Thursday, January 8, 2009

Obama's fatal conceit

Obama gave a dire speech today at George Mason University. It sounded impressive, but only if you take it at face value and fail to check the facts or question the logic. He was in full-blown Keynesian mode, arguing that massive government spending is the only thing that can save the day. Here are some key quotes, followed by my rebuttals:
We start 2009 in the midst of a crisis unlike any we have seen in our lifetime - a crisis that has only deepened over the last few weeks.
As I've been pointing out for some time, the economic and financial fundamentals have actually been improving over the last few weeks.
Manufacturing has hit a twenty-eight year low.
He's evidently referring to the ISM manufacturing index. But that index does not measure manufacturing activity, it only measures the percent of respondents who see things getting worse or better; it's a diffusion index, not a level index. Industrial production, as measured by the Fed, is down only 6% from its all-time high, and is 83% above the level of 28 years ago. This is a gross misrepresentation of reality. Shame on all those intelligent economic advisors who let him get away with such a blatant twisting of the statistics.
Many businesses cannot borrow or make payroll.
The economy is not suffering from a shortage of credit, as I've noted repeatedly. All measures of lending to U.S. businesses show rising trends. Bank lending is at or near all-time highs.
We arrived at this point due to an era of profound irresponsibility that stretched from corporate boardrooms to the halls of power in Washington, DC.
Corporate boardrooms had very little to do with this crisis. The principal causes of the crisis stretch back to the creation by Congress of Freddie Mac and Fannie Mae, unique for-profit enterprises that were encouraged to take on increasing levels of risk that were ultimately guaranteed by taxpayers. It was not for lack of regulation that everything came tumbling down—there were plenty of rules in place and plenty of regulatory bodies, but they either failed to act or were discouraged from acting by politicians. Congress bears a heavy burden of the responsibility for the crisis, yet Congress is now being put in charge of fixing the mess.
We cannot depend on government alone to create jobs or long-term growth, but at this particular moment, only government ... can break the vicious cycles that are crippling our economy - where a lack of spending leads to lost jobs which leads to even less spending; where an inability to lend and borrow stops growth and leads to even less credit.
The first clause is absolutely correct, but then he suspends disbelief and reverts to flawed Keynesian thinking and contradicts himself. Spending is not the source of economic growth; were it so we could simply spend our way to prosperity. We can only consume what we produce. Recovery efforts should be directed at increasing work, investment, and production, not at trying to stimulate consumer spending
We need to put money in the pockets of the American people, create new jobs, and invest in our future.
Every dollar the government puts in the pockets of the people is a dollar that comes from the pocket of someone else; how can that result in a bigger or stronger economy? How can the government create jobs that are better or more productive than those created by the private sector? How can government decide what investments are going to produce attractive returns for our future?
We will modernize more than 75% of federal buildings and improve the energy efficiency of two million American homes, saving consumers and taxpayers billions on our energy bills.
Is "modernizing" federal buildings going to produce a return on investment superior to what the private sector could get if its money were not appropriated? I doubt it. Is improving the energy efficiency of a small sector of our economy going to make any difference at all to the planet Earth?
To get people spending again, 95% of working families will receive a $1,000 tax cut.
The majority of working families pay little or no income tax, so this is not a tax cut he's talking about, it's a handout. This is likely to restrain the economy's ability to grow, since it rewards those who aren't producing a lot and punishes those who are (since they won't receive the handout and will have to foot the bill for it). And besides, we've tried rebates before and the results have been dismal. It's almost as bad as throwing money down the drain.
We'll continue the bipartisan extensions of unemployment insurance.
This will only delay the onset of recovery, since it reduces the incentive of the unemployed to find work. We've done this every time the economy slows down, and the main result is to simply increase the ranks of the unemployed. It's a nice humanitarian gesture, but like every government action, it leads in many cases to unintended consequences.
The American Recovery and Reinvestment Plan won't just throw money at our problems - we'll invest in what works.
The fatal conceit of politicians is on display here: how in the world are government bureaucrats going to decide "what works?" A handful of people are going to be making multi-billion dollar decisions using taxpayer money. The potential for waste, fraud, and inefficiency is staggering.

I could go on, but for now, 'nuff said.


Vinnie Brascia said...

Hear, Hear!

Gene Prescott said...

Obam should visit the beach :-)

John Peters said...

Perhaps we could build a few pyramids

Dave Balk said...

Scott, I finally have to way a financial advisor, I love this blog and now I also like the way you dissect the words of "that one"...keep up the good work!

Dave Balk said...

make that "weigh in"

LC said...

I look forward to traversing many bridges to nowhere in the near future.

Scott Grannis said...

Here's hoping that our outrage at all this ridiculous "stimulus" gathers followers and momentum.

Brian H said...

How 'bout we call it the "Bridges to Pyramids" progam?

Jon S. said...

The last administration that decided it was going to decide "what works" for all us poor simps in the private sector was the Carter Administration (yes, the Clintonites tried some of this too but they mostly failed to make any headway), who thought they knew best how to produce new forms of energy. The Synfuels Corp is now a case study in government gone mad, getting every fundamental aspect of this enterprise wrong from start to finish.

Obama may have picked a few good economic advisors, but if this speech is any indication, they're in the back row wearing muzzles, behind the smug 27-year old speech writers and campaign dweebs.

Scott Grannis said...

Jon: excellent observation

CDLIC said...

WSJ: 'Atlas Shrugged': From Fiction to Fact in 52 Years
Jan 9, 2009

Some years ago when I worked at the libertarian Cato Institute, we used to label any new hire who had not yet read "Atlas Shrugged" a "virgin." Being conversant in Ayn Rand's classic novel about the economic carnage caused by big government run amok was practically a job requirement. If only "Atlas" were required reading for every member of Congress and political appointee in the Obama administration. I'm confident that we'd get out of the current financial mess a lot faster.

