Introduction

In 2007, the biggest economic collapse since the Great Depression of the 1930s occurred as a result of high default rates in the subprime mortgage sector in the US, consequently affecting other parts of the world economy (Temin). After general discourse lasting a couple of weeks, the government bailed out big banks, such as Wells Fargo for 25 billion dollars, State Street Corporation for 2 billion dollars, Bank of America Corporation for 15 billion dollars, and so on. The total government commitment was 16.8 trillion dollars, of which only 4.6 trillion has been paid out as of 2015 (Collins). The debate on where to point fingers in regards to the financial crisis is ongoing. In this essay, I argue that the problem is that government intervention is disrupting the capitalist system, and this disruption has caused major stability issues in multiple sectors of society. When the government attempts to regulate a free-market economy and impose left-extremist ideas on a capitalist society, it begins to crumble the pillars that the structures were built on. An excellent solution would be to decrease the power of the state and allow consumers and entrepreneurs (the free market) to drive the economy.

The Misplaced Accusations Toward Wall Street

In the aftermath of the financial crisis which brought with it significant unemployment and economic problems, many blamed corporations and Wall Street as the primary cause. While it is clear that they were not blameless, I would side with those who argued that there be a significant misdirection of protest amongst the middle-class who pointed all the blame to the top the 1% and Wall Street, instead of big government. I contend that the protest should not be against capitalism, but should be pointed at what is redistributing wealth in an unhealthy manner, which is the doing of the state. In this section, I will discuss four specific issues that highlight how government intervention can hurt the economy: employment legislation, taxes, and government lobbying and subsidies.

Employment Legislation a.k.a. Minimum Wage

I would argue that unemployment is largely a result of government setting wages. If there was no minimum wage, every business owner could afford to hire, and unskilled labour workers could pick up odd jobs over weekends to help make extra income (Schiff). “The sensible way to deal with poverty and low income is to allow the market to work itself out, see what employers are willing to pay in various areas for different types and skill levels of labour, and if there’s people let over at the end who do not have what we regard as a sufficient income then we give them some money” (Worstall). Interfering with markets is not the right way to solve unemployment. Regarding basic supply and demand, setting a wage level above the market equilibrium will create an inefficient market and lead to unemployment. The inefficiency occurs because there is a greater number of workers willing to do labour then there are employers willing to hire (Schiff).

In the European Union, there are seven countries that do not employ a federal minimum wage. In the 21 countries in the EU that do employ a federal minimum wage, the unemployment rate as of 2012 was 11.8%. In the seven countries that do not have a minimum wage, the unemployment rate stood at 7.9% (Hanke).

High Level of Taxation on the Wealthy

The problem with government intervention goes beyond salaries. The popular claim that many protesters have is that the government should further increase taxation on the 1%. However, by logic, it is fair to derive that doing so would cause the economy to weaken as the savers, also known as the 1%, will be reluctant to redistribute money back into the economy. If a high-income individual is going to be taxed an increased amount (for example 39 cents on the dollar), for every dollar of income made above a certain income level (for example $400,000), the individual is incentivized to cease or slow their work as soon as they reach the “normal” tax ceiling. Meanwhile, capitalist models reward those who create jobs, increase value in the economy, and help spread the wealth. If the government intervenes, then the capitalist individual is reluctant to invest and help the economy grow. Again, big government has caused problems within the capitalist system, by intervening with unnecessary regulation.

Government Lobbying & Subsidies

The major sentiment amongst protesters in the “Occupy Wall Street” movement is that Wall Street and government are the same – they are both evil figures riddled with greed (Salsman). The truth is, corporations only lobby for government parties due to the amount of power that the government possesses. If government parties were stripped of their power, corporations would have no incentive to back them, and companies by themselves are harmless, as they are valued by the amount of demand they attract from consumers. If government parties were to stop granting favours to corporations, preferably by being stripped of their power regarding legislative measures within the economy, then there would be no misallocation of power, and no conflicts of interest. The problem is with the government subsidising businesses and institutions. If the banks were allowed to fail in 2008, the recovery would have been more efficient than the chosen method of bailing them out (Salsman).

