The Obama vision

by Russ Roberts on February 25, 2009

in Growth

What was in last night's state of the union address?

A short-term vision and a longer-term vision.

The short-term vision is that massive amounts of borrowed money can be spent effectively by the federal government to get us out of a recession. I think that's unlikely to work but as I have written elsewhere, the evidence for my view or the opposite side is not very compelling. It's a philosophical difference about the virtues of larger government vs. smaller government. So we'll see.

The longer-term vision is that energy independence, restraining health care costs and improving education are keys to long term growth. This is a weird vision. Energy independence as a goal unto itself is bad for long term growth. Paying more for wind power in the name of energy independence is costly, not productive. And if I heard him correctly, he crowed about spending $15 billion on alternative energy innovation. That is not a lot of money for one of the three legs of the growth stool.

It's nice to talk about restraining health care costs. America doesn't get its money's worth from its health care expenditure but that's because it's highly subsidized. To keep those subsidies in place and cut costs requires some serious rationing. The American people aren't going to like that. But either way, it's not a growth policy.

The third leg of the stool, education, is essential to long-run prosperity. Unfortunately, the federal government has shown little ability to improve it. Spending more money is unlikely to help, There is little evidence it has helped in the past. Introducing more competition via charter schools and vouchers is a good idea, but the teachers will fight such changes and the teachers are a powerful Democratic constituency.

It will be interesting to see if any headway will be made in these areas a year from now.

Either way, I'm glad I'm not in the administration defending these three areas as key to future growth. I suspect they came out of focus groups rather than the President's team of economists.
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Doug Stevens February 25, 2009 at 10:32 am
muirgeo February 25, 2009 at 10:37 am

Boy this is grim. I don't remember this blog being this grim in 2005 right up to this crash. But now things are really grim apparently because of the guys trying to fix the problem NOT because of the guys we cheered who got us into this problem. So if energy, health care, infrastructure are not the likely big growth areas I wonder what the team of economist would say are the big growth areas?

Food… I doubt it… we have too much of that.

Clothing… Pretty much we all have clothing.

Finance… HAH!

Housing… Hah again.

I can not even imagine what it could be other then what President Obama mentioned.

I think you are so far off in this post it's kinda like being in 1982 and questioning how computers or the internet could improve growth.

If people are spending all kinds of time in traffic and commuting improving the infrastructure and making commute times shorter could boost productivity. Likewise for roads with no potholes decreasing vehicle maintenance.

If technology advances such that I can run a wind turbine or solar panels on my property or we as a community association of 200 homes can produce all or most of our own energy to run our houses and our cars… you see that somehow as not a good plan for growth? You like getting you oil from wars and Middle Easterners? And you like having no choice but to drive an internal combustion machine that pollutes and warms the planet?

Health care. The baby boomers are getting older. They will need much healthcare. Plan and simple taking care of them will be a huge growth industry… in fact right now I believe it is one of the strongest growth industries.

Russ your post is nothing but ideological negativity. Russ you would not want to be the President defending his claims last night. But 2 years from now, 8 years from now… 20 years from now you will get too defend this post. I don't think you'll have a leg to stand on.

Greg Ransom February 25, 2009 at 10:58 am

Obama is a master of BS, isn't he?

Dressing all this stuff up as a "growth" package is rich ..

PB February 25, 2009 at 11:11 am

Muirgeo,
Your thoughts are half-baked, and you have not followed your logic through to its natural conclusion.

Health care is a growth industry because it's margins are artificially inflated due to the subsidies. If you cram down costs, it means lower margins, and no industry with decreasing margins will attract capital. Capital is smarter than people, and growth in demand will not necessarily mean growth in investment.

Your thoughts on energy show nothing but the lack of any real research. Do you have any idea what wind power, which is intermittent, does to a stable elctric grid? Have you considered that the actual physical space requirements of solar power preclude any household (except those with a few spare acres) converting to solar and wind?

To be clear, I didn't read Mr. Roberts saying these things were bad ideas to spend money on, only that they didn't translate directly into any meaningful measure of GDP. I agree these initiatives need some measure of funding, but to call it "stimulus" is a glaring misnomer at best, and an blatant excuse for more pork at worst.

