economic cycles similar to those in nature. When the Department of Natural Resources analyzes deer counts to regulate hunting licenses, there always are errors and lag time effects, creating wider-than-intended population swings. When humans interfere with species extinctions or reintroduce predators to correct the impact of population increases on ecosystems, they nearly always create new ripple effects.
As we adjust to a president who has begun the largest economic stimulus in our history, creating debt that no creditor will absorb (even China has said “no more”), will your business benefit, or would you rather take your chances? You might find lower prices on trucks, but the dealership will be farther away when you need maintenance. You may gain market share when competitors fail, but your customers will be expecting lower prices.
Like most experienced contractors, you probably are not waiting for the government to send you a “bailout” check, but you surely will help pay for those who receive one. As always, you will depend on your own judgment and shoulder the risk, and you will do the best you can to stay out of the way, and that is probably why you are still in business.
NORBERG-JOHNSON is a former subcontractor and past president of two national construction associations. She may be reached at email@example.com.