Historical Examples Show Government Intervention Only Prolongs Economic Downturns

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This study by the Federal Reserve examines the effects of government intervention and the absence thereof in two similar financial crises which occurred simultaneously in Chile and Mexico. Chile liquidated the insolvent banks and instituted a new regulatory system to prevent future abuses. Mexico nationalized the entire banking system keeping the insolvent banks on life support at the expense of the taxpayer.

This is what happened. Over the next 25 years, Chile’s per capita GDP grew 100% while Mexico has exhibited an impressive 0% growth rate.  This means the average Chilean is twice as rich as he was 25 years ago, whereas the average Mexican stayed just as poor as he was before.

Graph Illustrating High GDP Growth in Chile and Flat GDP Growth in Mexico Since 1980. Title: Real GDP per working-age person in Chile and Mexico.

The lesson is clear. If the government subsidizes bad behavior you get more of it. If the government taxes good behavior you get less of it.

Yet that’s exactly what were doing. We’re taxing successful, competently run businesses to subsidize irresponsible, poorly run businesses. Until we realize this simple fact, the previous trend of increased productivity and standards of living will only be a memory.

  • Anonymous

    Yes, but correlation doesn’t necessarily mean causation. One must be careful of this logical fallacy, especially in economics.

  • Mike P. Sinn

    Good point. But it does make intuitive sense that a country that takes resources from the private economy to maintain poorly managed institutions will not be as successful a country which allows its institutions to be exposed to a “survival of the fittest” evolutionary-style economic system.

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