Montreal, May 15, 2009 • No 267

 

Harry Valentine is a
free-marketeer living in Eastern Ontario.
 

 

 THE EMPEROR'S DERRIΘRE

Government Assistance
Creates Seasonal Businesses
 

by Harry Valentine
 

          Government involvement in the economy has turned many entrepreneurial activities into seasonal or short-term business ventures. An entrepreneur may open several restaurants prior to an event such as the Olympic Games or a summer-long exposition. The restaurant trade booms during the duration of the Games or exposition and closes after the event due to the anticipated lack of sales caused by the customers all having gone home, far away.

 

          Businesses that start due to government assistance often become seasonal businesses, except that in these cases, nobody can predict the end of the business season when sales will decline and the businesses fold. When they get started on state funding, new businesses need to buy supplies from other businesses that thereby register an increase in their sales. The established businesses may test market demand for various products and services by fluctuating prices. When sales increase despite higher prices, few entrepreneurs suspect that they are receiving distorted and misleading signals from a market that is subject to state tampering. Many suppliers adjust to the increased demand for products and services by hiring new staff and increasing production as well as inventory.

          Over the short term, businesses that received government assistance may actually have many customers who initially buy their products and services, provided that their business plans were formulated in response to genuine market signals. The long-term viability of the new businesses would be uncertain if their business plans were based on distorted and misleading market signals. It is very difficult if not impossible for entrepreneurs to accurately determine genuine long-term market demand for new products and services when market signals have been grossly distorted by artificially low interest rates.

Booms and Busts

          Such was the case for businesses that closed during the high-tech bust and dot-com meltdown. They had unknowingly responded to distorted market signals and became seasonal businesses that did not know when the business season would end. Their closures also brought down many other established businesses that had been their former suppliers. Pro-government economists called on government to provide stimulus funding to boost spending. Instead of restarting the high-tech boom, this launched another boom in the housing market, illustrating that state attempts at reviving economic activity in any one sector of the economy can have unexpected results in other sectors of the economy.
 

"Over the short term, businesses that received government assistance may actually have many customers who initially buy their products and services, provided that their business plans were formulated in response to genuine market signals. The long-term viability of the new businesses would be uncertain if their business plans were based on distorted and misleading market signals."


          When misleading market signals cause businesses to fail, government policies aimed at maintaining their cash flow due to lost sales may prove unproductive. Government consultants, advisors and economists may be even less adept than private entrepreneurs at accurately determining genuine long-term market demand for products and services when artificially low interest rates cause grossly distorted market signals. Nevertheless, government economists are committed to action, as is evident from the massive economic stimulus packages that were recently announced in both Washington and Ottawa.

          Governments are about to acquire part ownership of automobile manufacturers whose sales losses in the marketplace in recent years has jeopardized their future viability as business enterprises. In the near future, state stimulus funding may appear to achieve the intended objective as new funding flows from the government to the automobile makers and to their suppliers. Over the short term, these suppliers would have little choice but to respond to grossly distorted market signals that have no basis whatsoever in the economy. The long-term prognosis is uncertain.

Lessons Unlearned

          Politicians and their advisors may pat themselves on the back for having saved the automobile industry and the economy. Unfortunately, the expected boom in sales of new cars from the state-owned factories may be short-lived. Modern politicians and their advisors disregard the lesson taught by presidents Woodrow Wilson and Warren Harding regarding how to resolve an economic depression. According to Professor Robert Murphy's book, The Politically Incorrect Guide to the Great Depression and the New Deal, America actually underwent a severe but short-lived economic depression between 1920 and 1921. Both Wilson and Harding kept out of America's economic affairs as they curtailed government spending. Murphy credits that action for having brought a very rapid end to that depression. The economic stimulus packages from Washington and Ottawa, on the other hand, could prolong the current depression for several years.

          Murphy's treatise, along with Rothbard's treatise on America's Great Depression, both show that the start of the depression of 1920-1921 was more severe than the depression that followed the stock market crash of 1929. Instead of following the precedent of former presidents who cut government spending and let the economy resolve the downturn, then-president Herbert Hoover boosted government spending by over 40% and actively intervened in the economy. By doing so he worsened an already bad economic downturn. Roosevelt intervened even further and drove the American economy into a prolonged economic depression. By following the precedents of Hoover and Roosevelt instead of Wilson and Harding, the present administration in Washington may be setting the stage for another prolonged and severe economic downturn.