Does Obama subscribe to The Economist?

I hope so. If he doesn't, there's not much chance his advisors will alert him to the latest edition's lead article:

"Piling on: In his zeal to fix capitalism, Barack Obama must not stifle America’s dynamism."

(A ray of hope: maybe Austan Goolsbee can slip him a copy when the others aren't looking.)

This is a must read. It summarizes my main fear that the "temporary" fiscal package for stimulating the private economy is permanent, not temporary, and will stimulate politicians and bureaucrats, not entrepreneurs and innovators. (Outsourcing the package to Nancy Pelosi certainly didn't help matters, as the article points out).

A few excerpts:

America has experienced a failure of finance, not of capitalism... Even in boom times, 15% of American jobs disappear each year. Their places are taken by new ones created by start-ups and expansions... Americans are adept at finding opportunity in adversity...

Yet Mr Obama—and, even more, his Democratic allies in Congress—could do lasting damage to this marvellous [economic] machine. [Outsourcing rule-writing is risky because] Congress is much more likely than the executive branch to let special interests or demagoguery shape the outcome...

America’s free-market capitalism has always been a model for the rest of the world. By all means fix its flaws, Mr Obama; but do not take its dynamism for granted.

Future entrepreneurs and innovators would grow the economy (i.e., create real jobs)  faster if given sufficient incentives, but I'm afraid Mr. Obama doesn't know much about them, let alone what motivates them. That's the reading I'm getting so far, anyway. A long conversation at the White House with someone who does understand the growth engine, such as recent Nobel winner Edmund Phelps, might help cover that blind spot, but that's just wishful thinking on my part.

Anyway, be sure to read the article in The Economist. Here's the link again.

Comments

[beancounter]

Well there's many variables that get in the way of entrepreneurs to start without even talking about Obama. For one, big box stores and strip malls. How is a drycleaner, restaurant and convenience store supposed to compete when Americans are getting more and more car-centric to the point when it's considered "unsafe" to walk and neighborhood patrol call the cops for "strangers" walking in their community? Another is quality of immigration. No longer are people allowed into the country for their willingness to sacrifice and work hard, but by abstract factors like formal education. If it were up to me I would give incredible leeway to immigration officers to pick who to let into the country at their discretion of who would make a good citizen. Of course that goes against the grain of central authority and zero-tolerance, but hey let's micromanage border officials like we micromanage everything these days. That's without bringing up demonization of immigration or anti-immigrant sentiments so I am not playing the race card here.

Drycleaners, restaurants and convenience stores seem to have been replaced by Internet entrepreneurs with Google AdSense sites and eBay. It may be that even if Obama does not understand entrepreneurs, his actions unintentionally assist them such as removing job lock from healthcare:

http://tinyurl.com/r7cuqu

And Obama's Internet-centric administration is computer savvy and will never want to regulate the Internet (short of Clinton's abortive attempts to regulate violent video games).

But the "lottery mentality" phenomenon is something that has been brewing for decades and is out of Obama's control as a social problem (although he does try by blaming absentee black fathers and slamming get rich quick schemes). No longer are entrepreneurs content with single digit returns over many decades, especially if it involves slaving at a store counter (besides being near impossible to compete with big box stores). Entreprenuers now want double digit returns, 20-30x of their initial investment, and they want it incredibly fast before they're 30. Even better if they "win the lottery" or do it with very little actual work -- they would rather pay someone else to do the work for them. Google AdSense is a good example: make money without even working, when you are sleeping even. The land of opportunity has been perverted to the land of lottery and I'm not sure if it can be reversed in anything less than a generation.

There has to be a refocus on engineering, science, mathematics, generally the most rigorous and demanding majors, rather than human resources, journalism, accounting, marketing and management. Too many chiefs and not enough Indians. In your generation scientists, engineers and doctors were worshipped (atom bomb, NASA, vaccines) but nowadays nobody wants to become one because "they're treated like s***." You would roll your eyes at education these days if you could see it Steve; if you want to ensure your grandchildren have a healthy future as you say is your greatest goal make sure they major in something like computer science or nursing and you'll have done more for them than 1000 blog posts. If it must be that entreprenuers in the future will be technology experts, experts at arbitrage (which is not such a terrible thing according to Hayek) then they will be engineering majors not marketing airheads.

