Comrade Obama’s Speech to the Politburo

Here are the parts of the transcript of Barack Obama’s State of the Union address that struck me…

“The plan that has made all of this possible, from the tax cuts to the jobs, is the Recovery Act. That’s right – the Recovery Act, also known as the Stimulus Bill. Economists on the left and the right say that this bill has helped saved jobs and avert disaster.”

I would have liked to see the fact of persistent unemployment confronted more directly. Business people are greedy. The world is awash in dollars (unlike in the 1930s when the money supply was strangled by being pegged to a limited supply of gold). If a business person could hire an American and make a profit by doing so, the American would be hired. Some combination of regulations, taxes, costs, and education level make it unprofitable to hire those Americans who are currently unemployed. Obama proposes complex, temporary, and patchwork changes to some of these factors. If a small business person were smart enough to navigate this landscape of regulation and limited-time tax breaks, couldn’t he navigate the regulatory and tax landscape in Singapore, Brazil, China, or India?

“Well I do not accept second-place for the United States of America.”

This reminded me of the last time that I played the SET Card Gamewith a 9-year-old girl. I told her that “second place was just first loser”. Whenever she looked away, I stole cards from her deck and put them on mine. After winning, I ordered a three-foot-high red and gold trophy engraved with her name and “Second Place – First Loser” underneath. When it arrived at her apartment, her 3-year-old sister opened the box and scattered styrofoam peanuts across three rooms.

“But to create more of these clean energy jobs, we need more production, more efficiency, more incentives.”

More central planning. One of the nice things about a market economy is that prices send signals to producers and consumers. In our current economy, the prices of most agricultural products are tweaked by various subsidies and regulations. A farmer certainly cannot look at the wholesale price of a crop and use that to decide whether it makes sense to plant the crop. He or she might make more money by getting the government to pay him not to grow anything! The prices of houses are distorted by tax credits for buyers. If you’re a builder, should you break ground on a new house? Whether it will be profitable may depend entirely on whether the government extends the tax credits, something entirely unpredictable and beyond your control. A few more “incentives” should be sufficient to render all previously acquired business skills obsolete.

“we need to export more of our goods. Because the more products we make and sell to other countries, the more jobs we support right here in America. … We will double our exports over the next five years.”

I’m not sure that this central plan makes sense. Working hard to build stuff and then sending it offshore for foreigners to enjoy does not sound like a way to increase our standard of living. Imagine if we grew wheat, harvested it by hand, and exported it. That would result in a huge increase in export-related jobs, but would we be better off? Shouldn’t the goal be to get foreigners to work really hard making things and sending them here? While we send them back as little as possible? (We were doing a great job for a while with China, sending them dollars that we printed and taking electronics in return.)

“we’re working to lift the value of a family’s single largest investment – their home”

I wrote about this planned economy element in “Tax subsidies that encourage speculation in housing”, and in “Why do we want to maintain the world’s highest housing prices?” (April 2008). The Soviets built plain and functional housing, reserving their heavy investments for factories, mines, and machines. What do our central planners know that the Soviets didn’t know?

“We will continue to go through the budget line by line to eliminate programs that we can’t afford and don’t work. We’ve already identified $20 billion in savings for next year.”

We’ve figured out to save almost enough to pay out bonuses at a single Wall Street firm. An alternative way to look at this is that, with combined federal and state government spending approaching 50 percent of GDP, Obama and his team have figured out how to cut 0.14 percent.

“Starting in 2011, we are prepared to freeze government spending for three years.”

If you invest in a U.S. business today, be prepared for massive government expansion and tax increases in 2014.

“Since the day I took office, we have renewed our focus on the terrorists who threaten our nation.”

I.e., the TSA continues to hassle grandmothers, families traveling together, flight crews in uniform traveling together on the 3rd day of a trip, business frequent flyers, et al., while extending a welcome mat to a 23-year-old Nigerian man who checks no bags for a trip across three continents, carries no coat for a visit to Detroit in December, and whose own father reported him to the CIA as planning to carry out Islamic terrorism in the U.S.

[Personal anecdote: Together with a captain and flight attendant, after an overnight in the middle of a 4-day trip, I tried to go through an airport security screening. We were all wearing our uniforms and bedecked with airline IDs (these can be checked against a national database, complete with photos (the initiative for developing this came from the carriers and pilots, not the federal government)). Something in one of my pockets set off a metal detector. Two TSA employees spent 15 to 20 minutes hassling me, patting me down, reading my Jeppesen charts, etc. They did not ask the other members of the crew “Is this the same person that you flew down with yesterday?” Nor did they ask themselves “Why are we looking for a small piece of metal on this guy when, at any time during the flight, he could reach for the crash axe?” or “Why would a pilot need to have a weapon in order to harm passengers? Wouldn’t simple incompetence suffice?” While hassling me, these TSA workers were not available to look at other people and items going through security.]

