Gary Becker: The Great Recession and Government Failure


Friday September 2nd, 2011   •   Posted by Emily Skarbek at 8:45am PDT   •  

Gary Becker, University of Chicago Nobel Laureate in economics, has a must read article in today’s Wall Street Journal. The article echos much of what we here at MGC have been arguing — government failure as a cause of the recession, failure of stimulus and monetary policy to boost economic recovery, the necessity of entitlement reform for reasonable government policy and the political unlikelihood of actually achieving it.

Becker argues these points clearly, honestly, and as a voice of reason amid vapid policy debates. Below I have included some selected remarks, but the readers should read the entire article.

“The origins of the financial crisis and the Great Recession are widely attributed to “market failure”....Although many banks did perform poorly, government behavior also contributed to and prolonged the crisis. The Federal Reserve kept interest rates artificially low in the years leading up to the crisis. Fannie Mae and Freddie Mac, two quasi-government institutions, used strong backing from influential members of Congress to encourage irresponsible mortgages that required little down payment, as well as low interest rates for households with poor credit and low and erratic incomes. Regulators who could have reined in banks instead became cheerleaders for the banks.

This recession might well have been a deep one even with good government policies, but “government failure” added greatly to its length and severity, including its continuation to the present. In the U.S., these government actions include an almost $1 trillion in federal spending that was supposed to stimulate the economy. Leading government economists, backed up by essentially no evidence, argued that this spending would stimulate the economy by enough to reduce unemployment rates to under 8%.

Such predictions have been so far off the mark as to be embarrassing.

The expansion of government resulting from the stimulus and other government programs contributed to rising deficits and growing public debt just when the U.S. faced the prospect of big increases in future debt due to built-in commitments to raise government spending on entitlements. Social Security, Medicaid and Medicare already account for about 40% of total federal government spending, and this share will grow rapidly during the next couple of decades unless major reforms are adopted.

A reasonably well-functioning government would try to sharply curtail the expected growth in entitlements, but such reform is not part of the budget deal between Congress and President Obama that led to a higher debt ceiling.

In a nutshell, there is little political will to reduce spending on entitlements by limiting them mainly to persons in need.

The traditional case for private competitive markets goes back to Adam Smith (and even earlier writers). It is mainly based on abundant evidence that most of the time competitive markets work quite well, usually much better than government alternatives. The main reason is not that individuals in the private sector are intrinsically better than government bureaucrats and politicians, but rather that competitive pressures discipline market behavior much more effectively than government actions.

When the performance of markets is compared systematically to government alternatives, markets usually come out looking pretty darn good.”




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