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December 20, 2007

Economic policy choices

Many people think the economy faces some degree of danger today, especially from imbalances in the housing market, but also from oil prices and the lower-value dollar. Some want the government to do something to reduce these dangers while others think the best approach is a hands-off policy, letting the market correct itself. Here's some perspective on these alternative points of view. Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"You’ve really hit upon a very long-time controversy. I mean, this really goes back to the beginning of our country, but it really got heated in the 20th century. And that is, what role should the government play in the economy in terms of trying to move the economy one direction or the other? On the one hand, you have, I'll call them activists, who say that if there is an economic problem - like in the housing market now - we want the government to do something to ease that problem. So, for example, these people would want the Federal Reserve to lower interest rates. They would want government to help people that have foreclosed loans.

"Other folks who oppose this say, 'Look, although those actions may have good short-run benefits, they can have adverse consequences in the long run.' For example, lower interest rates may spark inflation and cause the dollar's international value to go down. And if the government helps out people who have had bad loans, that may send a message to people that 'Hey, don't worry about getting a risky loan. If it bombs, the government will come in and help you.' So this is really a clash between the short-run and long-run concerns. It's something that is going to go on forever, but again people, as citizens, should be aware about it."

Posted by Dave at December 20, 2007 04:18 PM