I should have made this a two-part question.
1. CAN the government save the economy?
and if yes,
2. SHOULD the government save the economy?
We can answer the first question rather simply. Any ECON 101 course will teach you that, through monetary and fiscal policy, the government CAN impact the economy. Congress CAN control taxes and spending while the Federal Reserve CAN play with the money supply and interest rates (oversimplifying their responsibilities).
Now for the 2nd part of the question…
Think about the government as parents and the economy as its’ only child.
Is the child better off running around and learning by himself EVEN IF that means he will occasionally get hurt?
I believe so.
If a child bruises his knee while running around the yard, he’ll likely run slower next time or run a different route. A bruised knee doesn’t necessarily mean the parents need to draw specific lanes for the child to run in, or control exactly how fast the child should run.
Through this parental “regulation,” the child will likely be too discouraged to do anything.
Do you notice the parallels with…
Before I graduated in 2008 with a degree in Economics, I may have heard the term “the economy” a hand-full of times. Since graduation, that # has gone up exponentially. Everybody is worried about “the economy.”
What happens when everybody worries about something? The government swoops in to “fix” it (at least it tries to).
The Housing Bubble
I love to oversimplify things. If I could oversimplify the recent financial crisis, I would say that it was primarily caused by…
…SPENDING TOO MUCH.
Without diving too deep into unsustainable asset prices and the illusion of wealth from home equity, most would agree that (as a nation) we were spending too much.
After the Financial Crisis, what does Ben Bernanke and Barack Obama think the solution is?
TO SPEND MORE!
(Cash for Clunkers, $8000 Home Buyer Tax Credit, QE1, QE2, QE3)
I’ve read enough of Paul Krugman to understand the benefits of government spending in times of need but I’m afraid it’s just delaying the problem. It’s the equivalent of putting a band aid on a broken arm.
Instead of focusing on consumption and borrowing, why not focus on saving and production?
It will undoubtedly hurt more now, but it’ll put us back on track to to true economic growth.
Would you rather go through a TRUE RECESSION now and see TRUE ECONOMIC GROWTH later?
Do you appreciate the government artificially aiding the economy and understand the slow recovery?
No answer is right or wrong.