Government Intervention and Its Consequences
Although it may look a bit like the classical economist’s view, defending the non-existence of government interventions in the economy might be useful sometimes. Interventions like taxations, regulations, or price limitations are needed in some economies, but anything more than enough creates adverse effects in the economy.
Let’s start with an example of exchange rate dynamics from our close history, which is happened in the late 1990s in East Asia. Thailand’s government decided to fix the exchange rate of baht to a value that is higher than its actual market value. Keeping their currency at a higher price level, they pumped vast amounts of dollars to the market to follow this policy. At first, this intervention was logical to help domestic firms pay their foreign loans, but this action required a considerable amount of foreign exchange reserves. When the country cannot pump enough dollars to market, expectations of depreciation in baht increase, and as a result, it depreciated even less than before. This made everything even worse, and this intervention was a failure.
On the other hand, when we get to the end of 2008s, which is closer to today, we can see another aspect of government intervention. One of the world’s largest economies, the United States, has survived one of the biggest financial crises in its history. It is hard to say they survived because they still suffer from the impact of that crisis. The most significant cause of this crisis was the lack of government regulations in the banking and finance sector. This crisis may not have happened if there were more strict regulations in the mortgage requirements and if the government put some limitations on financial derivatives. So, it is hard to say too much government interventions are worse always.
Lastly, we can support the government’s interventions about keeping unemployment, inflation, and exchange rate fluctuations at a reasonable level. This helps the economy to stay stabilized and decrease the unexpected consequences. But when those precautions and interventions become too much, the private sector may start to collapse. For instance, governments should prevent monopolization in the markets, but those regulations should not prevent new investors from entering the market. If the government strictly puts a price ceiling or minimum price to market, or if taxes become too much for private companies, this may force foreign investors to leave the country and cause significant problems.
In short, of course, there should be some government intervention to keep the economy safe and steady. But when those interventions start to be unnecessary or too much, things may get worse. We have witnessed the consequences of too much, and no interventions in history and history is a repetition. So, we should keep the balance!