Getty Images
The art for a 1999 postage stamp.

Many of us who know Rand's work have noticed that with each passing week, and with each successive bailout plan and economic-stimulus scheme out of Washington, our current politicians are committing the very acts of economic lunacy that "Atlas Shrugged" parodied in 1957, when this 1,000-page novel was first published and became an instant hit.

Rand, who had come to America from Soviet Russia with striking insights into totalitarianism and the destructiveness of socialism, was already a celebrity. The left, naturally, hated her. But as recently as 1991, a survey by the Library of Congress and the Book of the Month Club found that readers rated "Atlas" as the second-most influential book in their lives, behind only the Bible.

For the uninitiated, the moral of the story is simply this: Politicians invariably respond to crises -- that in most cases they themselves created -- by spawning new government programs, laws and regulations. These, in turn, generate more havoc and poverty, which inspires the politicians to create more programs . . . and the downward spiral repeats itself until the productive sectors of the economy collapse under the collective weight of taxes and other burdens imposed in the name of fairness, equality and do-goodism.

In the book, these relentless wealth redistributionists and their programs are disparaged as "the looters and their laws." Every new act of government futility and stupidity carries with it a benevolent-sounding title. These include the "Anti-Greed Act" to redistribute income (sounds like Charlie Rangel's promises soak-the-rich tax bill) and the "Equalization of Opportunity Act" to prevent people from starting more than one business (to give other people a chance). My personal favorite, the "Anti Dog-Eat-Dog Act," aims to restrict cut-throat competition between firms and thus slow the wave of business bankruptcies. Why didn't Hank Paulson think of that?

These acts and edicts sound farcical, yes, but no more so than the actual events in Washington, circa 2008. We already have been served up the $700 billion "Emergency Economic Stabilization Act" and the "Auto Industry Financing and Restructuring Act." Now that Barack Obama is in town, he will soon sign into law with great urgency the "American Recovery and Reinvestment Plan." This latest Hail Mary pass will increase the federal budget (which has already expanded by $1.5 trillion in eight years under George Bush) by an additional $1 trillion -- in roughly his first 100 days in office.

The current economic strategy is right out of "Atlas Shrugged": The more incompetent you are in business, the more handouts the politicians will bestow on you. That's the justification for the $2 trillion of subsidies doled out already to keep afloat distressed insurance companies, banks, Wall Street investment houses, and auto companies -- while standing next in line for their share of the booty are real-estate developers, the steel industry, chemical companies, airlines, ethanol producers, construction firms and even catfish farmers. With each successive bailout to "calm the markets," another trillion of national wealth is subsequently lost. Yet, as "Atlas" grimly foretold, we now treat the incompetent who wreck their companies as victims, while those resourceful business owners who manage to make a profit are portrayed as recipients of illegitimate "windfalls."

When Rand was writing in the 1950s, one of the pillars of American industrial might was the railroads. In her novel the railroad owner, Dagny Taggart, an enterprising industrialist, has a FedEx-like vision for expansion and first-rate service by rail. But she is continuously badgered, cajoled, taxed, ruled and regulated -- always in the public interest -- into bankruptcy. Sound far-fetched? On the day I sat down to write this ode to "Atlas," a Wall Street Journal headline blared: "Rail Shippers Ask Congress to Regulate Freight Prices."

In one chapter of the book, an entrepreneur invents a new miracle metal -- stronger but lighter than steel. The government immediately appropriates the invention in "the public good." The politicians demand that the metal inventor come to Washington and sign over ownership of his invention or lose everything.

The scene is eerily similar to an event late last year when six bank presidents were summoned by Treasury Secretary Hank Paulson to Washington, and then shuttled into a conference room and told, in effect, that they could not leave until they collectively signed a document handing over percentages of their future profits to the government. The Treasury folks insisted that this shakedown, too, was all in "the public interest."

Ultimately, "Atlas Shrugged" is a celebration of the entrepreneur, the risk taker and the cultivator of wealth through human intellect. Critics dismissed the novel as simple-minded, and even some of Rand's political admirers complained that she lacked compassion. Yet one pertinent warning resounds throughout the book: When profits and wealth and creativity are denigrated in society, they start to disappear -- leaving everyone the poorer.

One memorable moment in "Atlas" occurs near the very end, when the economy has been rendered comatose by all the great economic minds in Washington. Finally, and out of desperation, the politicians come to the heroic businessman John Galt (who has resisted their assault on capitalism) and beg him to help them get the economy back on track. The discussion sounds much like what would happen today:

Galt: "You want me to be Economic Dictator?"

Mr. Thompson: "Yes!"

"And you'll obey any order I give?"


"Then start by abolishing all income taxes."

"Oh no!" screamed Mr. Thompson, leaping to his feet. "We couldn't do that . . . How would we pay government employees?"

"Fire your government employees."

"Oh, no!"

Abolishing the income tax. Now that really would be a genuine economic stimulus. But Mr. Obama and the Democrats in Washington want to do the opposite: to raise the income tax "for purposes of fairness" as Barack Obama puts it.

David Kelley, the president of the Atlas Society, which is dedicated to promoting Rand's ideas, explains that "the older the book gets, the more timely its message." He tells me that there are plans to make "Atlas Shrugged" into a major motion picture -- it is the only classic novel of recent decades that was never made into a movie. "We don't need to make a movie out of the book," Mr. Kelley jokes. "We are living it right now."

Mr. Moore is senior economics writer for The Wall Street Journal editorial page.

Scott Grannis said...

CDLIC: Thanks so much for posting this, otherwise I might have missed it. I've been a big fan of Steve Moore and Ayn Rand for many years. This is a fantastic article that deserves wide distribution.