CHAMPAIGN, Ill. - Massive bailouts and other moves by the U.S. government to stem a near-epic economic meltdown could set the U.S. economy back by more than a half-century, a University of Illinois business expert warns.
Instead of mending the bruised economy, Rajshree Agarwal says government intervention is stifling innovation, entrepreneurship and other free-market dynamics that fuel long-term growth.
"Politicians are looking for quick fixes, but the issue is not so much whether this current crisis can be fixed," she said. "The larger issue is that in trying to find a quick solution we risk throwing the baby out with the bath water, setting our economy back 50, 60 or 70 years."
Government intervention flies in the face of economic theory, said Agarwal, a professor of business administration who studies factors that influence economic expansion.
She wrote a research paper in 2007 examining economist Joseph Schumpeter's long-held theory of "creative destruction," which maintains economies grow when innovation kills off old, inefficient businesses and spawns new ones.
Agarwal found that growth also follows an alternative path of "creative construction," which allows for win-win scenarios as established firms adapt to change and are joined by new businesses seeking to cash in on breakthroughs in knowledge.
But government bailouts are throttling the free-market competition that fuels growth, she said. By handing over billions of dollars to prop up large, existing firms, government is giving them an unfair edge that chases away potential rivals.
"There should have been zero bailouts, and government should have just let the market correct
tself," she said. "By buying into the 'too-big-to-fail' fallacy, the bailouts have set our economy back because economic power now resides in inefficient firms who ignored basic risk-return relationships and who weren't able to navigate the downturn on their own. More importantly, we've removed the underpinnings for growth."
"The rebuttal to that could be that without bailouts the entire financial system implodes," she said. "Indeed, you could have had a crisis that would have made the Great Depression look like a picnic. But if you go back to the origins of the depression, as documented by Alan Greenspan himself, it was caused by government intervention and Federal Reserve Bank policies, not the free market."
Agarwal says federal intervention during the current crisis has also wrongly shifted economic
power away from market forces and into the hands of government, mirroring policies that once stalled economic growth in India and Russia.
She says recent U.S. policy marks a disturbing trend towards big government, big business and big labor, where corporations survive not because of their entrepreneurial decision-making but because of government pull and political power.
"When businesses and consumers make economic decisions in a free market, any one being wrong is not a big deal," Agarwal said. "But if only the government is deciding, the consequences of not getting it right can be catastrophic to the economy."
More than 250 banks turned down bailouts through the federal Troubled Assets Relief Program as of late April, which Agarwal says is evidence that the free market best regulates the economy, not government.
"Why say no to 'free' money? Because of the strings attached," she said. "These banks are the ones that were fiscally responsible in the first place. And they quickly realized that government dictates on what, to whom and how loans should be given would hurt their ability to do business and be successful."
Government should move toward deregulation and fewer "big brother" policies as it mulls ways to ward off future recessions, said Agarwal, who will who appear this month on "First Business," a nationally syndicated financial program that airs on about 150 television affiliates in the U.S. and is distributed internationally.
Agarwal, who also will be a panelist at a U. of I. economic forum June 13 in Chicago, says pro-free market arguments have mustered little support in the current politico-economic climate, where capitalism is being blamed for the deepest economic downturn in decades.
But she argues that government policies are the real culprit, and says a free-market approach is the best route to restore prosperity.
"The U.S. was the biggest bastion of capitalism and individual rights," she said. "What's most depressing is that now we're turning back. And if that doesn't change, we may be leading the rest of the world back."