Making the most of the next recession: another downturn is inevitable. What matters is how we respond.

• Author: de Rugy, Veronique
• Position: Columns - Column

The U.S. economy is teetering on the edge of a cliff. The federal government's mounting debt combined with slow economic growth and exploding entitlement spending all but guarantee a recession is in our near future.

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That isn't necessarily a bad thing. Recessions are part of the natural economic cycle. In the best-case scenario, they restore balance to an economy by "cleansing out the misuses of labor and capital," says John Tamny, senior fellow in economics at Reason Foundation. "Recessions, while painful, are the happy sign that growth is on the way."

Unfortunately, the upsides of recessions can be wiped out by bad government policies that prevent the economy from making needed adjustments. What's more, many policies aimed at "moderating" recessions can lead to excesses in the economy that make the next downturn even worse. Instead of redirecting resources to more efficient uses, these measures often cause a doubling down of investment into wasteful endeavors that produce little in the way of surplus for society.

Writing for The New York Times in December 2008, George Mason University economist Tyler Cowen explained how the 1998 bailout of Long-Term Capital Management, a hedge fund, harkened the Great Recession of 2007-09. It's true that move prevented large disruptions in capital markets that would have made the situation more painful for some in the late '90s. However, Cowen wrote, "with the Long-Term Capital bailout as a precedent, creditors came to believe that their loans to unsound financial institutions would be made good by the Fed--as long as the collapse of those institutions would threaten the global credit system. Bolstered by this sense of security, bad loans mushroomed."

Government produced a sense of immunity for many in the financial sector, thus contributing to the biggest financial crisis since the 1930s. And this is but one example of government interventions that are aimed at helping ease economic problems in the near term but get in the way of necessary reallocations of resources and set the economy up for even bigger problems in the future.

Thankfully, there are things that can be done to help us better weather the next economic downturn and achieve faster growth in its aftermath. For starters, we should be working to restore flexibility in the economy, reduce uncertainty, and bring down our public debt.

Greater flexibility in prices, wages, and the ability to hire and fire or start and dissolve...