Methinks February 25, 2009 at 11:22 am

Considering the title and content, I want to know why our own individual visions must be subjugated to the vision of the state.

Why is the vision of the small individual for a life he desires less important than the sweeping visions of the grand state?

Russell Roberts February 25, 2009 at 11:22 am

Muirgeo,

Nobody on this blog cheered the economic policies of George Bush.

Nobody on this blog cheered the inept efforts by Paulson and Bernanke that have made the mess worse.

Eliot February 25, 2009 at 11:30 am

For simple straightforward honest reform to save medicare you need to look at the TED talk given by Juan Enriquez 5:00 to 6:20:

http://www.ted.com/talks/juan_enriquez_shares_mindboggling_new_science.html

You assume that alternative energy will cost the same amount in the long term as continuing to import oil or perhaps utilizing our coal reserves. You are ignoring the fact that those energy sources are becoming increasingly politically non-viable due to the harm they wreak on our planet. (If you'd like to debate global warming I'd be happy to. In the interest of full disclosure I am a physics student at University of Central Florida and I have spent a lot of time looking into this issue as it concerns me greatly. My conclusion has been to accept the scientific consensus of Global Warming as well as the caveat that humans are responsible for at the very least some of it.) As such oil and coal could be pushed over the price of alternatives due to CO2 limitations that the president called for last night. As well as the fact that there are a lot of advancements in alternative energy technology coming down the line to further reduce the costs.

Your final point of education not being a point of growth is unfathomable. Nearly every economist agrees that one of the surest ways to kill your longterm economic growth is to stop investing in education. Your argument that because the government has done a piss poor job in the past it shouldn't try anymore doesn't really hold water considering we have a new one. Your argument for charter school vouchers is entirely an ideological point which has its place. However that place is not in an economic blog when you are asking whether or not to invest in our nation's education system. You know we have to you just want to make sure it's done your way.

Russell Roberts February 25, 2009 at 11:34 am

Eliot,

Did you read what I wrote:

The third leg of the stool, education, is essential to long-run prosperity. Unfortunately, the federal government has shown little ability to improve it.

We'll see if this administration does better than the attempts of the last FIFTY years. Keep me posted. Or share some evidence that this time will be different.

OregonGuy February 25, 2009 at 11:38 am

One of the problems of fixers is their focus on static analysis. "We will "fix" this and this and that, and voila! unicorns.

Determining resource allocation without market forces affects markets in ways that are usually unintended, and harmful.
.

MnM February 25, 2009 at 11:40 am

PB, very well said! I agree 100%.

Methinks, as usual, you've asked a brilliant question. I wonder if any politician or political groupee could give us an honest answer…

muirgeo February 25, 2009 at 11:55 am

PB,

I await yours and others "fully baked" thoughts on WHAT will be growth industries.

I gave you mine now lets here yours.

Ultimately I think we may need to define what real growth is.

John V February 25, 2009 at 11:57 am

Muirgeo,

Nobody on this blog cheered the economic policies of George Bush.

Nobody on this blog cheered the inept efforts by Paulson and Bernanke that have made the mess worse.

Posted by: Russell Roberts

Don't worry, Russ. That little glitch in detail will not prevent Muirgeo from saying it again.

John V February 25, 2009 at 12:01 pm

Follow up:

Because remember, Russ:

Muirgeo's mental paradigm needs to be neat contrast between Dems and GOP.

It's one of the other. So since libertarians don't really like the current agends, it we means we HAVE TO support the opposite agenda from the GOP..both past and present.

MnM February 25, 2009 at 12:01 pm

…and again.

muirgeo February 25, 2009 at 12:02 pm

Considering the title and content, I want to know why our own individual visions must be subjugated to the vision of the state.

Posted by: Methinks

It's called democracy methinks. You were born or choose to move to one of the greatest countries ever that has been built on the backs of those that preceeded you. Now you think you have no obligations… you think everything that is here should exist free of charge to you? It appears to me you are the one asking for a handout and freebies.

Teenagers often ask the same questions of their parents. When they don't like the answers they run away and find reality.

Singapore is calling and no one is holding you back.

