Recessions are the economy’s leg day.

As (imo) we near the crash section of yet another Austrian business cycle (unless the fed manages to put it off a year or two by dropping interest rates a lot), one of the most important things to understand is the bad logic that will be used in support of government intervention to try and “fix” the natural and necessary -though painful for some- economic rearrangement that will occur.

One of these arguments is centered around the idea of bringing underutilized resources back into use. As the argument goes, the market (for various reasons) does not use all the resources and production capacity available, especially during times of crisis, and as such the fix is to incentivise the usage of these resources through government programs, particularly stimulus spending.

There are multiple rationales for why this is important, and multiple methods for accomplishing it. Some are more loony than others.

First, the big one:

The Keynesian argument. Founded in the idea of aggregate demand, this idea is basically that during times of economic crisis, people try and save money, resulting in a reduction in spending (aggregate demand), which causes the economic contraction to worsen, causing a reduction in spending, etc etc until we end up back in a preindustrial economy or it somehow balances itself on its own.

The solution, based on aggregate demand, is to pump money into the economy to try and incentivise consumers to spend and bring as much underutilized productive assets back into use as possible so that their owners can start producing and spending again, hopefully bringing up AD enough to cause people to want to spend more, a cycle which will repeat until the economy is booming.

Now, the MMT argument:

It basically goes this way: “if we interfere with the private sector, that will cause problems and could bid resources away from the private sector. That is bad. What we can do instead is be essentially an employer of last resort. Use the government to bring all underutilized factors of production, (land, labor, and capital (and maybe entrepreneurship, depends who you are talking to)) into productive use. This will boost output without reducing the efficiency of the private sector, ensuring that standards of living are not brought down too much while the private sector recovers”

The issue: Unfortunately, the only good solution to a crash is to let it run its course. (compare the non-interventionist 1920 crash and extremely interventionist 1929 crash for an excellent comparison of the effects of the two approaches)

During a recession, consumers reduce their consumption until they are only purchasing things they really need or want. This is vital, as the reason these crashes happen is due to distortions in the market, caused by fractional reserve banking/fed policy and/or government spending. The only way to purge these distortions is to return to spending only on the basics and letting all the businesses sucking up resources to produce things there is little demand for go out of business. Once this has occurred, businesses producing things that the consumers actually want will experience a resurgence as their input prices fall and demand for their products rises.

It should be immediately obvious why the Keynesian solution is so deadly. It actively resists this process, effectively ensuring the crisis will go from a short recession to a long slog (see the great depression or 2008 for excellent examples of this) as the necessary reallocation will be severely muted.

The MMT solution is much more interesting, but ultimately suffers the same fate. By assuming that things which are unused are better off being used, factors of production which are better left idle will be brought into use. Theoretically, I think the MMT solution would be better than the Keynesian solution, but in practice I don’t think it would be logistically possible.

An amusing aside to lighten the mood: I will occasionally come across georgists (to be clear, most don’t agree with this claim) who will claim that land is in a chronic state of underutilization and that because land is limited, all of it must be put into production at all times or society will suffer an opportunity cost. To which I would reply: “do you think we are suffering from not spending trillions to colonize antarctica?”

It’s a pretty good example to sum up this whole idea: “underutilized” resources are not being wasted. They are simply not worth using.

(major caveat being that sometimes government interventions can make otherwise profitable use unprofitable, causing waste)