How To Destroy the Economy

In the last month, the Dow Jones Industrial Average—a key indicator of U.S. economic health—has dropped more than 20 percent. The world markets are crashing, and pundits are already heralding this as the worst economic disaster since the Great Depression. President George W. Bush (R) and leaders of the Republican and Democratic parties would have you believe that they doing everything they can the head off an impending economic catastrophe.

But let’s step back for a minute and look at how we got here. The reality might be pretty surprising.

In the 1990s, we were riding high on the ‘dot-com boom’. Internet companies, many of which did not have rational business plans, were the darlings of the market. College dropouts could spend $80 to buy ‘’ with the intent of ‘linking together places on the Internet’ and their initial public offering on Nasdaq would bring in millions of dollars. It, like most irrational ‘booms’ in the economy, was not sustainable. Sure enough it came crashing down in 2000 and 2001 and most/all of these businesses are gone now. Some companies founded during the dot-com boom or otherwise beneficiaries of it, however, remain successful—, Ebay, and technology firms like Apple are a few examples.

When the markets corrected for this decade-long binge of insanity, Democrats—out of power in all corners of government—were quick to decry it as the result of ‘Bush policies’. That’s just petty politics. Had Al Gore been elected in 2000, the dot-com boom would have ended and the markets would have ‘crashed’ just the same.

Since then, we have been in a natural ‘holding pattern’. The economy has done fairly well. While we have not been in a ‘boom’, unemployment rates have stayed low, inflation has been under control, average household wealth and gross national product have continued to grow (slowly), and more. That’s why I wrote in August about the ‘mental recession‘. The economy over the last seven years has been doing far better than the pundits, media, and Democratic politicians would have you believe.

But now, we are on the cusp of a legitimate recession—possibly even a depression. A mere month ago I would have predicted that we were on the cusp of a new boom after nearly a decade of nominal growth; now we are making comparisons to the 1929 crash.

There were many contributing factors to this. The biggest two economic (i.e., non-governmental) factors were drastically increased oil prices and the sub-prime mortgage crisis. Increased oil prices effect the price of gas, and the price of gas effects consumer prices across-the-board since virtually everything has to be transported to its retail destination. The sub-prime crisis boils down to banks offering home loans to people who were unable to pay them. I place the blame squarely in two places: businesses taking on large numbers of risky loans and putting themselves in a position to go bankrupt, and individuals signing the dotted-line on monthly payments they knew (or should have known) they would be unable to pay.

But I am confident that these two negatives could have been weathered by the economy naturally. Perhaps a short-term recession like the one we had in 2001, followed by a few more years of nominal growth, then another natural boom time. Why didn’t that happen?

The answer is simple, if you understand how the economy works. The reality is that government has very little direct impact on economic stability. I wrote about this briefly back in 2004, and it’s still true today. But government can have an impact in one important way: what government officials say and do can directly effect consumer/investor confidence. Consumer/investor confidence is what drives the markets and the economy up or down. If people believe the economy is going to grow, it will. If people believe it’s going to crash, it will. It is, by nature, a prime example of a ‘self-fulfilling prophesy’.

So why did the markets crash? Because President Bush and prominent Republican politicos who had ’til recently talked up the economy and declared it strong changed course, joined their Democratic colleagues, and told the American public that the economy was going down the crapper unless they did something right away.

But an honest look at the ’cause and effect’ here tells us the truth. The government didn’t step in with their 700 billion dollar bailout package because the economy was tanking; the economy tanked because the government stepped in with a 700 billion dollar bailout package.

You want proof? Take a look at the Dow Jones Industrial Average over the roughly-three-month period leading up to the end of September. You’ll notice that it’s a fairly standard economic up-and-down cycle, with a total cumulative drop over that period of 0.04 percent. The bailout first came before Congress (and failed in the House) on September 29. The revised bailout passed the Senate on October 1 and the House on October 3. Take a look at the Dow from September 29 to yesterday’s close. Notice a pattern? It has dropped 23.01 percent since the bailout made the news and consumers and investors began, at the government’s behest, losing confidence.

The vast majority of the crash we’re in the midst of is due to investors losing confidence in the system, and they lost that confidence when the government and politicians started a bipartisan bad-mouthing of the economy.

There is another undercurrent involved here (though admittedly small in comparison to the overriding confidence issue). The investors who are not apt to frieak out because the morons in Congress do are, indeed, apt to freak out over this unprecedented government interventionism in the economy. I’m not an investor (my retirement funds aside), so I have no short-term horse in this race, but I’m not liable to invest in a market where the government is mettling. Government mettling will destroy this economy faster than it will ever fix it, so if-anything this 700 billion dollar bailout in-and-of itself makes me want to stay out of the market lest the government actively screws things up worse.

So how do we fix it now? Well, you can’t put the genie back in the bottle. It will take time for investors and consumers to regain confidence. The goverment, however, can make things worse by continuing to interfere and continuing to bad-mouth the American economy. The best thing for President Bush and members of Congress to do—including our two leading presidential candidates—is to shut up. Any talking they do about the economy should be positive, long-term talk and generally non-specific. The economy will recover no-matter-what, but it will do it much faster if we leave it to its own devices and stop trying to governmentalize the whole thing and propose half-baked ideas for intervention. Step back, and let it do its thing.

But when you want to point the finger, point it directly at President Bush (R), Senator John McCain (R-AZ), Senator Barack Obama (D-IL), and their buddies in both parties. While the OPEC oil price gouging and sub-prime mortgage crisis laid the foundation, it is these politicians who took a little economic instability and, with their blather, turned it into a full-fledged crash and possible recession/depression. Congrats, guys.

Scott Bradford is a writer and technologist who has been putting his opinions online since 1995. He believes in three inviolable human rights: life, liberty, and property. He is a Catholic Christian who worships the trinitarian God described in the Nicene Creed. Scott is a husband, nerd, pet lover, and AMC/Jeep enthusiast with a B.S. degree in public administration from George Mason University.