L Burke Files February 25, 2009 at 12:10 pm

Our President's vision is Myopic. He can clearly see the problems, the future is very fuzzy.

More succulently he is a "True Believer" and thus anyone who opposes him or his views will be dealt with harshly / and ignored.

Eric Hoffer comments on a True Believer lifted from Wikipedia…

"Hoffer argues that mass movements such as Fascism and Communism spread by promising a glorious future. To be successful, these mass movements need the adherents to be willing to sacrifice themselves and others for the future goals. To do so, mass movements need to devalue both the past and the present. Mass movements appeal to frustrated people who are dissatisfied with their current state, but are capable of a strong belief in the future. As well, mass movements appeal to people who want to escape a flawed self by creating an imaginary self and joining a collective whole. Some categories of people who may be attracted to mass movements include poor people, misfits, and people who feel thwarted in their endeavors. Hoffer quotes extensively from leaders of the Nazi and Communist parties in the early part of the 20th Century, to demonstrate, among other things, that they were competing for adherents from the same pool of people predisposed to support mass movements. Despite the two parties' fierce antagonism, they were more likely to gain recruits from their opposing party than from moderates with no affiliation to either.

The book also explores the behavior of mass movements once they become established (or leave the "active phase"). With their collapse of a communal framework people can no longer defeat the feelings of insecurity and uncertainty by belonging to a compact whole. If the isolated individual lacks vast opportunities for personal advancement, development of talents, and action (such as those found on a frontier), he will seek substitutes. These substitutes would be pride instead of self-confidence, memberships in a collective whole like a mass movement, absolute certainty instead of understanding."

All you need to do is read Eric Hoffer's old book "The True Believer" for a view of what is happing and Saul Alinsky's book on Rues for Radicals" and you can see the playbook.

Our President is a very committed and intelligent man, who is very confidently and sincerely going down the wrong path with the opposition silenced (recall the comment – " … remember, we won the election….") and a cheering section (media as a whole) producing nothing but "Thumb sucking stories" that no one wants to read (see their circulation).

It is going to be a though battle for all people that get "For every opportunity their is a responsibility" as we point out the condition of the Emperors Cloths…. The facts may be inconvenient…

PB February 25, 2009 at 12:11 pm

Muirgeo,
"Real" growth has already been defined and you can find it in any economics textbook.

Growth industries in the US will be different from those in other parts of the world, but assuming you are speaking about the US as it now stands (i.e. assuming no more protectionist measures are put in place like the nonsense we saw in steel, lumber, and beef under Bush), then growth industries will be nontradeables (think IP, content, etc.), capital intensive (not labor intensive) manufactured goods with production bases in non-union states (look at what the Carolinas and Tennessee are doing), and I would expect our chief exports (chemicals and capital goods) will see growth when the world does get back to growing. This thesis is based on current trade structure, and my belief the US dollar is going to get weaker vs hard goods in a major way.

If you have different thesis on currency, your growth industries would look more like our major imports as they would have enhanced margins and therefore attract more capital.

In an open-trade world, global currency movements and local trade policies have more to do with what a country's growth industries are than local demographic changes (especially in a country like ours with less than 7% of the world population but an oversized portion of world GDP). This is one of the many reasons getting education right (does not necessarily mean throwing more money at it), is imperative as an educated population is one of the key non-tradeable assets in most economies.

Greg Worrel February 25, 2009 at 12:39 pm

Elliot wrote:
"Your argument that because the government has done a piss poor job in the past it shouldn't try anymore doesn't really hold water considering we have a new one."

This really made me laugh. We have a bright shiny new government and we can all have new hope. I am sorry but you have been duped. There is nothing new here.

New name plates on some of the offices perhaps but it is still politicians thinking they know how to run the world and run our lives. All done with our money ostensibly for our benefit but really for the benefit of the politicians and their friends and benefactors.

The system itself is wrong both from a functional and a moral perspective. It doesn't matter who is running the show.

ben February 25, 2009 at 12:40 pm

What is coming out of Obama's economists? Not the auto bailout. Not the decision to cap manager's salaries. And apparently nothing in this vision for growth.

ben February 25, 2009 at 12:41 pm

Muirgeo: idiot.

