How much government intervention is too much? That’s the big question on the minds of many Americans looking at the economic plans launched by President Obama’s administration over the past several months. While some economists are welcoming additional regulation of the institutions largely blamed for the recent financial crisis, others say more government involvement is only going to make things worse in the long run, damaging the country’s free-market economy.

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“I think it’s a disaster,” says Economics Professor William Boyes of the W. P. Carey School of Business at Arizona State University. “I didn’t think I would ever see the United States move to a primarily government-controlled economy, and it’s happened in just a few months.”

Boyes, who has consulted for the U.S. Commerce Department, Federal Trade Commission, AT&T and Intel, is one of the vocal critics of recent economic measures taken by the administration. He believes the actions taken will significantly lower the standard of living in America over the next decade.

“It’s been proven throughout history that people who get to choose and spend what they want are better off than those who have to do what the government dictates,” says Boyes, who believes at least one-third of the U.S. economy is now directly owned or controlled by the government.

He doesn’t agree with the recent bailouts or the premise that certain banks and companies are too big to be allowed to fail, saying, “If something’s too big to fail, it shouldn’t exist. The whole feeling of systemic risk is ridiculous because in the long term, markets have always forced out inefficiencies. In a free market, businesses will fail, and you have to let it happen.”

W. P. Carey School of Business Finance Professor Herbert Kaufman, who has consulted for the New York Stock Exchange, commercial banks, savings and loan associations, and government agencies, including the U.S. Treasury, the World Bank and the Congressional Budget Office, disagrees with his colleague. He believes that much of the recent government intervention in the markets has been positive, including the bailouts of AIG and large banks deemed “too big to fail.” He also likes some of the new regulatory ideas.

“Nobody was watching, and regulation was insufficient. Free markets depend on transparency and people knowing what’s going on in the financial system,” Kaufman says. “I’m pretty favorable toward the Obama proposal on regulation, especially the calls for greater transparency, increased capital requirements for financial institutions, and making the Federal Reserve the basic arbiter and agency that deals with systemic risk and the whole spectrum of banking institutions.”

Kaufman does have some concerns about requiring the Fed to receive approval to use its balance sheet to infuse the financial system with liquidity, which it has already been doing at its own discretion over the past few months. He believes the independence of the Fed has kept the financial system from “falling into the abyss,” so far. He also doesn’t like the extra layer of bureaucracy that would be created in the form of a group to determine which organizations the Fed should consider a systemic risk and treat differently than other institutions.

Dean Robert Mittelstaedt of the W. P. Carey School of Business, who previously served as vice dean at The Wharton School at the University of Pennsylvania and who is on the boards of three public companies, is concerned about systemic risk, too, but he thinks the country is moving in the wrong direction with some of these new measures.

“I think it’s dangerous, both broadly speaking from a moral hazard standpoint, where people expect to be bailed out, and philosophically after 200-plus years of capitalism,” says Mittelstaedt. “We’ve been more free market-oriented than the rest of the world, and then all of a sudden, we have more government involvement. Unfortunately, America is like a pendulum; we tend to wait for something bad to happen and then try to fix it. We take risks, get burned and then go back to being overly conservative. That’s a dangerous way to live.”

Mittelstaedt does believe that the “ripple effects” from allowing huge companies like AIG and larger banks to fail would have affected the lives of millions of people, so he thinks those specific bailouts were needed. However, he is wary of further government intervention or bailouts, with the sole exception of additional oversight to prevent future problems.

“In some cases, we need regulation to save us from ourselves,” Mittelstaedt says. “The real problem that created the current financial crisis is that nobody was thinking of systemic risk and how interconnected financial institutions are. Safeguards created after the Great Depression didn’t work because we had other kinds of risk that had crept into the system since then. The Obama administration’s proposed new regulatory group would be the ‘glass half-empty’ people looking at what bubbles could happen in the future and new ways to prevent them.”

The professors and dean also offer views on other recent government intervention.

1. On the auto industry bailouts –

Boyes: “The auto companies should have been able to file bankruptcy at the very beginning so contracts and other inefficient setups could have been resolved. U.S. labor costs are 20 percent higher than for foreign companies, and the government involvement will force the automakers to produce smaller cars that Americans don’t want, instead of larger trucks that have traditionally made a profit. The auto companies will be begging for money for the next 10 to 20 years, and taxpayers will subsidize them until they ultimately fail, anyway.”

Kaufman: “We do have bankruptcy processes in place that could have been used without government involvement. However, I understand the employees and suppliers that would have been affected. I don’t necessarily think it was the best solution for this.”

Mittelstaedt: “I think the auto bailouts were not only unnecessary, but also a huge detriment to how our capitalist system is supposed to work. We are protecting an industry that is not cost-competitive on a global basis. The auto industry worldwide had a 40-percent excess in manufacturing capacity before the crisis. You can fool the laws of economics for a short time, but not for long. If taxpayers subsidize U.S. auto products that are unsustainable, the rest of the world will look at this as protectionism – and it is.”

2. On the mortgage situation –

Boyes: “Mortgages were messed up by the government pushing Fannie Mae and Freddie Mac to make subprime loans. Government messed it up, and now government is going to save them. The government will be pushing for loans to very low-income customers before long, and then we’ll either have another housing bubble or rapid inflation.”

Kaufman: “One of the things in the new proposal is that when mortgages are sold, the original mortgage owner will have to have a piece of the mortgage on their books, which will motivate the financial institutions to underwrite to better standards, instead of just originating a bunch of mortgages because it’s profitable. As a former economist for Fannie Mae, I’ve been advocating for privatization of Fannie and Freddie for more than a decade because of the government liability, but it’s too late now. I don’t see any alternatives at the moment.”

Mittelstaedt: “Fannie Mae and Freddie Mac are a perfect example of the kind of mess you create when you try to mix social and business objectives. They were created to make more capital available for people to own homes, but Canada doesn’t have a Fannie/Freddie equivalent, and they are within 1 percent of the United States in home ownership. While well intended, it’s not clear that Fannie and Freddie were ever necessary, and they influenced risk management and questionable loans that are at the heart of the current crisis.”

3. On other proposals –

Boyes: “I think the whole plan regarding the SEC is a joke. The reason the markets are falling is because of regulation. The SEC didn’t understand the situation. If they just called for more transparency and stayed away and removed the monopoly on credit ratings, consumers and investors would be more cautious and have more information to make decisions. Now, people will just say, ‘The government will protect me.’ Normally, you make a profit or take a loss much more carefully when you don’t think someone will back you up.”

Kaufman: “I’m hugely in favor of the notion that hedge funds will have to register with the SEC and be more transparent. I believe that under the new proposals, the Fed will also be able to deal with problems before they become systemic risks. I just don’t like the executive branch oversight and blurring lines between the Fed and the executive branch. I think it adds bureaucracy and results in far too much executive branch authority over the Fed.”

Mittelstaedt: “I like the idea of having an agency to deal with consumer credit issues, such as credit cards. That’s protecting consumers from themselves. There are a lot of financial organizations that, if offered the opportunity, will make high-risk loans to turn a profit. However, that motivation can lead to a crash that hurts others and makes it tough for those with good credit to get loans. There’s a reason society doesn’t tolerate drinking and driving, either. Sadly, even if these new rules are the right thing to do, you wouldn’t have been able to sell people on them two years ago and get it done.”