The sub-prime crisis and the ensuing economic slowdown have led many to question some widely held economic tenets, particularly the belief that unfettered markets inevitably lead to the best of all possible outcomes.
Writing in yesterday’s Wall Street Journal, University of Chicago economics professor and Nobel laureate Gary Becker whines about this assault on the unconditional faith in completely free markets (sometimes equated with “the Chicago School of Economics”), by saying, in essence, “Sure, the market performed badly–but the government was even worse.” He concludes his article with: “…when the performance of markets is compared systematically to government alternatives, markets usually come out looking pretty darn good.”
Professor Becker is attacking a straw man. Mainstream economists and politicians are not proposing a statist or socialist system in which the government owns the means of production and directs economic activity. On the contrary, some are arguing that government spending should be increased by a few percent of gross domestic product in the short-to-medium term in hopes of reviving the economy.
Professor Becker’s article contains a number of other misleading features. Although correctly citing the fact that the Federal Reserve kept interest rates too low for too long, he ignores the irresponsible fiscal policy of the Bush administration in both cutting taxes and increasing spending. I agree with Prof. Becker that Medicare, Medicaid, and Social Security are in need of attention, but if the Bush Administration had not spent away the surplus built up during the Clinton years, these programs could have been dealt with on something less than an emergency basis.
Prof. Becker also alleges that the fiscal stimulus had no positive effect on the economy. In fact, there is a substantial body of opinion among economists that the stimulus prevented the economy from falling off a cliff. Unfortunately, Prof. Becker does not share his alternative scenario with us. In his ideal world–a world without government intervention–what would have happened to the US economy? How much higher would unemployment have risen? How much more frozen would capital markets have become?
Finally, Prof. Becker dismisses regulatory reform as “badly designed,” without sating anything about what aspects of it he finds most objectionable. Is there no element of financial reform he can support? Does he have any positive recommendations? Or should all regulations and regulators be dismissed? Do we really want our financial system to be ruled by the law of the jungle? Didn’t such a jungle regime contribute to our financial problems in the first place?
It would be reckless to argue that effective regulation can completely insulate the financial system from crises Profit seekers will always be more nimble than the regulators who attempt to constrain them. Nonetheless, these constraints make a vital contribution to financial stability. Prof. Becker’s desire to eradicate them is a recipe for disaster.