[Optimist123]

bc:

Entrepreneurship is not limited to retail shops in malls. Entrepreneurs know that consumers vote with their dollars. They also know the best way to get the most possible votes (i.e., to make an honest profit, however large or small) is to change the dollar-voters' paradigm for the better, thereby raising the voters' standard of living. Typically, the most successful vote-getters have been the unknowns who invented and successfully marketed innovations that nobody (not even government-employed PhD's, believe it or not) had thought of before.

Almost all of that action happens at the micro level in the marketplace. Government policymakers can make and enforce rules that foster or hinder that process, but they can never, ever understand enough to manage that process better. Setting and enforcing rules that allow the pursuit of micro-level honest-profitmaking to thrive is what we desperately need. But any policymaker arrogant enough to think he or she can pick winning and losing technologies, then dictate their choices to the consumers and suppliers in that marketplace, is guilty of the macroeconomic religious equivalent of "Intelligent Design."

Unfortunately, that is just about the only type of policymaker I see in the current administration: arrogant "intelligent designers" who think they know what's best for us.

(In case it's unclear, Intelligent Design is not my cup of tea -- in any field of science, including the social sciences.)

[beancounter]

Do you believe in subsidy? By definition a government must pick winning or losing technology if it subsidises. Unless you believe in 100% results based reward and no government support up to that time, you already believe in government picking one technology over another because it will have to, to fund research. Results based only is fine if there's low barriers to entry but if it costs hundreds of billions or trillions to make a 50 MPG car and Detroit hasn't gotten around to it in 30 years, I have to wonder if direct intervention is necessary before we get hit hard by peak oil.

You must also be aware that government subsidises many of America's largest businesses. Corporate welfare is not just a term used by liberals to slam tax breaks for business, but by libertarians to slam direct subsidy with the same mindset you detest: picking winners and losers. It may just be this administration's more transparent and honest rather than increasing intelligent design.

[Optimist123]

"Do you believe in subsidy? By definition a government must pick winning or losing technology if it subsidises."

False.

The GI Bill subsidized (correction, subsidizes) people, not technologies. The people whose education it subsidized transformed the nation with the subsequent technologies (physical and social) they created.

The GI Bill, the last New Deal program, was one of the best investments the government ever made. Trusting people to do the right thing with their acquired tools is what it was all about. It was *not* about subsidizing 4-barrel carburetors or gas-fired water heaters -- the 1950s equivalent of subsidizing UAW-built battery-powered cars or roof-mounted solar panels.

[Jerry McInvale]

Steve,

I doubt that the issue is whether the President has a subscription to The Economist or even whether he has competent growth oriented advisers. His philosophy as nearly as it can be discerned from his actions (as opposed to his speeches) is that Government is the appropriate decision maker as to what should be done to assure an appropriate outcome in distributing the wealth and benefits of the economy. In every action so far, the President has opted for more government control over all aspects of the economy and more policies that mimic the European Social Democratic model - a model that exemplifies chronic low growth. Therefore, in that pursuit, tax and regulatory policies that are detrimental to growth are essential to consolidate government power. After all, if people are allowed free choice in free markets to spend or invest their funds as they see fit, why would they want or need government to tell them what to do?

If the President has any knowledge of economics, business or entrepreneurship, he has kept it well hidden. So to a major extent, the Economist article seems to be wishful thinking. If we simply look at actions taken, and budget proposals made by the administration, it is clear that one must be an Un-sceptical optimist to believe that the President is concerned about growth or policies that would not be detrimental to that end.

Jerry McInvale

[Bob]

Some observations:

I'm intrigued by Phelps' theory of imperfect knowledge wondering if there is a Karl Popper (who, philosophically mused the same) link there.

Bernanke recently gave a commencement address in which he acknowledged that despite all the advanced computational power, access to data and other tools the Fed's prowess at forecasting is underwhelming.

A while back Steve posted about what he saw as disingenuous remarks about people hoping that Obama is successful. Unlike a certain radio personality I consider it to be in my best interests for any President to succeed as long as I can share in that success. That stated 4 plus months into the term I'm a bit concerned.

Looks like Goalsbee, like Volcker,
has been relegated to the shadows somewhere. It's Summers show or at least is appears so.

My personal preference is for the
government to do very little "investing" if any at all. I'm not sure the track record is all that great, GI Bill and the Interstate notwithstanding. Paul McCulley at Pimco reportedly said to a group:

"If the PE of FedEX is 12, what should the PE of the U.S. Post Office be?"