“We are helping developing countries to feed themselves”

With our farm subsidies, import restrictions, and dumping surplus bags of grain into poor countries, wouldn’t it be more accurate to say that we are a major impediment to Third World agriculture?

Conclusion: Another smart person in love with central planning. How does this love develop? Suppose that you notice that a trip to the supermarket works out better with some advance planning. And then you notice that you’re smarter than the average American. So you decide that the U.S. economy would work better with a touch of planning and, by Jove, you’re just the person to do it!

17 thoughts on “Comrade Obama’s Speech to the Politburo

  1. My takeaway: in 2010, Obama is going to take as much money as he can from people who voted Republican in ’08 and give it to people who voted Democrat in ’08. In 2011, he will suddenly develop fiscal responsibility and never do something like that again (honest!).

  2. I nearly hurled when he mentioned that lobbyists are not allowed in his administration (would have been a bad move as I was driving at the time). I guess the $3M in “speaking fees” (i.e. bribes) Larry Summers received from Wall Street do not qualify because Goldman Sachs just wanted to avail himself of Dr. Summers’ superior wisdom. Honni soit qui mal y pense….

  3. “One of the nice things about a market economy is that prices send signals to producers and consumers.”

    Absolutely. And the underlying cause of most of our problems is that since the Clinton administration days we have allowed the Chinese to falsify their prices to an incredible degree through an exchange rate peg that has valued the yuan at between 6.8 and 8.2 yuan per dollar when the purchasing power parity level has been under two per dollar. This is the equivalent of a 60-75% tariff on imported goods combined with an equal subsidy for exports. The pricing falsification and distortion resulting from this dwarfs that of the examples you mention. The trade barriers created by this currency misvaluation are higher than those of the Smoot-Hawley tariffs.

    Ricardo’s theory of comparative advantage implicitly assumes that the prices in the trading nations accurately reflect the true values of the inputs to production. When prices are falsified by currency pegs, comparative advantage is made to seem to exist where it actually does not.

    The reason that the Chinese have to peg their currency by committing to buy up every dollar their exporters bring in at the current rate of around 6.8 yuan/dollar is that no one else in the world would pay that many yuan for a dollar, for the simple reason that you can buy three to four times more with 6.8 yuan than you can with a dollar.

    In building up their current hoard of more than $2 trillion, the Chinese government has paid out to its exporters yuan whose actual buying power in terms of US products was about $8 trillion. The resulting $6 trillion loss amounts to more than $4500 per Chinese citizen, $13,500 for a family of three.

    By enforcing an exchange rate that ensured no one in China would use the dollars brought in from exports to buy US goods, the Chinese government created a situation in which they had to use the dollars they bought to buy US securities. During the housing bubble years, they were one of the biggest buyers of GSEs and Treasury bonds, keeping interest rates low and helping drive the bubble, at the same time that they destroyed a significant fraction of US manufacturing jobs.

    Because any enactment of countervailing tariffs would cause a ferocious reaction by the Chinese (not to mention impacting the profits of the many US companies selling the cheap imports), the US government does nothing about this.

    Because the dollars have to come back to the US somehow (the Chinese can’t just warehouse them in Scrooge McDuck style money bins), and they can’t come back to buy US goods, the only way they can come back is for the US to borrow them. Since individual Americans are now maxed out on debt, the only entity that can do the necessary borrowing is the government. If the dollars can’t be recycled back into the US, Americans won’t be able to buy Chinese exports, and the resulting unemployment in China will have very unpleasant consequences. And the longer this goes on, the worse it will get.

    As I wrote at the beginning, this is the fundamental problem underlying all the rest that face us.

  4. Just two questions: would anyone move to a country that is poorer, with worse weather, more crime and whatnot just because it’s better for business?

    Things like having your family living nearby, generally good weather, decent infrastructure, reasonably low crime and corruption seem to be worth quite a premium. And if you could move your business without having to move yourself, how many countries are a safe bet? Not only lower taxes, but no corruption, decent infrastructure…

    Obviously, if you’re a big business that ‘cannot be allowed to fail’ you can take any risk you want. How many small to mid size business with no political clout can move to China/Russia/wherever?

    And secondly, would *you* live in a plain and functional Soviet house? I damn well would not (been in one for a night and that’s enough), and I’d pay premium to get something better.

  5. Just a thought on on the 3-year “spending freeze” that doesn’t seem to be reported much. Keep in mind that a “freeze” is neither an increase *nor* a decrease. This “spending freeze” is occurring AFTER both Bush’s and Obama’s massive federal expansionary policies have been put into place.

  6. @jm

    How can a Chinese subsidy (through current pegging) negatively impact the United States? (I can see how it would hurt the Chinese.) What’s wrong with losing manufacturing jobs, if another country wants to subsidize their manufactured goods and sell them to us at a price below what it’d cost to manufacture them ourselves? This ultimately should prove unsustainable for them, no?

