Government Failure versus Market Failure

My Forbes magazine column this week reviews the latest empirical evidence on why government actions and interventions–government failure rather than market failure–should be at the top of the list of what went wrong in the recent financial crisis. Some continue to be surprised by my finding. While I focus on macroeconomic policy, mainly monetary policy and fiscal policy, my finding that government failure rather than market failure rises to the top of the list is not at all unsual in the broader context of empirical policy evaluation research.

Cliff Winston of the Brookings Institution carefully reviews three decades of empirical research on a wide range of microeconomic policy studies in his important book Government Failure versus Market Failure. He comes to the same basic conclusion; as he puts it “thirty years of empirical evidence… suggests that the welfare cost of government failure may be considerably greater than that of market failure.”

It is interesting that he focuses on research done outside of government because, again as he puts it, “studies conducted by the government,…can be biased, inconsistent, and technically flawed.” So perhaps it is not surprising that so few government agencies or officials are pointing to government failure as the main problem in the recent financial crisis.

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