However, if the Government is to invest I'm thinking that energy is the industry to do so and no I don't mean windmills, food as fuel and solar panels. Why we don't look at an abundant natural resource and find ways to clean it up is beyond me.

We've highlighted real systemic problems in our financial system what with all the greed, crooks and other despicable people. Why haven't the enviro-fascists gotten the same treatment?

Just when I'm trying to become more optimistic...they suck me back in! (With apologies to Micheal Corleone).

[Optimist123]

Jerry:

There's a good chance you're right. But I've heard that Obama is a fast learner; if that's true, then I still have a bit more time to remain optimistic that he will soon figure out he has very nearly painted himself into a corner -- and the only way out of that corner is enhanced growth rates.

If he spots that fact soon enough, we still have a chance to avoid a fate worse than the European stagnation syndrome; if not, all of our grandkids will be working for the government (...which form is unclear), and innovation will be some other country's schtick -- maybe China's.

The corner he's painted himself into is the result of all the commitments now on the record: that trillion-dollar deficits (Bush's fault, of course) are unsustainable and they must come down after the economy turns positive; that 95% of taxpayers (...correction, "working families", not necessarily taxpayers) get a tax cut; that the Fed should not inflate away the debt obligations; and that interest payments would crush the budget if the deficits aren't eventually brought under control. In short, he has locked down all the variables except one: growth.

If he doesn't figure that out, and therefore doesn't figure out the best policies for fostering it, he will go down as the president who pushed our creditworthiness past the tipping point, thereby causing the world to reject the dollar as the world's reserve currency. That would turn us into the financial equivalent of an Eastern European economy, and would be likely to make us change our form of government in a big way.

I am optimistic that Obama can figure out that would not only destroy his legacy, it would immediately give him sole possession of the title "worst president ever." Growth is the only way out, politically and economically; if he does figure it out, he may go down as a superstar president. In any case, we know how to measure which way it's heading, and the trend should be very clear within 12-18 months. (Just about the time both sides start rough-drafting their themes for the next presidential campaign season.)

[Gil]

Hey, S. Optimist, I couldn't help but notice the Best Debt Clock in the U.S.A. isn't quite as, er, optimistic as they once were. The percentages are actually going up now. :/

[Optimist123]

Glad you noticed; it's been that way for months. Any recommendations?

[Bob]

Steve,

Trend lines are rear view mirrors, right?

What would you need to see from the administration and Congress that would give you hope that, in 12 or 18 months, real economic growth, sans government stimulus, could be on a steeper trajectory?

[Optimist123]

Bob,

You're right about trend lines. They convince the turkey that life is good; then, surprise, Thanksgiving Day arrives.

For me, two positive signs from the administration would be (1) a halt to the class warfare rhetoric, and (2) some indications and criteria about when and how all the "temporary" interventions will be phased out. The former would indicate that it's finally sunk in that the campaign is over and it's time to govern; the latter would indicate that "temporary" wasn't just slick branding to get support for a package that was anything but temporary.

Regarding Congress, I have no hope of seeing anything but political games as usual -- from either side. One exception: Paul Ryan has several ideas I like, so I'll keep an eye on him.

The most significant sign we could possibly see from any politician is also the one I am almost convinced we will never, ever see from any of them: the revelation that growth is overwhelmingly important, and it doesn't just happen -- followed by articulation of what policymakers can do to enhance it (and to retard it).

But neither politicians nor journalists nor bloggers understand it. To every single damn one of them, almost without exception, the *numerator* of the debt/GDP ratio is the thing that needs to be "fixed"; the denominator just happens, and we can't do anything about it except take the CBO's word for it -- then whip up hysteria, slogans, and bumperstickers about the calamity we face if we don't fix the numerator. Growth is exogenous, as the Keynesians have been telling us for decades; Schumpeter, Hayek, and Romer were fringe crazies whose time has come and gone.

Focusing on the numerator of debt/GDP (and ignoring the denominator) sells a lot of books, gets a lot of blog hits, and attracts a lot of fear-driven votes. It is an insurmountable obstacle to the growth discussion.

Want some first-hand evidence? See which of these two topics gets more attention at the next gathering of friends or family: (1) the present value of "unfunded liabilities" on the spending side due to Medicare, etc.; or (2) the present value of "uncounted assets" on the tax receipts side due to potentially higher growth rates than CBO projects.

