We have weathered the worst recession since 1981-82, and we are better and stronger for it.
The two most influential economists of the 20th century were John Maynard Keynes and Milton Friedman. History has proved one to be spectacularly right, and the other spectacularly wrong.
Keynesian economics came into popularity in the late 1950s and early ‘60s. The theory was that government, through spending, could affect the economy in a positive way by “priming the pump,” even if this meant deficit spending (i.e., printing money). To Keynes, this would provide the capital needed to keep business investment strong and smooth out negative business cycles.
The first President to fully embrace this theory was Franklin D. Roosevelt (without realizing it…I doubt he ever read an economics book in his life), through his New Deal spending during the Depression. What is interesting is that none of it worked, and only World War II brought us out of the Depression—not Roosevelt’s alphabet soup of agencies that were supposed to make a difference. John F. Kennedy also tried to apply Keynesian methods, but frankly didn’t have enough time to measure the result.
Keynes’ theory has two fatal flaws. First, government spending can only come from two places: through taxes, or by printing money through the Federal Reserve. The first takes capital out of private markets and exacerbates the economic downturn, and the second causes serious inflation. Second, the nature of governments is to spend money, and even when “good times” return, they (especially ours) rarely stop spending it.
Friedman, on the other hand, was a “monetarist” who felt that the money supply determined the rate of inflation, and that the government’s only responsibility was to regulate that supply, conservatively. When the ruinous inflation of the late 1970s was coupled with almost two decades of “Keynesian” economics as espoused by Kennedy, Johnson and Nixon, we were saddled with 10.8% unemployment, 17% inflation, and 11% interest rates. It took Friedman’s theory of economics, as embraced by the Reagan Administration, to pull us out of a severe, 18-month recession and break the back of the inflation we were experiencing. This then held up, until the last two years.
Milton Friedman explains this cycle in a book he wrote in 1991, Monetary Mischief. His carefully researched thesis identified the effect of “monetary lag.” He showed that six to nine months after an injection into the money supply, there are short-term increases in economic activity: stock markets go up, bond markets are good, and there is measurable growth in GDP. But then, after 24 months, inflation appears until money growth is slowed, and another recession occurs. Then another 24 months go by until inflation is abated.
So why I am I distilling my Econ 201 class into a Club & Resort Business editorial? Because this is exactly what is going on again right now. The $800 billion “stimulus” was nothing more than Keynesian economics writ large. The Fed is scheduled to purchase over $600 billion in Treasury debt over the next few months (it started in November 2010), and this amounts to nothing more than inflating the money supply. If you overlay this on the political calendar, you will see a spurt of economic growth just about the time of the elections of 2012. But then, the bill will become due almost immediately after that.
The moral of this story? Unless the new Congress asserts itself (which I hope it does), serious inflation will kick in right after the 2012 Presidential election. This will induce another recession and take about 24 months to work itself out, if Friedman is right.
But this isn’t all gloom and doom for us in the club market. We have weathered the worst recession since 1981-82 (yes, it was worse than this one), and we are better and stronger for it. We are seeing a healthy return of capital expenditures at the club level today, as long-delayed improvements or additions are being funded. But a bill is going to come due economically in late 2012 or early 2013, and we had better be prepared for it.