What Should We Produce?

     Government is trying to restore the housing industry.  It
has used direct subsidies to buyers and artificially low interest
rates with limited success.  Politicians and others seem to believe
that restoring the housing industry and raising housing prices is
the key to economic recovery.

     Spending too much money on too much housing caused
the housing bubble that burst into recession.  How wise is it to
try to recreate the conditions that were a major cause of the
recession?

     Recessions happen because of major mismatches between
supply and demand.  When production of a certain thing, such as
housing or higher education, greatly exceeds what consumers
want to buy, production must decrease.

     Decreased production causes unemployment.  Excess
production facilities must be liquidated and directed to other 
uses.  During this process employment and production decrease. 
We call these inevitable decreases recessions.

     The cure for a recession is putting labor and other
resources to work producing the things consumers want the
most.  Those are the things that consumers will buy.

     Government should forget about restoring the housing
industry.  For one thing government has no way or knowing how
many houses people want and what prices they are willing and
able to pay.  All government can do by artificially manipulating
housing is reinflate the housing bubble and set us up for another
recession when that new bubble bursts.

     The purpose of all production is to provide consumer
goods.  A balanced, stable economy must produce the things
consumers want most.  Only consumers can decide what they
want most.  In markets not manipulated by government, market
prices tell businesses what is most in demand.

     Businesses wanting to sell products and earn profits
constantly seek out those price signals and attempt to produce
what consumers want most.  Businesses that misread the signals
lose money.  Those businesses either clean up their acts or slide
into bankruptcy.

     Businesses constantly make mistakes and fail.  The
economy as a whole doesn't collapse because of these business
failures.  Recessions happen when businesses are misled by
government actions, such as subsidies, mandates, prohibitions,
and artificially manipulated interest rates.

     Such manipulations lead many producers to make the
same mistakes, such as building too many expensive houses, or
directing too many resources into higher education.  When
consumers balk at buying the excess production, production
collapses and we have a recession.

     The root cause of the recession wasn't the drop in
consumer buying.  The root cause was the government
manipulation that caused the excess production in the first place.

     When a recession happens the only good thing to do is
let it happen.  The temporary drop in production is the inevitable
result of government artificially pushing production of things
consumers didn't want.  Left free to act, producers will put the
improperly used resources, including labor, to work making the
things consumers want most.  Soon the recession will be over.

     Before government started trying to fix recessions, they
didn't last long.  The last US recession government didn't try to
fix was in 1921.  That recession ran its course in one year.  The
first recession the US government tried to fix was 1929.  The
economy didn't recover until 1946.

     So long as government tries to stimulate production of
anything beyond the quantities consumers want and are willing
and able to pay for, a never ending succession of bubbles and
recessions is inevitable.

     To avoid recessions government must quit manipulating
supply and demand.  Consumers must be free to set the pace for
production.  Producers must be free to follow the consumers'
directions.  Manipulating supply and demand for housing,
ethanol, higher education, electric cars, windmills, etc. can only
lead to crashes and recessions.

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Copyright 2012
Albert D. McCallum
18440 29-1/2 Mile Road
Springport, Michigan 49284