John Allison, retired CEO and Chairman of BB&T, spoke about the financial crisis on April 4 at the University of Houston. His talk was very informative, and one point was particularly interesting.
Many people are aware that government policies—such as low interest rates and the Community Reinvestment Act—drove the housing bubble and ultimately created the economic crisis. Government intervention always leads to a misallocation of resources. In regard to the housing bubble, the most obvious misallocation was the money poured into real estate. But those interventions also created other misallocations that are less obvious.
The construction boom created a high demand for construction workers, which drove up wages. Allison noted that construction wages and manufacturing wages move in tandem. As manufacturing wages rose, American companies became less competitive and moved jobs overseas in order to cut costs.
When the housing bubble burst and construction jobs were cut, those workers did not the skills for other jobs, such as manufacturing. At the same time, there were fewer manufacturing jobs available. The result has been the lingering high unemployment numbers we have witnessed.
Government interventions always beget more government interventions. The initial intervention distorts the market, leading to the misallocation of resources. When problems materialize, and they always do, further interventions are presented as the solution. And that has been the case in the economic crisis.
In response to the misallocation of both capital and labor, the government has responded with numerous schemes to create jobs, such as throwing money at “green energy” companies and “investing” in infrastructure. Such “solutions” may provide some temporary relief, but all they do is create bigger problems in the future.
The real solution is to end government intervention and allow the market to clear. In a free market, businessmen quickly learn when resources are misallocated—they lose market share. In a free market, the self-interest of businessmen motivates them to continually make corrections to meet the changing needs and demands of consumers.
Click here to see an earlier version of the talk.