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The Obama vision

Posted By Russ Roberts On February 25, 2009 @ 8:59 am In Growth | Comments Disabled

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 [1], 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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[1] written elsewhere: http://www.boston.com/bostonglobe/editorial_opinion/oped/articles/2009/02/02/stimulus_just_digs_debt_hole_deeper/

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