Economic Recovery: Free Markets vs. Big Government

Economic Recovery: Free Markets vs. Big Government
by Mario Rizzo

[w]e are at a crossroads with regard to the role of the state in our lives. This is a matter that no political economist can ignore. The impetus for a vast expansion in the role of the state is coming from our current financial and economic situation mediated by urgent macroeconomic policy advice....

1. We must remember that the current economic state of affairs was caused by the Federal Reserve's excessively low interest-rate policy the from about mid-2002 through the third quarter of 2006. This policy resulted in significant economic distortions or imbalances...

Recent research by John Taylor suggests that if the "Taylor Rule" had been followed during 2002–06 much of the housing bubble would have been avoided and therefore the subsequent price reversal and associated financial difficulties would have been much less severe.[2] (The Taylor Rule adjusts the federal-funds rate in accordance with the degree to which the actual and desired inflation rates differ, and the degree to which actual output differs from full-employment output. It would raise rates when inflation is higher than desired and lower them when output is below full
employment.)...

What should be done?

The first thing to keep in mind is that activities that prevent or inhibit the re-allocation of resources out of their bubble-induced misdirected uses will only prolong the current recession. This kind of stimulus is not better than nothing. It is worse than nothing...

My own preference is, first to allow market adjustments to take place.

Simple rebates and lump-sum credits, however, are not as likely to work as reduction in marginal rates. This is because rebates and credits do not offer incentives that will offset the disincentives to spend generated by generalized uncertainty...

However, to avoid the impact of later tax increases or inflation to pay for the current tax reductions, a credible commitment must be made to cut government spending later.

read the entire speech

My thoughts: More excellent insight. Markets work given time. Government interventions slow the market correction process.