The Visible Hand of the Government, and Why that Worked in 2008.

NEW YORK - A question that dates back as far as the very study of economics itself is whether and how much the government should intervene in the economy. Over the centuries we have had dozens of different answers to that question with dozens of different situations spurring them on, however we have very few modern examples where we can compare and contrast economies and how they performed after an economic crisis with and without government intervention. The 2008 financial crisis is one of these rare examples, in which we can clearly demonstrate the effect of government intervention in the economy and how that has positively affected the economic environment of the United States by lowering unemployment, increasing economic production, and stopping the potentially disastrous effects of an economic depression. 

But first, in order to understand the effect of this economic stimulus on the economy, we must first understand the economic doctrine that influenced the intervention in the economy and the doctrines that firmly opposed it on all grounds. Opposition to the TARP program and President Bush’s temporary tax cuts came from both the left and the right. On the left, we saw people believing that the projects were largely a transfer of money from the poor to rich, and would’ve preferred that government intervention had been targeted towards the ‘little guy’; on the right, people believed that government intervention as a whole was having negative effects, with adherents of the Chicago School of Economics believing that the government intervention in the economy could only be a detriment to the forces of the market and the so-called invisible hand of the market. Both of these criticisms are, however, ignore the larger fact that the government intervention is what can be shown to have largely stopped the economic bleeding during the financial crisis, and if it were allowed to continue, we would undoubtedly have fallen into the depths of another depression, just as the laissez-faire attitudes of Herbert Hoover allowed the Great Depression to become exacerbated. While there is some validity in the idea that the tax cuts allowed for some amounts of wealth to be transferred from the poor to the wealthy, the government intervention in bailing out the banks allowed for those banks to stay afloat and thus allowed for millions of Americans to remain assured that their life savings were secure and that they didn’t have to start to bank rushes more than what had already happened, which would have caused further economic devastation. So clearly, the economic intervention that both Bush and Obama pursued during the economic crisis allowed for the economy to remain afloat, even if there were other economic consequences that exacerbated undesirable traits in the economy such as inequality. Meaning that it is undoubtedly true that without the economic intervention in 2008 we would be worse off than if we had let the economy fail on its own, showing that Keynesian economic thought has at least some merit.

 One of the most apparent benefits of the TARP programs and the government intervention is the effect that it had on decreasing unemployment. The TARP regime clearly stopped what was the failing of the American economic system and the dramatic and economically devastating increase of unemployment, which peaked in October 2009 at 10%, and gradually declined to the rates that it was it before over a period of a few years, and whilst this decrease in unemployment did come slowly, the unemployment rate did in fact fall down. Which is a dramatic improvement upon what was the previous rate of unemployment. Ironically, if the government had begun to intervene in the crisis earlier than it did, we wouldn’t have had such a large financial crisis. The presentation of these facts shows clearly that the government intervention in the economy, not especially the temporary tax cuts, but particularly the TARP regime of bailing out banks helped keep the unemployment rate after the initial shock of the crisis from rising, and even helped lower it to some degree, though perhaps not as quickly as one would want. 

Another apparent demonstration of the successes of the government intervention is the fact that economic production was noticeably increased after the government’s temporary tax cuts as well as the TARP regime of the government bailing out banks. The simple fact is that both the tax cuts that Bush and Congress passed in 2008, as well as the TARP program that was passed in the later year helped stimulate economic growth by increasing production. It allowed for banks to stay afloat and allowed for the businesses that those banks supported to stay afloat and employ people, which encouraged economic production and economic spending in the economy. In summation, government intervention that George W Bush and Barack Obama pursued in order to assuage the concerns over the economy were broadly helpful in increasing economic production.

Alongside the reasons already mentioned in this essay, one of the most evident reasons that the government intervention in the economy during the 2008 economic crisis was the correct course of economic action is that the Great Recession was just that, a recession and not a depression. This is simply a fact; the Great Recession had all the trademarks of what a depression would be. Bank runs, major failures in the economy, and other economic calamities are all hallmarks of what economists assume could be a depression. Through stabilizing the economy by bailing out the banks, as well as the economic stimulus effect of the temporary tax cuts that George Bush passed both allowed for the economic crisis to be tempered. In summation, the government intervention in 2008 was clearly a success because it stopped what could’ve been an economic depression from turning into that, which is clearly a success. 

The course of action that the government went through during the 2008 economic crisis was the correct course of action because of the demonstrable effects that it had on unemployment, the increase it had on economic production, and the simple fact that the great recession was not a depression largely because of the government intervention that took place. These reasons are so important in understanding how economic policy should be explored further in the future, giving us a further understanding of how economies work under deep economic stress. Tying us back to the start of this essay, one of the oldest questions in economics may have an answer, at least, if we’re willing to believe 2008’s response to it.

Author: John Valat de Cordova

This work was submitted as a piece in the Author's Economics class initially, and later was revised and published on our site.