MnM February 25, 2009 at 12:49 pm

I don't know why I bother, but here it goes…

"Now you think you have no obligations…"

No, you just think that is what she thinks.

"you think everything that is here should exist free of charge to you?"

She didn't say that. Did you even read her post?

"It appears to me you are the one asking for a handout and freebies."

That's only because you insist on projecting your ideas of her on her posts. Try dealing with what she's actually written, rather than what you think she believes.

As long as you swing at shadows, you'll never hit anything, Shadow Boxer.

John Pertz February 25, 2009 at 12:50 pm

Hmmm….

Proposed U.S government expenditure on education, new energy, and health care reform is not a new idea. Well lets see?

The government already spends tons of money on U.S secondary education and gets the worst results of any industrialized nation. A democratic president is not going to go to war with the forces that arbitrate outcomes in that field, i.e the unions and school boards. So Obama's hopes in that regard are a waste of time. Even under the best of circumstances this effort will only slightly effect the growth rate in the short run.

I really dont feel like wasting my time on government lead energy initiatives. Again, if the plan is going to create gobs and gobs of VALUE ADDED, then why wouldnt the private sector do it? Is there a new left wing theory of market failure that I need to read up on?

As for Obama controlling health care costs, again that would create another political war which he wont have the guts to fight. Removing the layers of cost insulation from consumers is a political dead fish, so I dont see any hope in that regard.

So essentially Obama did exactly what I thought he would last night, give an emotionally charged speech about nothingness and offered 3 meaningless ideas that sound good in the context of a speech. Why people expect anything more from their president is beyond me.

I bet there are people in this country who really think Obama is going to "fix this" economy. They really think about the world in those terms. As though Obama is a man behind a curtain who needs to tinker with a few levers here and there and then, voila, we have lift off. LOL

Dallas February 25, 2009 at 1:06 pm

In viewing the energy issue, independence means independence from imported oil. The real issue here is national security. Oil money in Venezuela, Russia and Middle East allows these areas to be a threat to the US.

Most of our defense budget is just protecting our oil interest and that cost is much greater than the inefficiency of a shift to oil independence. Without massive oil incomes, both Iran and Iraq would be about as relevant as Rwanda.

This oil independence issue could be easily solved by a $100/bbl oil tax on all supplies. The money could even pay for part of the so called "stimulus".

Cheers February 25, 2009 at 1:16 pm

"It's called democracy methinks."

Wikipedia: Democracy is a form of government in which power is held directly or indirectly by citizens under a free electoral system.

Muirego, perhaps you could explain to me which part of that definition or any other official definition of your choosing requires that Methinks give up her desire to expend energy and resources on her own happiness? Does democracy mean that she isn't even allowed to wish that her resources and dreams are her own? Now we have to be appreciative when they leave?

raivo pommer-Eesti February 25, 2009 at 1:18 pm

EUROPÄISCHE KOMMISSION

von Raivo Pommer-Eesti

Die Europäische Kommission kommt den EU-Staaten in der Frage der Ausgestaltung von staatlichen Auffanglösungen für sogenannte faule Wertpapiere entgegen. So sollen nicht nur Institute, die vor der Insolvenz stehen, sondern alle Banken „unabhängig von der individuellen Situation“ solche Wertpapiere auslagern oder anders staatlich absichern können.

Das geht aus einem internen Schriftstück der Kommission hervor, das die Behörde in diesen Tagen in Brüssel präsentieren will. Die EU-Staats- und Regierungschefs sollen das Kommissionspapier, mit dem die Union einen einheitlichen Rahmen für staatliche Auffanglösungen bekommen soll, schon am Sonntag auf dem Sondergipfeltreffen zur Finanzkrise diskutieren.

Sam Grove February 25, 2009 at 1:33 pm

The next growth industry, which is well underway, is based in D.C. and involves getting a chunk of that thaere 'stimulus'.

Methinks February 25, 2009 at 1:44 pm

Hey, MnM!

Thanks for that reply to Morngeo. It was perfect.

When I first read his drivel I debated whether I should point out to him for the 11,954th time that this is not a democracy, that adults are not children and that liberty is not a hand out or do what's easiest for him to understand – remind him he's an imbecile. Pithy and to the point. You'll never guess which way I was leaning. Oh what to do, what to do.

