Reasoning Right

On February 25, 2009, President Barack Obama addressed both houses of Congress and the nation in the functional equivalent of a State of the Union Address.  The President started off by reviewing the factors which caused the current economic crisis.  He then outlined his plan for America and detailed the means necessary to realize his new vision.  In looking back at history, he has blurred the facts, and in looking forward, he is flying blind.  A clear analysis of the president’s speech shows that Obama’s explanation of the cause of the recession and his proposed solutions are full of contradictions, economic fallacies, and a false view of history.

The first part of the President’s speech focused on blaming capitalism for the economic crisis.  Rational self interest, economic freedom, and wealth production were summarily re-defined as “valuing short term gains over long term prosperity” and “transferring wealth to the wealthy instead of investing in our future.” Obama went on to explain how the “gutting” of regulations led to banks and lenders “pushing bad loans” resulting in people buying houses they couldn’t afford.

Obama’s attempt to blame capitalism for the economic ruin now facing this country borders on intentional deceit.  A thorough analysis of the causes of the current economic crisis proves that capitalism did not fail.  The current crisis resulted from pre-existing government regulation of the market. The main culprit was the Federal Reserve Board and Alan Greenspan's decision to lower interest rates to 1%.  This loose credit flowed into the housing sector and artificially increased the demand for housing by borrowers, thereby forcing up the price of real estate. Demand for housing was further artificially increased by government programs such as the CRA, Fannie Mae, Freddie Mac, and tax rebates on mortgages.  When interest rates rose, a huge percentage of sub prime mortgages with variable rates defaulted and the price of housing experienced a precipitous fall.  The underlying securities backing these sub-prime mortgages then fell in value, plunging the entire economy into chaos. Centralized regulation of the monetary supply by government caused this national crisis.  The market reacted as rationally as possible given these circumstances.

Obama then turned to the recent passage of the 787 billion dollar American Recovery and Reinvestment Act and asserted that the economic stimulus afforded by the passage of this bill will bring about 3.5 million new jobs with over 90% of those jobs created in the private sector.  Included in that 90% were jobs “rebuilding our roads and bridges; constructing wind turbines and solar panels; laying broadband and expanding mass transit.”

The false statements in the above paragraph are too numerous to dispel here.  In short, the entire stimulus package was based on Keynesian fiscal theory.  This is the idea that increasing the demand for goods by giving people money (or by paying them to perform government sponsored public works) will increase spending by consumers.  The increase in consumption is thought to then spur further economic growth.  The truth is that there is no net number of jobs created in the private sector through government sponsored public works.  Government directed spending on projects deemed important by bureaucrats only serve to redirect wealth from other areas in the private sector where that wealth could have been better utilized.  Artificially increasing spending on such a level also decreases private savings, resulting in less money invested in ‘real’ capital.  This means less money for banks to loan out to new innovators with fresh ideas uncompromised by ‘legislative consensus’ and ‘earmarks’.  Finally, governmental outlays to banks, auto companies, and other industries further stalls investment because of the uncertainty created in the minds of traders and investors. The recent downward trend in the stock market likely reflects this uncertainty.

After thoroughly discussing the terrible economic crisis we are now experiencing and the supposed factors which brought it about, President Obama proposed a new budget for dealing with the crisis over the next ten years.  The budget demanded massive new spending in the areas of energy, healthcare, and education and a new vision, comprised of government regulations which will direct or control investment in these areas.  Obama’s new vision is counter intuitive and misguided.  Alternative energy, healthcare, and education were the only sectors of the economy having no relation to the current economic crisis.  There is no reason to suddenly shift massive government and/or private investment into these areas.  Such expenditures would lead an already fragile economy to shift is remaining vital resources into areas already heavily regulated and unlikely to experience increased profitability in the future.

First, investment in alternative energy is primarily an elitist-liberal idea which has its motivations not in profitability, but in combating ‘global warming,’ maintaining clean air, and saving the environment.  It should be obvious that any investment undertaken without the goal of monetary gain is likely to yield a monetary loss in the future.  The truth is that green energy in all its forms is not cost efficient and currently provides for only 2% of the world’s energy consumption.  This number is not likely to increase that significantly as a result of new spending. Energy sources which are cheaper, more efficient, and more profitable than fossil fuels require no government funding as the market will one day supply these new forms of energy in accordance with the laws of supply and demand.  There is no need to go into too much depth on this topic as there is ample literature available on the subject.  A more recent article can be found here which gives a fantastic summary of the reasons that additional spending is not warranted in this area.

Next, the billions of dollars to be spent on healthcare is in every sense an expansion of government controlled healthcare, including new spending on Medicare, Medicaid, and perhaps a government run health care system, the cost of which is expected to be in the hundreds of billions.  The groundwork for government control of healthcare has already been laid in the American Recovery and Reinvestment Act. Provisions in the act reportedly call for the electronic keeping of medical records, and allow for the government to collect data from these records.  The data will then be used to make assessments of the cost effectiveness of different procedures/treatments.  Whatever one’s thoughts on socialized medicine, there is no question that increased government control in healthcare is a growing cost, and in no way represents an ‘ingredient’ for economic recovery and growth.  To be clear, there are ways of making the health care industry more profitable and amenable to growth. A first step would be to decouple individuals from employer sponsored group plans to increase choice. The government should also repeal benefit mandates and mandatory guaranteed issue, guaranteed community rating, renewability mandates, and other regulations which cause perverse incentives and artificially increase the cost of healthcare.

Lastly, the President’s call for an increase in spending on public education is not likely to generate any measurable monetary return and is likely to have no discernable effect on the competitiveness of American students.  There are too many things wrong with America’s educational system from both a philosophical and practical perspective to discuss here.  Notwithstanding the foregoing, the President’s main selling point is to enable access to a complete and competitive education.  This vision does not address the larger issue of making children understand the morality of wealth production, hard work, learning, and self sufficiency. Education is a tool to enable people to learn a skill and utilize that skill in the market place. Skills allow people to become self sufficient and more importantly self supporting.  As the President’s new vision of America is focused primarily on expanding entitlements, providing for free medical care and increasing taxes on those that have achieved success through education, it is far more likely that dependence on these programs will increase with a corresponding decrease in the importance of education in the minds of those who need education most.

President Obama’s proposed vision of America is not one based on individual choice, capitalism, or economic growth. It is an elitist vision now mandated by the government to achieve ‘greater goods’ such as promoting universal health care, saving the environment, and spending on public schools. It is a vision engineered to fail just as all centralized economies around the world have failed in the past. The achievement of these goals necessitates unprecedented control over our money and our lives. When combined with increased bail outs to industry, bank nationalization, and wasteful public works spending, this country is indeed flying blind into the abyss.