The right and wrong way out of secular stagnation

Is there an alternative? Yes: laissez-faire, practiced before the rise of FDR and Keynes’ General Theory, offers a quick path to recovery. When government stays out of the economy, it rebounds on its own. In 1920, for instance, the economy suffered a harsh contraction. Unemployment tripled that year, to 12 percent. GNP declined a full 17 percent. But President Harding resisted calls to intervene. Instead, he cut taxes and slashed spending. The Federal Reserve didn’t promote the ‘easy money’ policies we’ve seen since 2009. Instead, it kept interest rates at normal (pre-recession) levels and didn’t print more money. And the economy rebounded. By 1922 unemployment was 6.7 percent. By 1923 it was down to 2.4 percent. Rather than a decade of stagnation, the economy bounced back within a few years.

Summers and Krugman are right about one thing: we’re in a period of secular stagnation. But the cure isn’t more government stimulus and easy money. What we need is a dose of laissez-faire economics.

Julian Adorney is a Young Voices Advocate and is majoring in English and Advertising at the University of Colorado at Boulder. Julian’s written for the Foundation for Economic Education, the Ludwig von Mises Institute, Junior Scholastic magazine, and Speak Liberty Now.