The Business Cycle: Mises vs Keynes

Theory:Con tries to use an increased savings rate during recessions as evidence for his theory. But, as Austrian theory would also expect this, it doesn't work. During the boom, people are fine with their low savings rate, because the stock/housing boom makes them think they have more wealth than they really have. But once the bubble starts popping, once their houses and stocks are worth less, they start to save more to compensate.And the data, comparing the stock market and the savings rate, is just what Austrians would expect. http://www.debate.org... (Note: The link is to my photo album, but the source isn't me, it's the government's own statistics)Furthermore, Con's theory fails to explain why the business cycle happens. It describes how it happens—the decreased consumption causes unemployment, because wages are sticky and don't lower to compensate for the decreased demand. But it fails to explain why any of this happens—why does this decrease happen, why is the boom and bust generally concentrated in one specific sector, like housing?Evidence:First, I'll discuss how well our competing theories explain the current recession's employment data. The Austrian theory emphasizes the different stages of production—higher order production of capital goods vs. lower order production of consumer goods. Austrian theory argues that the recession happens because the production structure is distorted—production is artificially shifted to higher order goods, like construction. Then, the bust happens because this distortion is unsustainable—so the artificial boom in the higher order industry collapses, and the ‘recession' phase is the reallocation from the boom sector to the natural way the economy would organize. So, the Austrian theory would expect more of a recession in the higher order sectors than in the lower order sectors. The Keynesian theory, on the other hand, would expect a general problem, due to general decrease in demand, and would expect no such disparity. So let's look at the data, comparing employment in 3 areas of the economy—1) Construction, 2) Durable goods manufacturing, and 3) Non-durable goods manufacturing. Austrians would expect construction to be the worst-hit, as it is the highest order good here (because it is very capital intensive, and buildings are used over a long time period once built), then durable goods manufacturing would be the next hardest hit, then non-durable goods (generally consumer goods) manufacturing would be the least hardest hit.http://www.debate.org... (Same as above note)"Savings evidence above, as well as the evidence of moderate inflation with shorter recessionary periods since the theory has been in practice."Presumably, Con is referring to the claim that recessions have been shorter and less severe since the creation of the Fed/after the Great Depression (I've heard both claims, so I'm not sure which he's referring to), than they were before the Fed. He fails to cite this claim, probably because it's clearly false. Only studies that skewed the data by counting deflationary periods as worse than inflationary ones, regardless of whether the actual recession was worse, had this conclusion—it is simply a trick of statistics, as even Keynesian Christina Romer, former advisor to the Obama administration, admits, saying that the post-war period wasn't actually more stable than the pre-Fed period. [1] [2] An example of this is the so-called Long Depression of the 1870s. Mainstream economists assumed that falling prices must mean a depression, and since prices fell an average of 3.8% annually during this decade, it must have been one of poor growth—the National Bureau of Economic Research estimated that the depression lasted from 1873 to 1879. [3] While there was a depression during this period, the average real growth for the decade was 6.8% per year, with a per-capita real growth of 4.5% per year. [4]"To find the merits of this theory, one need only compare the great depression with the great recession of today and observe the time period of each."I agree completely with this statement. First, let's look at the beginning of the Great Depression, when Hoover was in office. While Keynes' General Theory had not been published yet, that didn't stop Hoover from applying what would later become Keynesian economics. He increased spending, and the Fed cut interest rates. Even FDR, during his 1932 presidential campaign, criticized Hoover for out of control federal spending. [5]Charts of Hoover's spending/Fed interest rates:http://www.debate.org...http://www.debate.org...http://www.debate.org...Of course, one could argue that Hoover didn't do ‘enough' to stop the depression, but it's certainly not a case of him ‘doing nothing.' Furthermore, the idea that the Great Depression was as bad as it was because Hoover didn't do enough is discredited by the fact that his moderate dose of Keynesian economics seemed to do worse than all of the times the federal government actually did nothing in response to an economic crash.Now let's look at the current recession. Whatever the results are, they can't be the result of do-nothing economics—bailouts, cutting the interest rate down to 0%, and massive stimulus spending are clearly Keynesian prescriptions for a recession. And, again, we can evaluate the effectiveness of Keynesian theory by the fruits it bears. So let's look at employment. Looking just at the U3 figure, it would seem that this recession isn't so bad. But this figure is misleading—it doesn't count short and long term discouraged workers (people that have been out of work so long that they've stopped looking for work). Obviously, if the U3 rate decreases, but the rate including discouraged workers increases, there's no real improvement—it isn't decreasing because people are getting jobs, the rate is decreasing because unemployed people have stopped looking for work.http://www.debate.org... (The U6 rate includes short-term discouraged workers, and the SGS alternate includes both short-term and long-term discouraged workers. Using the SGS alternate rate, unemployment has gone down from a high of 22.5% to 22.1%--hardly significant improvement).Sources:[1] Christina D. Romer, "Is the Stabilization of the Postwar Economy a Figment of the Data?" American Economics Review 76 (June 1986): 314-34.[2] Christina D. Romer, "Remeasuring the Business Cycles," Journal of Economic History 54 (September 1994): 573-609.[3] "Business Cycle Expansions and Contractions" National Bureau of Economic Research. http://www.nber.org... [4] Milton Friedman, Anna Jacobson Schwartz. A monetary history of the United States, 1867-1960. Princeton University Press, 1971. p. 37[5] Samuel I. Rosenman, ed., The Public Papers and Addresses of Franklin D. Roosevelt (New York: Random House, 1938), I, 648.