Matt February 25, 2009 at 1:48 pm

Doug –

Here is why you are wrong…Russ is on the money.

Health Care is not a fundamental growth engine in any economy. Taking care of ourselves when we are sick is almost the same as paying taxes. The fact that health care is consuming a bigger portion of our economy is a bad thing, not a good thing.

If it actually made us more productive workers, then fine. It does not. Health care is a tax on the private sector. Given that is the case, and unlikely to change it should be an efficient tax.

Where are costs literally out of control in the health care system? It is not the private portions at all. It is Medicare. We already have government run health care and it is bleeding us dry and the wound is getting bigger.

You cannot tell me that more Medicare is going to grow our economy. It will just absorb dollars that would be better spent elsewhere, say in the production of goods and services.

As for Education, it is right to spend money here, subject to the requirement that we actually get better education. Without fundamental reform there is just no reason to believe here. Education has increased 800% per capita since 1950. Test scores in reading, writing and math are unchanged.

That is a 0% ROI on trillions of dollars spent. It has done nothing to advance our economy. If Obama attached fundamental reform to that money, say a highly aggressive merit-pay structure that allows superstar teachers the ability to earn $150,000 and allows bad teachers to be shown the door, I would cheer from the bleachers for Obama.

He has no intention of doing anything like that. If he did, he just missed the biggest and best chance he will ever have.

Russ is right, $15 Billion is a pittance compared to what private money is already putting into this sector. It is approximately one-fifth of a single year's development budgets for the entire energy sector.

It is hardly transformative. Wind grew 45% last year under Bush. It is growing without this new stimulus. Obama will just take credit for what was going to happen anyway. $15 Billion is simply not enough to appreciably move the needle, especially given that it will likely go to the low-end investments that private markets will not fund without the extra juice.

All three are important, but health care and energy are a tax on commerce, not a growth lever.

Reducing the tax would help, but if you believe that health care costs will be lower any time soon, you are on a different planet.

The best renewable energy technologies are still 3-5 years from deployment, so this $15 billion will go into first gen technology right at the cusp of a quantum leap forward. It is just badly timed.

Education can change long-term growth prospects, but truly fundamental reform is required. This is good money after bad.

Bob February 25, 2009 at 1:53 pm

Any alternate ideas?

- Drop/Reduce income tax
- Add consumption tax

Methinks February 25, 2009 at 2:08 pm

Matt, great post!

MnM February 25, 2009 at 2:25 pm

No problem, Methinks. Though I suspect he'll miss the point…

Bob Smith - Fort Worth February 25, 2009 at 2:26 pm

Dallas,
You are a perfect example of why the people of Fort Worth want little to do with our sister city to the East.
Amon Carter was right!
Russia, Venezuela and the Mid-East don't have us over an oil-barrel; it's quite the reverse. They are required to sell their oil as it is inedible, while we have choices for our energy sources, both as to type, as well as source. Also, at $40/bbl they are suffering serious dislocations.
To say that "Most of our defense budget is just protecting our oil interests" is inane. Having spent a considerable amount of time at the highest levels of the DoD, I can tell you that while keeping the sea lanes open is important, it is a far cry from "most" of the defense budget.
Finally, the entire idea of giving government an extra $100/bbl in taxes is insane. Does anyone really believe that we're better off by reducing our wealth? And oil independence is a chimera. In Capitalism, the goal for producers is to find the lowest cost for their production needs. Additional reading can be found at Dr. Arnold Kling's blog. See "Oil Econ 101".
You need to come out West for a while and learn to breathe the fresher air of freedom found in Fort Worth.

MnM February 25, 2009 at 2:26 pm

I'll also second Methinks. Well said, Matt.

Say What? February 25, 2009 at 2:46 pm

Eliot said:
"In the interest of full disclosure I am a physics student at University of Central Florida and I have spent a lot of time looking into this issue as it concerns me greatly. My conclusion has been to accept the scientific consensus of Global Warming as well as the caveat that humans are responsible for at the very least some of it.)"

This is very disturbing. Science is not based on "accepting the scientific consensus" about something. Science is based on the scientific method. For a Physics student to miss this fundamental tenet does not speak well of the UCF Physics department.

