MSU prof: Latest government bailout is overreaction

Jeremy Elwood, SBJ ReporterAs with any issue that gets a lot of press coverage, the economic stimulus plan proposed by President-elect Barack Obama – which could carry a price tag of up to $1 trillion – has drawn opinions on both sides.

Decidedly on the “no” side is Missouri State University economics professor Tom Wyrick, who thinks the plan is an overreaction to a cyclical downturn.

The financial crisis and the recession are not the same issue, Wyrick said in a Wednesday news release.

The financial crisis a few months ago required government intervention, including the $700 billion Troubled Asset Repurchase Program, to prevent another Great Depression, he says.

“If Bank of America, Citigroup or JPMorgan had gone bankrupt in recent months, the FDIC would have been threatened,” Wyrick says. “Widespread panic might have followed, and it would have affected not only America, but many other countries.”

But the recession, while tough, isn’t much different from recessions in the 1970s and 1980s, he adds. An example: The unemployment rate, which stands at 7.2 percent right now, is nowhere near the 8.7 percent peak in the mid 1970s or the 10.8 percent peak in the early ’80s. Recessions are a normal part of the economic cycle and typically don’t last more than a year or two, he says.

“The greatest threat to the economy was three or four months ago, when several key financial institutions were closing and triggering financial panic,” Wyrick says. “Today, the economy is at much less risk, and for the time being, the crisis has subsided. What remains is an economic slowdown or recession.”

The steps that were taken to fix the financial crisis will eventually pay off – but politicians want it to happen instantly, Wyrick says.

“It takes a long time to turn it around,” he says. “We can pump $1 trillion into it, and it could still take a year to turn around. Recessions do not end overnight.”

He added that if the government is too quick to step in and bail out companies during a recession, future corporate leaders would have less incentive to increase efficiency and spend wisely during economic lean times.

“If you want a prosperous economy, you’ve got to let people go out of business when they’ve failed in the marketplace. The companies that go under are either producing the wrong products, paying employees too much or using too-expensive materials,” he says.

Do you think the government should be bailing out businesses, or does it set a dangerous precedent? Tell us what you think! Post a comment in the Responses area below.

1 Response to “MSU prof: Latest government bailout is overreaction”

  1. 1 Jackie Barger January 15, 2009 at 1:35 pm

    Yes, bailout is an over-reaction. Our economic system health has a life-cycle with ups and downs, and that includes the reality that some businesses will fail, others will succeed. If the size of some of the businesses that fail happen to be very large, so be it. Our long-term economic health has been based on the assumption that the system provides freedom to choose and to succeed. But that doesn’t mean we legislate away risk. Without risk, the health of our long-term economic system will be damaged. Let the economic system absorb the ups and downs of economic success and failure without government intervention and bailouts.

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