Government Failure or Market Failure?

by Elaine Schwartz    •    Sep 4, 2011    •    605 Views

The illness? High unemployment and sluggish growth. The patient? The U.S. economy. And sometimes, according to Nobel Laureate Gary Becker, a stimulus pill just won’t work.

In a WSJ opinion piece, Dr. Becker first explains that government misdiagnosed the illness. Rather than “market failure,” the problem is “government failure.” Before the recession began, the Fed’s rates were too low, Fannie Mae and Freddie Mac were quasi-government institutions that facilitated subprime mortgage lending, and regulators were ineffectual.

The misdiagnosis led to the wrong cure. Adding to the deficit and debt, stimulus spending did not work out as predicted and Dodd-Frank became another layer of regulation when existing laws were not adequately enforced. According to Dr. Becker, because the “imperfections in government behavior were greater than those in the market” only the market is the cure.

With Nobel Laureate Paul Krugman their leading spokesman, a second group of economists responds that the diagnosis was correct and the dose of the stimulus medicine needs to be increased.

The Economic Lesson

Seemingly chaotic, a market actually has an invisible hand guiding all participants. Consumers demand quality goods and services that are priced low. Proft-seeking businesses produce the goods and services that consumers, businesses, and government want. When markets function well, reasonable prices and appropriate quantities are the result. In addition, competition tends to prevent individual abuse and control individual power.

An Economic Question: Your choice–Becker’s position or Krugman’s?

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