Thursday, April 23, 2009

Who Shall Decide?

I often tell my students that, when it comes to economic policy, the most important question is not "What shall be done?" but rather "Who shall decide?"

Each of us, informed and trained in matters of economics or not, is opinionated about what should be done to "save" the auto companies, achieve energy-independence and similar important questions. While low-level, relatively simple, decisions in our every-day lives, often paralyze us, we have almost no compunction deciding what steps should be taken to save the nation, its poor and its unemployed, its rich and its old. Of course, most of these statesmen-like decisions are prefaced with such phrases as "we ought to … " without specifying who this "we" is. What it really means is that someone, like the president or the Congress for example, ought to have the power and the resources to do this or that. And there's the rub.

This is an exercise of the fatal conceit of thinking that human-will is all that is necessary to fix the world. Give the power to he-who-has-the-will. And in this case many Americans think that Barak Obama is that guy – the guy who should have the power and the responsibility to put everything right. He thinks so too and he has not been shy about accumulating as much power as possible for this purpose.

Just this week we have him deciding which cars GM should produce – now that the Federal Government is a shareholder – having previously decided who should be the CEO. This includes deciding that GM should produce less SUV's, tucks and mini-vans and more Chevy Volts. No matter that more consumers want the former and pretty much shun the latter. As economic czar he gets to exercise his preference for environmentally friendly cars, regardless of consumers' preferences. (It gives me no pleasure to note that I predicted this would happen – but why do I feel that I am the old one who is terrified by it?)

This week he is also deciding how the credit card companies should run their businesses, what interest rates they should charge and under what circumstances. Pretty much the whole banking industry, including banks and other financial institutions, are now subject to the veto of the Federal government in one form or another in what they do. Is their any part of the economy that is not at risk?

The whole point of a civilization that runs on laws and markets, and not on the decisions of individuals or committees of individuals, is that such things do not have to be decided by our leaders. The leaders are subject to the rule of law and the laws of economics just like the rest of us. In such a society I get to decide, without interference from the president, what kind of car I want to drive. What gives him the right to decide for me? The usual answer is that my car may pollute the air by causing global warming. (Actually even if we abolished all of the high carbon footprint cars, the affect on global warming would be about zero – so this is a terrible answer.) Even if it were true, this would just mean that ways need to be found to cause me to take this into account when I make my decision. If my private act of consumption causes harm to someone-else then I should be made to compensate them. So, theoretically, the price of the car could reflect the cost of cleaning up that pollution – by, for example, levying a tax or a toll (I hate taxes or government tolls – but this is much preferable solution to micromanaging the auto companies). [See GM Is Becoming a Royal Debacle in the WSJ].

At the twilight of the first 100 days of this president I keep trying to find something to cheer about. Its really tough. You might think he would favor parental choice in education for their kids through vouchers or charter-schools, but he is flip-flopping on this, anxious not to offend the toxic teacher-unions. [see The Union War on Charter Schools in the WSJ] And, though I am not an expert on foreign affairs, I cannot but feel uneasy about the enthusiasm with which he is prepared to be seen with the likes of tin-pot dictators like Hugo Chavez of Venezuela and Daniel Ortega of Nicaragua, thereby undermining the credibility of the domestic opposition in these countries who often need at least our moral support to fight for human rights and freedom; and I wonder why he feels it necessary to apologize to the whole world for everything bad America has ever done or to deny the reality of American exceptionalism. [see The President's Apology Tour in the WSJ ]. Why, at least, is he not talking straight on human-rights abuses around the world, including in, most prominently, Russia?

This messiah-president is getting to make a lot of important decisions. God help us.

Sunday, April 5, 2009

A Microeconomist's Protest

Check out this incisive analysis of the "stimulus" by my colleague Mario Rizzo.

Worth reading carefully.

A Microeconomist’s Protest

Friday, April 3, 2009

Deconstructing Obamanomics

In this month’s issue of Commentary Magazine just published, John Steele Gordon has an analysis of the contradictions in Obama’s economic plans. I have extracted the relevant parts below. (The rest of the article is bad history). 

This analysis greatly clarifies the horrendous disregard of basic common sense and elementary economic logic. It also suggests the nature of Obama’s single-minded determination to pursue his activist agenda – effecting a green revolution, strengthening unions, nationalizing health-care, restricting international trade, etc. all under the smokescreen of claiming to cure the economic crisis. Steele analyzes just one of these insane initiatives (energy) but it applies with equal force to all. The Obama economic program is blatant doublespeak – what it claims and what it really means are exactly the opposite.

The truly Orwellian nature of the rapidly unfolding transformation that is occurring has not been fully realized by most people. When they do realize it they will be shocked to find an administration every bit as tenacious, scary and utilitarian in its pursuits as the much-maligned neo-conservatives of Bush-the-younger. Team-Obama seems willing to do just about anything to achieve its goals. As they see it, the worthy nature of the ends they seek justify extreme means. Just because they are dressed up in the garb of leftist propaganda should not make them any less scary.

There are signs, reflected in some Congressional pushback, that realization is beginning to dawn. Let us hope so. 

The Economic Contradictions of Obama-ism


April 2009

In February 9th, President Obama visited Elkhart, Indiana, the American community with the country’s highest unemployment rate, 15.3 percent. (It had been only 4.7 percent the year before.) He was there to sell his stimulus bill, then moving through Congress and since signed. He noted that the bill would provide help for the workers who had lost their jobs and, more important, help them get their jobs back by reviving the economy.