The subsidization model can be transferred to the education system. If the government did not give such massive grants to educational institutions, then the price of tuition would not be so high. Research also suggests that there is “no link between higher education subsidies and economic growth, and none between college degrees and job creation” (Skorup). Student loans are a major hurdle in many people’s lives, but they were not only 20-30 years ago. As a matter of fact, one could get a job while still in school and have completely paid off their student loan by the time they were out of school (Edwards). This debt further harms the economy by decreasing the purchasing power of consumers over the long-term (Skorup). It is as if the aim of the government is to create a controlled, socialist state, in which it is the only governing power over both public and private sectors.

Furthermore, government-backed bank accounts are also a bullet to the financial system. The consumer should not be guaranteed their money by the government, but instead, the banks should compete for the trust of the consumer. This lack of competition, caused by increased regulation by the government, is decaying the capitalist states. Crony capitalism is not going to be sufficient (Roberts). It is because of the rules the government enforces that the cost of production within the United States is too high. Before the 1960’s, America had the most roaring economy, and most goods were also produced domestically. Nowadays, because of regulations, most materials are too expensive to produce within America and are thus imported, primarily from emerging markets. The ideal scenario would be for the government to be small within the economic system.

I believe it is not an exaggeration to say that the government is gambling with our money. Government subsidies essentially become gambling money for corporations. It allows them to take risky shots, without feeling the financial consequences. Because of the federal reserve, money is funnelled into government bonds, put back into government hands, and then gambled away. Also with the increased taxing on high-income entities, the amount of gambling money increases. With this influx of monetary assets, the only thing that makes sense is to take huge risks. To fix the issue, we need to get Wall Street out of Washington. Better yet, get Washington out of Wall Street (Reich). The collapse and instabilities faced in Wall Street are a direct consequence of the subsidies that Washington has granted big banks. If a business is going to fail because of unsafe practices, let it. The government allowed big banks to pay off rating agencies, such that they continued to give AAA ratings to subprime mortgage securities issued by the mortgage departments. If the federal reserve had imposed higher interest rates in 2007, as they were supposed to, the banks would not even be able to afford lending subprime loans. The defaults were able to occur because of the illogically low-interest rates (Collins). The higher rates would have resulted in people putting money into the bank, and stimulation of the economy, which at the time was solely backed by monopolies, rather than the public. If the corporate structure is put together to protect shareholder capital, then why did the management of big banks have the audacity to make risky decisions on behalf of the entire corporation? It is because they had government bailouts guaranteeing them the continuation of their practice – whether it is ethical or not (Collins). As stated by one journalist, the bailouts did the opposite of what they were intended to do. The bailouts turned out to be “committing American taxpayers to permanent, blind support of an ungovernable, unregulatable, hyper-concentrated new financial system that exacerbates the greed and inequality that caused the crash, and forces Wall Street banks like Goldman Sachs and Citigroup to increase risk rather than reduce it” (Collins). If interventions were less, then businesses would have to make safer decisions to both retain the trust and maintain their practice. The state needs to allow business models to fail, and through this, let capitalism allow what it is supposed to do.

Conclusion

The imposition of higher taxes for the 1%, government-licensed monopolies, subsidies, and the whole plethora of government interventions are unhealthy stimuli for the capitalist market. The single way we can improve the economy, for the betterment of everyone’s lives and standards of living, is to implement a purely capitalist market, in which prices and quantities are decided by trade and social benefit, instead of government-backed pricing. Corporations should operate on ethics and regulations, rather than being allowed to be too big to fail. This way, the cycle can continue in a proper manner, and achieve longevity.

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Writer: Shayan Salesi

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