The science of global warming/climate change should be about science – not politics. I have seen credible evidence that the IPCC panel is significantly driven by politics. I have also seen claims by many reputable scientists challenging the global warming conclusions. That alone is reason to not simply "accept the consensus" on this issue.

To be redundant and say things twice, a consensus is irrelevent to science, and there is no consensus anyway. PLEASE, let's keep the politics out of science!

gappy February 25, 2009 at 2:52 pm

My reply to Muirgeo would be that he's asking the wrong question: it's not essential to growth that the government identify the right areas. I remember a long talk by Bill Easterly at Cato (you can watch it on the web site) in which he illustrate the key to growth in the developing world. The answer: there is no secret. Major forward-looking policies are usually a recipe for disaster. What works is setting up an effective institutional framework: property rights, law enforced for everyone, civil and economic freedoms. Cooperating individuals will then have the incentives to process available information and identify growth areas. They won't be "optimal" or "efficient" in any meaningful sense, but they will yield higher welfare to all participants than any planned solution, and will be more resilient to shocks.

jorod February 25, 2009 at 2:58 pm

What's wrong with this picture?

Let's see. First we run up a deficit of $1.5 trillion. Then we cut the deficit by 50%, then we are happy we only have a deficit of $750 billion.

Obama will go "line by line" through the federal budget in search of wasteful and ineffective programs. The horses are out of the barn courtesy of Mr. Obama and he is looking for waste? Doublethink?

I am reminded of a song by Neil Diamond –Brother Love's Travelin' Salvation Show….

Kevin February 25, 2009 at 3:06 pm

I don't understand how health care can possibly be a growth industry by anyone other than a politician. The best health care outcome is the one that results in the least amount of health care required. Medicine is a strange bird in that the more it fails the more money it needs (and gets) to cope with the result of its failure. Thus the irresistible urge for people to politicize it.

Christopher Renner February 25, 2009 at 4:13 pm

Kevin: Medicine is a strange bird in that the more it fails the more money it needs (and gets) to cope with the result of its failure. Thus the irresistible urge for people to politicize it.

Inasmuch as the medical care industry displays this trait, it's relatively recent(since government got involved c. 1940) and not unique in the least.

Throwing money after failure is inevitable if and when the money is coming from 3rd and 4th parties, as is seen with public education, subsidized mass transit, alternative energy, farm subsidies, and medical care since the IRS made it tax-exempt for employers but not employees in 1943.

Kevin February 25, 2009 at 4:45 pm

Christopher I agree with the political dynamic. The strangeness I see in medicine is that bad medicine actually does create the need for more medicine, not just the political cry for more money so the bad medicine could be good medicine. Again, that makes it particularly attractive to politicians.

Carl Pham February 25, 2009 at 4:47 pm

I've spent my entire working life, two decades, in education, and I'll tell you flat out the nostrum that America needs still more and better education is complete fantastical bullshit, unsupported by the least bit of empirical evidence.

Are you still thinking this is 1820 America, pre-Industrial Revolution, where 20% of the population can't read or write, and 60% make their living doing unskilled labor on the farm? Get a grip. If education were the key to productivity, you'd see sky-high wages win fields requiring PhDs, and miserable wages in fields requiring GEDs and apprenticeships, and the "problem" would pretty much take care of itself, since people are not stupid.

But that's not what you see at all. It's actually the jobs requiring GEDs and apprenticeships — plumbers, carpenters, car mechanics — that have high and climbing wages, and it's jobs for college graduates with majors in Black Studies, Journalism, Government, Social Ecology, and Anthropology that have crappy and stagnating salaries. To be sure, at the tippy top, wages are still great. But not for most modest college-man jobs.

Plain fact is, I suspect Americans are about as college-educated as they need to be, probably more so. If anything is needed, it's probably very practical, school o' life stuff, like being careful and reliable at work, so your company doesn't have to recover from expensive careless mistakes, or being sensible in your consumer life, so your government doesn't have to save you from expensive dumbass consumer mistakes, or being sensible in your political and social life, so your community is more self-policing and you treat your government less like your church.