The jobs that have vanished in Elkhart are predominantly in the recreational-vehicle industry, which is concentrated in the city of 52,000. With the severe recession the country is now experiencing, it is hardly surprising that this industry has been devastated. After all, an RV is expensive both to purchase and to operate and is hardly a necessity. But when the economy recovers, will those jobs come back as demand for RV’s returns? Or, in the meantime, will new environmental regulations championed by Obama work to impede the sales of vehicles that get only a few miles to the gallon and thereby make job growth in Elkhart an impossibility?

The latter seems to be the case. In its proposed budget for fiscal year 2010, the Obama administration has also said it would inaugurate a “cap-and-trade” program to reduce the emission of carbon dioxide into the atmosphere. This program would require all companies to buy at auction the right to emit the gas, which all fossil fuels—oil, gasoline, coal, natural gas, etc.—do, in varying amounts. The total amount of emissions allowed would be strictly limited.

While billed as a program to reduce greenhouse gases, cap-and-trade is, inescapably, a tax on virtually all economic activity, as fossil fuels are an input in nearly all economic outputs. Even a lawyer, after all, has to use electricity to have the lights on in his office and power his computer. And electricity is mostly generated by fossil fuels, especially coal, the biggest emitter of carbon dioxide.

This will be no small tax. The Obama budget estimates that the carbon tax will bring in revenues of $78.7 billion in 2012. The Congressional Budget Office estimates that it might net as much as $300 billion. The administration says that in 2019 this carbon tax will be the sixth-largest source of federal revenue, after personal and corporate income taxes, payroll taxes for Social Security and Medicare, and excise taxes.

Cap-and-trade will have a profound impact on the recreational-vehicle industry in Elkhart, whose pain Obama professed to feel. The cost of manufacturing the vehicle will rise because of the new tax, which will in turn increase the retail price of RV’s and thus inevitably decrease sales. The cost of operating them will also rise substantially as the tax raises the price of gasoline, further limiting demand. Nor will the tax’s effect on Elkhart and its environs be limited to RV’s. The entire mid-section of the country, where Elkhart is located, will be especially hard hit, because the region is far more dependent on manufacturing and coal-fired electric generating plants than the continent’s two coasts.

Limiting carbon-dioxide emissions may (or may not) be a worthy goal, but a cap-and-trade system to further that goal will take a disproportionate toll on the sort of people who are now out of work in Elkhart, Indiana and not the bicoastal elite, whose members can more easily afford the tax.

The Obama budget envisions an explosion of economic growth as the country recovers from the current recession—more than four percent a year from 2011 through 2013. This will supposedly be sufficient to halve the $1.75 trillion deficit it projects for 2009. But there is something off here. Many of the policies Obama and his team are pursuing, cap-and-trade being the most obvious, are likely to interfere with growth in exactly the sectors in which the United States will need it. If the goal is growth, as it should be, the role of government should be to determine ways in which its conduct can fuel that growth. And that is precisely what Obama is not doing.

The cap-and-trade tax will inescapably and adversely impact the economic recovery and future growth rates. If passed, it will act on the economy as a whole exactly the way a governor acts on a steam engine, increasingly resisting any increase in revolutions per minute. With the supply of licenses to emit carbon dioxide fixed, the price of the permits will inevitably rise as economic activity picks up. That means that any increase in overall demand will increase the price of energy, and thus, in a feedback loop, nearly everything else. That will damp down demand. The more the economy tries to speed up, the more the carbon tax will work to prevent it from doing so.

The same is true of many of the other policies embedded in Obama’s budget. He will raise taxes on high earners rather than lowering them to give those earners an incentive to put their money into the private markets. He intends to increase the number of federal regulations on private business and industry, rather than reduce the number of those regulations for the purpose of eliminating barriers to growth. Taken together, these counterproductive actions will make job creation in the private sector difficult, because they will make it more expensive to hire new workers. The Obama plan will, in general, make it more expensive to do business at a time when one would think he and the nation as a whole have every reason to make it as inexpensive as possible to do business.

There is, it appears, a contradiction between the economic growth Obama says he wants and has promised to produce, and the goals his policies actually indicate he wants to achieve. Those policies suggest there are financial goals he values more highly than economic growth. But can he succeed without growth? And what, at this moment, could be more important?


Mark Twain once said that “history doesn’t repeat itself, but it rhymes.” That goes double for economic history, especially in the industrial era when the economy has evolved so quickly from generation to generation. But certain patterns are clear. In modern times, the more that government has controlled the economy, the more bureaucrats, politicians, and intellectuals get to choose winners and losers instead of the marketplace, the less economic growth and innovation there is, the more persistent unemployment is, the slower the improvement in the standard of living.

If you want a vivid example, just compare post-war Britain, which both moved in a socialist direction and became the sick man of the Great Powers, with Margaret Thatcher’s Britain, in which the welfare state was pared back, socialism was reversed, and the forces that had made Britain great were unleashed once again.

It is worrisome in the extreme to realize that Obama’s policies have much more in common with those of Clement Attlee, the prime minister who took over from Winston Churchill when the Second World War ended and put it on the socialist track, than with those of Thatcher, who took charge in England at a time of desperate economic straits. At a time when the United States needs dynamism more than ever, the nation’s voters have chosen to be led by a president whose animating philosophy has led him to adopt policies that will make that dynamism impossible to achieve. If the contradiction proves costly to the American economy, as history suggests, it will exact a profound tribute of its own from Obama’s political future as well.

About the Author

John Steele Gordon is the author of An Empire of Wealth: The Epic History of American Economic Power, among other books. His articles for COMMENTARY include “Look Who’s Afraid of Free Trade” (February 2008) and “Speculators, Politicians, and Financial Disasters” (November 2008).

© 2009 Commentary Inc.