Wall Street analysts and financial pundits are struggling with a “conundrum,” declared the talking head on MSNBC this morning. Retail sales in stores open at least a year (“same-store sales”) posted an unexpected increase of 3.3 percent in January compared to a year earlier. Furthermore, labor productivity rose a seasonally adjusted 6.2 percent in the fourth quarter of 2009. This productivity improvement also exceeded expectations and implied a fall in per unit labor costs. Yet, on the same day as these statistics were released,an unanticipated and substantial rise of U.S. jobless claims was reported. The concurrence of these data presented the conundrum: Why are businesses not taking advantage of their rising sales and declining labor costs to increase employment and output and earn higher profits?
The answer, as Mises told us, is that entrepreneurs and workers only belatedly and painfully free themselves from the false and frenzied optimism fostered by the inflationary boom, especially one that turns into a runaway bubble. Once people finally do recover a sober view of reality, a deep and abiding pessimism sets in and makes entrepreneurs especially wary of embarking on new and seemingly profitable ventures. As Mises explained it:
“The process of readjustment, even in the absence of any new credit expansion, is delayed by the psychological effects of disappointment and frustration. People are slow to free themselves from the self-deception of delusive prosperity. Businessmen try to continue unprofitable projects; they shut their eyes to an insight that hurts. The workers delay reducing their claims to the level required by the state of the market; they want, if possible, to avoid lowering their standard of living and changing their occupation and their dwelling place. People are more discouraged the greater their optimism was in the days of the upswing. They have for the moment lost self-confidence and the spirit of enterprise to such an extent that they even fail to take advantage of good opportunities. . . . The recovery and the return to ‘normalcy’ can only begin when prices and wage rates are so low that a sufficient number of people assume that they will not drop still more.”
Trillion dollar deficits, higher present and future tax bills, inflationary monetary policy and promiscuous bailouts to stabilize prices and wages are hardly the means to restoring the shattered confidence of entrepreneurs.