Role of Government Intervention: Regulation and Deregulation

Regulation and Deregulation

Prior to the 19th century, most people would have voiced their support for the "concept of laissez-faire, a doctrine opposing government interference in the economy, except in" the maintenance of law and order (U.S. Department of State, 2014). The turn of the 19th century, however, saw attitudes begin to change, and labor movements as well as small entrepreneurs asking the government to intervene, following the apparent failure of the market forces to allocate resources efficiently. This text answers the above question by providing real examples that are proof enough that the government ought to be the catalyst for innovations in all sectors because reliance on bubble-driven, market-controlled growth is both precarious and unsustainable.

At the start of the 19th century, the U.S. had no industry in its name and only survived by growing cotton, and later on, exporting the same to England. After being turned into clothes by the English, it was then sold to U.S. citizens at a huge premium (Brodwin, 2012). That was not all; the U.S. also exported its fur pelts to France, only to import, at exorbitant prices, hats made out of the exported fur (Brodwin, 202). The U.S. government then, though weak and tiny, "realized the importance of industry and took a bold risk to move America forward" (Brodwin, 2012). It imposed taxes on imports in an attempt to protect the country's infant industries and bring them to the scale needed to compete with the industries in Europe (Brodwin, 2012). This strategy attracted massive criticism from fur trappers and cotton growers, but the government stuck to its plan and the country quickly became an unbeatable industrial nation with an economic base that sufficiently steered the nation through two world wars (World Bank, 2010).

This kind of strategic support for infant industries has come to boost the nation's economy many times since. The development of nuclear power has largely been driven by the government, which "is heavily involved through safety and environmental regulations, R&D funding and setting national energy goals" (World Nuclear Association, 2014). This is one of those affairs that, though quite costly to implement, would yield immeasurable benefits that would steer future generations to nuclear energy sustainability. If left to the control of market forces, such policies would collapse as resources would be allocated to alternative energy sources whose benefits accrue within a relatively shorter period (World Bank, 2010).

Most institutions that define America's economy today, including the internet, semiconductors, and aviation, owe their success to this kind of strategic support and direct government investment (Brodwin, 2012).

The New Deal Era of the 1930s is another significant illustration of the government's role in innovation and the maintenance of economic stability (U.S. Department of state, 2014). The New Deal was spurred by the 2009 stock market crash that had left the economy dislocated and depressed, and characterized by legislation that extended federal authority in public welfare, agriculture, and banking, and in so doing, establishing minimum wages, and providing platforms for the "expansion of labor unions in such industries as steel, automobiles, and rubber" (U.S. Department of State, 2014). Such agencies and programs as the Social Security System, the Federal Deposit Insurance Corporation, and the Securities and Exchange Commission, which all seem indispensable to the modern economy's operation were created through New Deal legislation (U.S. Department of State, 2014).

Having outlined some of the real examples that demonstrate the government's effectiveness in fostering innovation and maintaining stability in the economy, it would be prudent to examine how the economy has performed with less government interference. Not so well, I would argue; economic growth has remained relatively low. Despite a massive reduction in taxes, the rate of unemployment is still considerably high, most people's income streams have flattened, education attainment has been on the decline, and the levels of innovativeness - measured by the number of patents advanced in the last half-decade - have slumped in comparison to other economies, especially in Asia (Brodwin, 2012).

Nothing demonstrates the unsustainable nature of free market forces better than the 2007 financial crisis. The crisis was triggered by the "bursting of the housing bubble based on inflated home prices, maxed-out credit cards, over-leveraged banks, and overvalued assets," wreaking havoc and triggering what experts brand the deadliest recession since the second World War (National Economic Council, 2011).

Later on, the house-buying formula in America changed, making it relatively easy for people to take out credit that their incomes could not support just so they would be part of the housing bubble. Real estate prices shot up as the financial sector found ways to channel money into the industry while spreading the credit risk among other sectors in the economy (National Economic Council, 2011). House prices almost doubled during the period, and the financial sector accounted for more than 40% of the reported corporate profits (National Economic Council, 2011). This was, however, unsustainable; the value of houses fell by more than half in less than three years and the stock market collapsed, wiping out more than $13 trillion over the same period (National Economic Council, 2011).