Thursday, May 26, 2011

Thornton on The Lehman Brothers Plan: What to Do in a Recession

In chapter 13 my book Foundations of Economics, I discuss the issues of recession and inflation. Following Mises and Rothbard, I explain that recessions are the necessary consequence of inflationary booms. I also lay out what I believe to be the best policy for economic recovery possible. Economic theory teaches that in order to recover from a recession and quickly as possible, we should stop inflating, reduce government spending, cut taxes, and allow the market to freely operate.

In an excellent essay on, Mark Thornton comes to the same conclusion. He does so in the context of the Lehman Brothers' bankruptcy and therefore designates his recovery prescription, "The Lehman Brothers Plan."
Government should balance its budget. There should be no new credit expansion by the Federal Reserve. Most importantly, government should not meddle in markets to try to soften the consequences of the correction. Specifically, that means no bailouts, stimulus packages, or new public-works projects. Do not prop up wages. Allow competition to lower the prices of land, labor, and capital. The only positive steps for government to take are implementing tax cuts and spending cuts, eliminating regulations, and allowing free trade.
He also does a masterful job concisely responding to claims that such a policy would hurl us into a deflationary death spiral. Treat yourself to Thornton's masterful economic commentary.

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