I predict that (2) will cause everyone's eyes to glaze over, because nobody has ever seen "uncounted assets" in any headlines or bumperstickers yet, and they never will, either.

As a result, I've been lowering my expectations on that front, and refocusing my attention to innovators in science, technology, and business. I'm hopeful that some of them can pull off positive black swans -- before their incentives to do so are dampened or drowned out by the egalitarians in power.

[beancounter]

Well, it may be that Obama will never stop talking about taxing the "rich" and spreading the wealth but is uninterested in class warfare. Unless one believes that a flat tax is the maximum possible growth (or even more radically near no tax), one must discuss who should and who should not be taxed more. At least taxing the "rich" higher can be argued purely from a mathematics rather than a value judgment. The top percentile of earners have a quarter of the nation's income, and the gap expands even further if you look at the top ten percent. So unless you propose higher taxes for the middle class and poor, mathematically speaking the rich will have to pay more if tax recepits are to remain constant, given the gap is getting wider and wider. Of course the other solution is tax everyone less and drastically reduce government spending and hope the denominator (GDP) increases to maintain tax receipts. But firstly, government spending is not even remotely linked to tax receipts (a great evil I know) so reducing spending does not necessarily reduce the tax burden, and secondly increased growth is not guaranteed with an across the board tax cut. Targeted tax cuts seem to be the key, but who to target is the question government is wholly inadequate to decide.

Steve is right that investing in people is the right step rather than investing in technologies, but Pell Grants, retraining programs, unemployment insurance and especially healthcare are not considered by modern day conservatives as economic stimulus or even worthy investment, but as a step towards "European Social Democracy." Libertarians especially are less concerned with economic growth than personal liberty and freedom from coersion, and they would reject paying for another person's education. They would certainly reject a second GI Bill. Unfortunately I believe Steve is right when he says my generation will pay dearly, because the word investment has become compromised by identity politics and overuse. Rockefeller Republicans are extinct, replaced by those who interpret the Constitution literally (as bad as those who interpret the Bible literally). Just imagine if Colin Powell was interested in politics and his reputation hadn't been trashed by the UN WMD presentation; it could be President Powell right now, unbeholden to the unions, who presumably supports much of the same policies as Obama but without any of the class warfare. And he understands entrepreneurs.

[Bob]

Steve,

I've been following this blog for around 2 years or so. You've converted me to the idea of growth and that the national debt is not of major concern if it enhances future growth prospects. So you're basically preaching to the choir.

Unfortunately I see nothing that gives me hope that growth is on the national political agenda. For me, it's simple. It begins and ends with energy. Thus far the collectivists in government (and my read is that Obama is a card carrying collectivist) want us to conserve out way out of the energy problem. I have no problem with conservation per se' having spent many a year in demand side management. It's just that one reaches a point of diminishing returns after the cherry's have been picked and focus needs to be on the supply side. For many energy conservation projects to achieve a competitive return on investment we need energy prices to rise to a point in which projects become more financially viable. Or, we can make them appear to be viable through credits or subsidies but all that does is offset the higher prices. To make matters worse cap and trade and the enviro-fascists virtually guarantee that prices will be on an above trend increase, IMO. And the people that get hurt the worst are the those that this administration appears to want to help the most. This can get circular in a hurry and we go nowhere fast. In fact, we've been in nowhere land for many a year.

So, if you are inclined to make more entries about stuff such as nanotechnology, I, for one, would welcome it.

[Jerry McInvale]

Steve,

In thinking about your concern that people talk a lot more about the deficits or debt levels rather than the growth rate of the economy (numerator versus denominator), I would offer a few thoughts for your consideration. First - almost everyone has some experiences with debt, and has learned at some point that incurring more debt than you can repay rarely works out well. Most people do not have any significant education in or understanding of GDP or economic theories. What thay do have is a lifetime of experience with politicians failing to control expenditures in relation to funds available - whether on the local, state or national level. The issue of growth, and what may encourage growth is largely the province of entrepreneurs and business management. Few of those people move into political positions. Who can you think of on a national level in congress or in the administration would have any practical experience in planning for or working to achieve growth? On the other hand, they have great experience in expending more funds in order to satisfy constituent groups - see Obama and the UAW for a clear example. So, as a citizen who has followed politics for some time and as a former business executive who tried (sometimes successfully) to encourage corporate growth - I have a lot more confidence in the effectiveness of trying to restrain expenditures by government, than in getting government to adopt positive growth policies or at least fail to implement growth retarding policies. The great majority of citizens understand the implications of excessive debt, but do not understand the impact of government policies on GDP growth. See as examples the current fervor for "cap and trade", closing "corporate loopholes in taxation of foreign sourced income", increased "CAFE Standards to throw a lead weight on top of drowning industries", etc., etc. All of these things can be made to sound reasonable as actions against the evil corporations or evil rich by grandstanding politicians who are clueless as to their impact.