CRC February 25, 2009 at 5:02 pm

L Burke Files,

You wrote: "Our President's vision is Myopic. He can clearly see the problems, the future is very fuzzy."

Are you sure that he can clearly see the problems. I'd agree that he may clearly see the symptoms, but not sure he sees the root causes (and therefore not sure he "clearly" sees the problems at all).

I mean seeing the symptoms or results is no great feat. In fact you'd have to be quite blind, deaf or dumb not too. But seeing the real problems in their entirety requires some deeper insight and analysis. I don't agree that Barack Obama (or his people) has done this. In fact it is simply too easy for them to simply blame the previous administration rather than put any real thought into it.

Marty S February 25, 2009 at 5:08 pm

Muir

"Singapore is calling and no one is holding you back."

You lying loser, Krugman/deLong cult is calling you and we are not welcome there. Have you grown a pair yet?

Randy February 25, 2009 at 5:09 pm

Carl Pham, Well said.

Methinks February 25, 2009 at 5:12 pm

Well, I like a good 5 year plan as much as the next guy (brings back memories of home for me), but Obama is busy rebranding socialism as capitalism again. Boy, this brings back memories of a childhood filled with teachings that bondage is liberty.

The man loves the sound of his own voice and during his at least once daily speech on this day he ended with the following:

"I have every confidence if these outstanding public servants beside me work in concert, if we all do our jobs, if we once again guide the market's invisible hand with a higher principle, our markets will recover…blah blah blah"

MnM February 25, 2009 at 5:23 pm

Even without the bold, those are very, very big "if"s.

Bob D February 25, 2009 at 5:26 pm

Obama and the Dems. are not concerned with solving the financial problems unless they are solved by socialist programs. Market based solutions would undoubtably work but that would confirm the market's power and that is unacceptable to the Socialist leaning leftist Dems. We must tell everyone that we know about the swift and calculated destruction of the Capitalist system that is going on in the name of rescue!

MnM February 25, 2009 at 5:50 pm

I'll second Randy. Nicely said, Carl.

Matt February 25, 2009 at 6:56 pm

I think someone was asking if I had alternate ideas for how to promote growth sectors or for a stimulus.

If the objective is promoting growth sectors, I object to the government trying to choose. We artificially made housing a growth sector via implicit subsidization of Fannie and Freddie and it distorted the market badly.

We do not need more centrally planned growth. It appears to be quite temporary in nature.

That said, if you ask me what will grow I have opinions. Health Care is going to grow through sheer demographic inertia. This is why making it a target of the stimulus is all the more perverse. It simply does not need the help. The greatest gift in the world for this country would be that health care does not grow a single bit. As I said earlier, it is really a tax on the productive, wealth generating parts of the economy.

I exclude pharmaceuticals, devices and medical research. If these make treatment less expensive or more effective, it should deliver wealth creation in the form of lower costs, better worker productivity, better lives and longer lives. That said, such events should help restrain the growth in Health Care costs.

The real growth and wealth creation industries are those that continue to squeeze greater productivity out of the capital stock and labor. Software, IT, high-tech equipment, efficient autos, pharma (biotech), medical devices, and anything in the product design part of the value chain. This includes engineering services, architecture, etc.

As Russ points out, renewable energy does not boost productivity when it substitutes less expensive alternatives. It just costs more, and the environmental benefits are sometimes negligible(solar cells in landfills) and sometimes absurd (ethanol?).

Now, in 5-10 years the math is likely to shift as solar cell efficiency, cellulosic ethanol, and next-gen nuclear (which is nearly renewable) become deployable technologies. Then it is a growth industry, because deploying them makes capital more efficient and productive.

I am not against investing in them at all, it is just that the private sector will commit some $90 Billion per year at the same targets in a much more productive way. Government really does not need to if the money is there. It is not as if there is a huge investment shortage in this sector. It was the single largest trend in venture capital.

As for a stimulus that might work?

I think any stimulus that breaks the decision-delay cycle in durables and housing can have an immediate positive impact and jolt these sectors back from the brink.

Example: Nobody is buying a car because everyone is scared to death. My current car stinks, but it runs.

