Coach Obama still doesn't understand the game

From a taxpayer's perspective, Obama's biggest weakness is his lack of understanding of how the economy really works. That weakness has already cost us $1 trillion, and what he said in his SOTU speech last night shows that this was a lot of money down the drain, because he learned very little from his failures these past two years. He continues to believe that enlightened politicians can boost economic growth much like a good coach can whip a team or a star player into shape. Last night's SOTU peech was Coach Obama's pep talk before the big game. Problem is, he still doesn't understand the game of economic growth, so there is little chance that his coaching will prove effective.

If he learned anything in the past two years, it was that the public doesn't like the concept of stimulus spending, and it doesn't like a lot of new government programs. Solution? Call the stimulus spending something else, and don't say it's government that is taking over healthcare, energy research, high-speed rail and education, just say it's all about investments that will make our economy stronger. That may sound great to other liberals, but to those working in the trenches it's just more spending, more regulations, and more suffocating government presence. Competitiveness comes from the bottom up, not from the top down: from entrepreneurs, inventors, risk-takers, and just about anyone who is willing to work and wants to improve his standard of living. Policymakers' ability to influence things is limited to setting the ground rules that in turn maximize the private sector's growth incentives. The chances are slim that Coach Obama can direct tens and hundreds of billions of dollars to the companies and industries that are going to revolutionize the future; there are millions of people at work all over the world trying to do this already, and there is no shortage of capital ready and willing to finance economically viable projects.

If Obama really understood the economy, he would have showed much more interest in cutting spending. Proposing to freeze discretionary spending while also proposing to spend a whole lot on "investments" is not going to avoid the fiscal train wreck we are headed for, and it's not going to help the economy. Federal spending has increased hugely under his watch, and is scheduled to absorb an unprecedented amount of the economy's resources in the future. This is sapping the economy's strength by allowing inefficient government programs and bureaucrats to waste the economy's scarce resources. Cutting spending now is the best way to strengthen the economy, since it returns money to the private sector where all true growth originates. Cutting spending also reduces expected future tax burdens, which in turn encourages more investment and work effort.

About the only thing Obama proposed that would actually enhance the competitiveness of the economy is a reduction in corporate tax rates, in exchange for the elimination of loopholes and deductions. A lower tax rate applied to a broader tax base is bound to strengthen the economy, since it increases the rewards on the margin to new investment, and it removes distortions which lead to inefficient investment decisions. Higher after-tax returns should result in more investment, and more investment means more productivity and more jobs.

Since our head coach is almost clueless, should we be worried about the ability of the U.S. economy to win? Fortunately, Obama is not going to be calling many of the plays. He's lost the ability to ram things through Congress, and the Republicans are tightly focused on doing the right thing (e.g., cutting spending and reducing tax and regulatory burdens). At the worst we will suffer from gridlock, but that's much better than suffering from an even more burdensome government. At best, the Republicans will convince some Democrats to move in a more sensible direction (e.g., dismantling ObamaCare, cutting farm subsidies, scrapping the ethanol program, cutting corporate taxes) and Obama may find himself forced to go along. Obama has also lost a lot of his authority, because so much of his agenda has proved misguided, and his popularity and power of persuasion consequently have suffered.

Lacking authority, vision, and a coherent plan for the future, Obama's SOTU was a big disappointment. Nevertheless, it has expanded the political vacuum that exists in Washington, and politicians likely will scramble to fill it, and that is not a bad thing at all. There are plenty of politicians of the Tea Party variety that understand what needs to be done, and the public has already voiced its approval via last November's elections.

I think we have a lot of positive fiscal policy developments to look forward to, and that is an important source for my continuing optimism.