I tried to take a look at growth history. Starting in 1948 (for no good reason other than it gave me even decades of history after World War II, I found that the compound growth rate of GDP in nominal dollars was 6.79% per year. In 2000 dollars, the growth rate was 3.28% per year. The 10 year budget as proposed has growth of 4.86% per year in nominal dollars, and the CBO estimate is growth of 4.03% per year. I have no data as to their inflation assumption. However, for the past two decades the growth rates were 5.48% and 4.72% respectively in nominal dollars, and 3.04% and 2.24% in 2000 dollars. That would somewhat simplistically imply an inflation rate of approximately 2.5%, which if continued would resulting in growth rates in 2000 dollars of approximately 1.9% for the budget as proposed, or 1.5% for the CBO estimate. Both of these budget forecasts are probably somewhat optimistic given results in 2009 thus far, with higher expenditures (debt) for bailouts, higher unemployment, etc.

If we were analyzing the budget as a strategic plan, we would see increased taxation, increased energy costs, increased government control of key industries as factors to be offset by lower defense expenditures, investment in alternate energy technologies and college education. Given that set of factors, and the emergence of effective international competition in key technical fields, it may be quite reasonable to be concerned about the additional debt being incurred.

This is not to say that deficit spending is the only issue. Of the six decades since 1948, the only decade that was not characterized by budget deficits was the decade beginning in 1948 which actually ran a surplus of approximately 0.4% annually. The average over the 60 years was approximately a 1.65% annual deficit, with the most recent decade of 1998 through 2007 recording an approximately 0.9% annual deficit. The proposed budget implies an annual deficit of approximately 3.9% (2010-2019) with annual spending at a far higher level than any experienced in the previous 60 years. The CBO and other analysts forecast even higher spending with less growth as an offset. Given those spending levels and the somewhat less robust forecasts for growth, it should come as no surprise that many are concerned about the prospect for the massive increases in debt. In addition, unless the "unfunded liabilities" are defaulted, the growth prospects are further diminished by the increase in interest levels on additional debt to fund the liabilities or diminished by additional taxation (or both).

I agree that the only solution is more growth if we are to support the spending levels. Question is - will government policies permit the growth?

Jerry McInvale

[Optimist123]

Jerry,

Agreed that it’s easy to extrapolate a bad individual experience with debt onto the nation’s situation. But it’s not a sufficient comparison, because an individual is not a going concern. A better basis for comparison than an individual would be an entire family. Starting with my two grandfathers and proceeding through the present, the total amount of outstanding mortgages has grown and grown, even though many individual mortgages within that group have been paid off -- but the increasing debt is not a problem because the aggregate income has grown more than enough to sustain it.

But your point is valid: “debt” is a word that evokes the same reflex emotion as “cancer” does. And trying to use a logical argument to fight against a widespread emotional gut feeling is like using a tennis racket to fight back an inbound fog bank. I’ve been at it for twelve years, and am running out of steam.

Regarding growth history, I almost forgot I had noodled around with that several years ago, for the most recent ten presidents at that time. Here’s the article:
http://tinyurl.com/nt456p . JFK/LBJ stood out no matter how one looks at it. Contemporary conservatives like to attribute that success to the tax-rate cuts Kennedy implemented; progressives point to the 48% (or so) marginal tax rate we ended up with after the rate cut. In other words, the spin doctors never quit, so we still don’t know if we should cut tax rates, or raise them to 48%, if our goal is to return to JFK-era growth rates. (I have an educated guess, though.)

I’ve analyzed the budget, and have two takeaways. (1) The math works; starting year 5, the interest burden stabilizes at the Clinton-era level. But (2) the assumptions are already breaking down, and they haven’t even had their six-month anniversary yet. It makes me wonder whether the quant jocks back calculated their numbers back in January, to figure out which growth and deficit assumptions were necessary to keep the criticism down to a dull roar. My money is now on “yes, they did.”