Government Bailouts May have Stifled Economic Recovery

Big government is never far from the minds of many Americans. Unfortunately, these thoughts have likely been compounded by the economic downturn, which had the government not just …

Big government is never far from the minds of many Americans. Unfortunately, these thoughts have likely been compounded by the economic downturn, which had the government not just scrambling for fast-acting solutions, but actually intervening in the private sector. What resulted was billions of dollars in bailouts that penetrated key American industries, including automakers, banks, specialty lenders and, to some degree, homeowners.

While the funds may be good news for some of these companies in the short-term – as they can keep them and their employees afloat – they may not necessarily be beneficial to the economy, the public and even these same companies over the long-term.

Some critics of government intervention argue that it interrupts the normal cycle of businesses, which allows the best of the bunch to flourish while other, less successful companies fail and fall by the wayside. Other critics argue that the bailouts are helping big companies and high-powered executives at the expense of the American public. Another group, to which Dr. Michael Cosgrove belongs, believes that the expense of these bailouts and other federal expenditures will be so great by the time this recession is over that they will stifle the economy, resulting in a slower and less zealous recovery.

Dr. Cosgrove, an economist at the University of Dallas, believed that the economy may actually become so stifled that it could stop growing at a rate of 3% a year, its normal course, and instead only grow 2% annually.

Cosgrove argued that had these bailouts not occurred the economy would already be in a recovery. “Bear Stearns should have been allowed to fail and get it over with – allow counterparty risk to be exposed and allow the equity market to collapse,” Cosgrove said in his March 2009 Econoclast Trends report. “[If this happened] the U.S. economy and equity market would be in recovery mode by now.”

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The consequences of these bailouts and interventions may not end there, however. While the government is buffering some companies from huge losses, it is also unfairly stacking the deck against others that do not need, want or receive bailout monies. If the playing field were equal, each business would be in the same boat – all struggling with a down economy, a lack of consumer spending and a fairly distrustful public.

However, by providing select companies with federal funds the government may have thrown off the delicate balance of free market competition. This may also, according to some, discourage entrepreneurs and small business owners – both current and potential – from attempting to wade through the rough economic waters. Even if it doesn’t involve an actual bailout, the tax credits and incentives that are given to some businesses and not others may make for a discouraging marketplace.

While these sentiments may simply advance the matter-of-fact argument that life is not always fair, it has also made the public extremely weary of not just the government’s actions, but those of some of America’s top companies as well. According to an April 2009 Gallup Poll, 80% of Republicans believe big government is the most significant threat America faces. This is up from 68% in December 2006. The poll also noted that 52% of Democrats view big business as our nation’s greatest threat. “These shifts in attitudes have occurred … as the government has taken on an expanded role in regulating U.S. financial institutions in response to the financial crisis, under the Bush and Obama administrations,” the poll said.

Making Investors Weary

One sector of the public that has been particularly skeptical of big business and big government is investors. Though many investors are the same CEOs who couldn’t manage their own companies’ financial meltdowns, this group is also composed of millions of Americans who saw stocks and net worths drop substantially as many reacted skittishly and adversely to the news of potential bailouts. Cosgrove noted that this government intervention can absolutely delay, rather than expedite, the revivals of these companies and the free enterprise system. This could mean many things. A few being that stock prices may not bounce back as quickly and qualified applicants may be weary of job offers from some of the highly publicized bailout takers.

Perhaps the biggest problem with the government interacting in the private sector is that it creates uncertainty among investors. While the government can affect interest rates and credit availability it has not been able to positively affect the investment sector or consumer spending in general. Cosgrove believed this was because the government’s fickleness when it comes to who receives a bailout and how much say the government then has in that company has led to distrust among the investment community. “A larger role for the central government crowds out the private sector and slows trend economic growth,” he said.

Recovery Takes Shape

The government interventions are, according to Cosgrove, likely to cause an L-shaped recovery. For a while many economists anticipated a V-shaped recovery, one that would have seen America bouncing back just as strong as ever. However, as time has gone on and predictions went from an early 2009 recovery to mid-2010, to now perhaps even 2012, more and more analysts now believe that the economy will remain flat lined for a while before slowly improving.

Though no one can say for sure whether the role of big government has actually changed the shape of the recovery, it’s not a far-off thought. At the very least it likely slowed it down. At the very worst it may have temporarily frozen the country, as well as foreign investors, who feel that they can’t trust a private system that is being meddled with by a large public entity. “Research by the European Central Bank tells [us] that a larger central government has the effect of slowing trend economic growth,” Cosgrove said. “And variation in central government spending also creates a slowdown in the economy.”

It’s clear that the economy has many problems that must be sorted through before a recovery can occur. It’s also clear that no one entity, whether that be the public government or a private company, caused this whole melee.

What’s not clear is whether we, as a country, would have been better off if we were allowed to make our own mistakes, fall on our faces and be left to deal with the consequences ourselves. No matter how much we beg for answers, we may never get them. What we’re left with, instead, is the knowledge that the financial support the government has given to so many businesses has left many unconfident that the private sector can continue on its own, unabated by the federal government.


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