Switching Hands
Subject Free Markets, Economic Growth
Topic Productivity and Growth
Key Words Free Market Capitalism, Economic Growth
News Story

Prior to the events of September 11, the Bush Administration had been critical of attempts by government to interfere in financial markets. Adam Smith could have written the Administration's policy to the extent it believed that allowing individual consumers, investors and consumers to pursue their self-interest results in overall prosperity. Treasury Secretary Paul H. O'Neil, for example, has steadfastly, refused to comment on the direction of financial markets. After the terrorist attack and the precipitous decline in stock prices, O'Neil has been urging investors to buy stocks. The Administration will likely show flexibility in a great many of its policies in an attempt to achieve its goal of routing terrorism.

The decline in the financial markets is a reaction to both the direct impact of the terrorist attack and the indirect result of the increased uncertainty about the future of the economy. Uncertainty about consumer confidence and consumer spending, the potential consequences of the Administration's effort to reduce terrorism and the impact on government spending and taxes make financial markets volatile and unstable. Administration officials have apparently suspended their belief in a hands-off policy in order to strengthen the economy. U.S financial regulators admonished bank and brokerage-firm executives to put aside individual interests for the sake of stability of markets. Regulations were relaxed to allow firms to buy back their own shares. Vice-President Cheney, appearing on television, encouraged individuals to buy stock as a way of sticking "their thumb in the eye if the terrorists," and other Administration officials have been pushing patriotism as a reason for buying stocks. Given that defeating terrorism is now the Administration's number one objective, its hands-off markets policy will likely take a back seat.

(Updated October 1, 2001)

1. In a free market economy, how are the questions of what goods are produced, how goods are produced and how goods are distributed, answered?
2. In general, what can you say about market outcomes if the government were to interfere in the market through price ceilings or price floors?
3. Is interference in the marketplace ever justified?
Source Paul Blustein, "Another Casualty: Free-Market Dogma," The Washington Post, September 19, 2001.

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