When asked about the current economic downturn, many economists and analysts pawn the economic problems off on the business cycle.
So what is the business cycle? Is it part of nature like the water cycle? Is it magic?
The way modern economics treats the business cycle might have you believe this; however, maybe there is more here than originally meets the eye.
The business cycle refers to the periods of expansion and recession that happen in the economy. The idea is the economy cannot sustain a highly successful pace and will eventually sputter no matter what.
So in order to counteract this, the Federal Reserve Bank takes different actions to try to slow these recessions. These actions include increasing or decreasing the money supply along with controlling interest rates. It is widely believed that these measures keep the economy from spiraling into deeper depression. So for some time, evaluation of the Federal Reserve Bank has been positive. The economy starts to spiral downward and eventually, through increasing the money supply, the economy gets back to normal. Meanwhile, experts sit back and laud the Fed for dampening the blow of the evil business cycle. Still, the question remains: Are the Fed directors heroes that save our economy, or could they be part of the problem?
Considering that many economists measure the success of an economy on the strength of the gross domestic product, it makes sense the economy would be “booming” when the Fed decides to increase the money supply. When the money supply is increased, people are free to spend, and, in many cases, this excess flow of money props up businesses bound to fail when the money supply tightens again. This has especially been the case under the current Federal Reserve.
Current Chairman Ben Bernanke has often referred to his policy as a “loose” monetary policy that responds quickly to economic change. When the economy starts to contract, Bernanke’s policy is to respond with increases in the money supply. So when trying to ascertain the causes of our current economic state, perhaps a look into the actions of the Federal Reserve will produce answers.
The responsibility of the Fed is to control the money supply. While it is true that increasing money flow, in many cases, leads to a larger GDP, if you take this idea to its logical conclusion, it would mean infinite money supply equals infinite improvement in welfare. This is clearly not the case as printing money causes inflation and, taken to such a degree, would leave the dollar valueless. So, all these increases in money flow do is prop up businesses for which the market does not provide, and cause inflation.
In his book “Economics in One Lesson,” economist Henry Hazlitt wrote the failure of new economics is the refusal of economists to see issues from all angles.
The idea of the business cycle is much the same. It is seen as a driving force for action in an economy. However, perhaps bad policy from the government and the Federal Reserve alike are the driving force of the business cycle.
The business cycle is not magic, and it is not inevitable. A free market system in which human action drives prices and interest rates could pull us out of recession and into sustainable economic prosperity, and by the looks of it, it needs to happen soon.
Derrick Godfrey is a junior majoring in economics. He can be contacted at [email protected].