Can Government Manage the Economy?

Article excerpt

A doctor says he can cure illness by waving birch wands over the patient. We are skeptical, but being open-minded we agree to give him a chance with ailing Uncle George. He waves a red wand and chants something. The patient shows no improvement.

"Let me try a green one," he says. We're still tolerant. The new wand is waved. Afterwards dear George is decidedly worse.

"Let me think," the healer says. "Maybe it should be a purple wand and a different chant."

For 98 years the federal government has been attempting to prevent asset bubbles, recessions, and spasms of unemployment. In 1913 Congress and Woodrow Wilson created the Federal Reserve System, the President telling the country this new institution would be "a safeguard against business depressions." In 1929, after 15 years of Fed operations, the United States plunged into a deep depression.

Okay, so maybe red wands don't work, and we should try green. Politicians of the 1930s created more bodies designed to stabilize the economy and build investor confidence: the Federal Deposit Insurance Corporation, the Federal Savings and Loan Insurance Corporation, the Securities and Exchange Commission, and the National Credit Union Administration. The Depression deepened, becoming by far the longest and deepest economic downturn in the history of the United States.

This is the national pattern in economic policy: In the face of failure, we keep looking to government. Since the Great Depression, we've added more units designed to curb inappropriate behavior and ward off recession, including the Commodity Futures Trading Commission (1974), the Federal Financial Institutions Examination Council (1979), the Working Group on Financial Markets (1988), and the Office of Thrift Supervision (1989). Yet in 2008 we fell into another economic downturn.

The 2008 recession was triggered by the boom and bust in the housing market. Was housing an unregulated market where government had failed to intervene? Sorry: There were seven agencies supposedly nurturing this industry:

1. Federal Housing Administration (1934)

2. Federal National Mortgage Association (Fannie Mae) (1938)

3. Government National Mortgage Association (Ginnie Mae) (1968)

4. Federal Home Loan Mortgage Corporation (Freddie Mac) (1970)

5. Neighborhoo d Reinvestment Corporation (1978)

6. Federal Housing Finance Board (1989)

7. Office of Federal Housing Enterprise Oversight (1992)

In sum, at the onset of the 2008 recession there "were 16 units of the federal government that were supposed to manage economic life and keep us from harm, yet harm befell us. No wand-waving faith healer has ever failed so conspicuously.

Alas, economic policy is not a drug trial; it is politics, and politics is ruled by illusions. In June 2009 we found President Barack Obama urging the creation of yet more government units to manage the economy, promising that his reforms would "make sure that these problems are dealt with so that we're preventing crises in the future."

We can't be too critical of Obama, because many others share this confidence in government regulation. "Without intervention by the government," say economists George Akerlof and Robert Shiller in their 2009 book Animal Spirits, "the economy will suffer massive swings in employment. And financial markets will, from time to time, fall into chaos." It's astounding to assert that government can prevent crises, recessions, and "swings in unemployment" while being fully aware that for 98 years it has been trying and failing.

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