Well, how about a 10% government rebate check for not waiting any longer, as long as you buy a fuel-efficient model (for political purposes, I really don't care that much). We are already on the hook for a lot of the auto company losses anyway, so the taxpayer will just be giving themselves some money back in reality. It would spark some production overnight as manufacturers look to grow inventories. The direct multiplier is potentially large (a $10 boost to GDP per $1 spent). The indirect multiplier is big too. It gets the latent capital back into good use and could do it almost immediately.

The enticement has to be juicy and VERY temporary, or you just subsidize car sales that would have occurred anyway and do not bring forward some future pent-up demand.

You could take the same approach across a range of (mostly) domestically produced durables like big-ticket energy star appliances (again, for the politics of it).

This are targeted, high multiplier and immediate.

I would do the same with housing. The only way you fix the housing mess is by changing the fundamental dynamics.

We have several million foreclosures and owner-occupied homes that should really be rental properties owned by a landlord.

Any smart real estate investor (not a flipper) is on the sidelines right now, and there are perhaps a million of them out there. They have been frozen out of the market for 5 years as the home value to rental value ratio departed from reality. It is already back in line across 80% of the housing markets.

So get them to stop waiting. Convince them that waiting for a bottom is futile. How? Give them some juice.

1. A rental income tax exemption for 5 years on any foreclosed property

2. Attractive financing terms through Fannie and Freddie for WELL-CAPITALIZED purchases of foreclosures by solvent investors

3. A capital gains exclusion tax credit for 200% of the value of any maintenance improvements made to converted foreclosures. Basically you can deduct the cost of improvements from any future Cap Gains liability with a much better than average rate.

4. THESE MUST BE TEMPORARY! So that A) They do not distort the market any further than it is and B) You move forward the decisions that will eventually be made. We are just speeding up a change in the market that simply is going to occur.

It is the delay in these decisions, (certainly perpetuated by the Obama administration's lack of a cohesive plan on anything) that are causing the usual suspects from saving the economy.

The only way to save an economy from a lack of spending or investment is to get those who have idle capital (probably in T-Bills for God's sake!) back into productive use.

You know what that means? Giving the rich an incentive to spend their money or invest it.

Well, we just cannot bring ourselves to do such a thing because everyone knows that tax cuts for the rich caused this, right?

Scaring the rich into not wanting to get more rich is what will make this last a lot longer than it should.

Matt February 25, 2009 at 7:08 pm

Also –

Just think what clearing a million foreclosures from the housing market would do for the banking sector?

It may not boost home prices, but it will put a floor underneath them.

Most banks are still solvent if home prices stop dropping TODAY.

If they go another 20%, it is going to be a bloodbath of red ink.

I don't consider government intervention to be too bad if it gives people incentives to make decisions that need to happen to bring stability. Any reasonable person knows that somebody needs to decide to buy a foreclosure. We know that. We also know that waiting is killing the market in a lot of areas that are mostly back in line with where they should be.

I also think that the more temporary an incentive is, the less distortionary it is.

Capital does not get fundamentally reallocated on the basis of a short-term incentive. It only motivates people who would have made the same decision anyway to do it sooner. Time matters right now. Companies are bleeding and just a little shifted demand will be enough to limit the damage.

That can save us and not distort markets any more than necessary.

ThomasL February 25, 2009 at 7:25 pm

What is the obsession with viewing maintenance costs as growth? Increasing health care expenditure simply means one has to spend more money to remain as healthy as you once were. It is undisputed that most people need more care to maintain their overall level of health as they age; but why should that be called progress? This is a kind of broken windows economic policy applied to broken bodies.

Strangely, one of the liberal commenters seems to get it when he mentions that better roads might lead to lower maintenance costs of vehicles. Ignoring the likelihood of that really happening, it at least acknowledges that maintenance costs are deadweight.

This same holds for energy, which is basically a maintenance cost on almost every activity of modern life: unless the new production cost is enough lower to recoup both the research and the deployment costs it is a losing proposition. It isn’t useful to spend more to produce the same amount of energy as we are already producing. You can claim externalities (lower carbon emissions, etc.) but externalities are not growth.

We'd all be richer if health care wasn't necessary and energy production had no limit and no cost. Sadly, that isn't the world, but it seems perverse to act like the more we spend on them the better off we become.

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