    (I understood this was one of Milton Friedman’s fundamental arguments in favor of free trade.)

  7. I think it’s really a great question to ask why so many smart people seem to be more attracted to the idea of central planning than free enterprise.

    One would think the students who were able to successfully compete for coveted spots at the finest schools would be all for a competitive market. Then again, the college admissions process has many of the same characteristics as central planning. Secret committees make decisions behind the veil of bureaucracy, where illegal practices like quotas are ironically but rather easily disguised as individualism.

  8. “I would have liked to see the fact of persistent unemployment confronted more directly.”

    “. Working hard to build stuff and then sending it offshore for foreigners to enjoy does not sound like a way to increase our standard of living. Imagine if we grew wheat, harvested it by hand, and exported it. That would result in a huge increase in export-related jobs, but would we be better off? Shouldn’t the goal be to get foreigners to work really hard making things and sending them here? While we send them back as little as possible?”

    Philip, don’t you see the connection between these two paragraphs? That they are two sides of the exact same issue. (Wall Streeters & government employees (including police officers and educators on all levels) have money which they can use to buy cheap Chinese stuff. People (factory workers, engineers, etc.) involved in the private design, development, and manufacture of tradable goods are unemployed because the factories and much of the R&D is overseas.

    This situation IS great for retirees, government employees, and bankers, but not for those of us who tied our fortunes to “private industry.”

    And to further add to jm’s excellent point on why American’s “can’t compete” in a HEAVILY rigged game, add China’s lack of environmental protections, theft of IP and use of SLAVE LABOR. How can anyone compete on price with SLAVE LABOR?

    Here’s an excellent summary from a capitalist Silicon Valley source):
    http://www.tapsns.com/blog/index.php/2010/01/what-is-china/

    I also agree 100% that artificially inflating housing prices is idiotic. But it will continue because it favors older and wealthier people at the expense of the younger & poorer. It is indeed huge competitive disadvantage for US firms and workers, but middle-class jobs are very low on any politician’s list of priorities.

  9. Tax cuts indeed. Our taxes went up 20% because Ububba drained the treasury market. Bridge tolls just yesterday hit $6 after hitting $5 last year. Remember when movie tickets were $3.50?

    However after his healthcare fiasco, it’s surprising anyone but CNN still notices him talking.

  10. Your comments about centralized planning brought my mind back to the work of your colleague, Mitchell Resnick, and his work modeling decentralized systems:

    http://www.sigchi.org/chi96/proceedings/demos/Resnick/mjr_txt.htm

    Decentralized systems are driven not from a centralized authority but from local interactions where the component parts (ants, birds, people) follow a few simple rules. Perhaps someone should give President Obama a StarLogo environment where he can model traffic jams, insect foraging or flock behavior. Maybe that would change his thinking…

  11. Matt Henderson wrote: “How can a Chinese subsidy (through current pegging) negatively impact the United States? (I can see how it would hurt the Chinese.) What’s wrong with losing manufacturing jobs, if another country wants to subsidize their manufactured goods and sell them to us at a price below what it’d cost to manufacture them ourselves? This ultimately should prove unsustainable for them, no?”

    It certainly will prove ultimately unsustainable for them, as it finally seems to have for Japan. And then what do we do, having scrapped or sent to China most of our production equipment, having destroyed the organizations that knew how to manufacture, and having educated no young people in manufacturing techniques?

    Although I have no doubt that we will be able to resurrect manufacturing in the US when the unsustainable Chinese system ultimately collapses, I suspect the cost will equal or exceed the savings that we have gotten from the present trade regime. In fact, after having made an argument somewhat similar to yours to someone a few years ago, I asked myself whether I was really right, and after some moderately serious consideration of the ultimate cost decided that I had been wrong. And even that conclusion had not taken into account the losses due to the malinvestment in housing. (Have to go now, will try to write more tonight.)

  12. “I think it’s really a great question to ask why so many smart people seem to be more attracted to the idea of central planning than free enterprise.” – Ben

    I don’t think this has ever been quantified in terms of raw IQ. I have, however, certainly noticed that central planning seems quite popular around Cambridge and Palo Alto, but this is a complex phenomenon. Firstly, top students actually learn to fear competition in those environments for obvious reasons. Secondly, central planning actually guarantees their position amongst the elite. Thirdly, despite all their rhetoric, education systems form a centralized authority that generally rewards followers and consensus-builders. Finally, the university is the foci of a socialized distribution system that takes money from taxpayers and rich parents and returns only hope and rhetoric to the impressionable youth. Cognitive dissonance pushes us all to believe that this was a valuable investment, and possibly that similar irrational beliefs are justified.

  13. jm:

    Your account of the fundamental problem is right on target. You might enjoy Charlie Munger’s take on this. He gave a talk at UCSB some years back and reported on a conversation he had with George Schultz. Munger took your view and Schultz candidly admitted he preferred not to think about it.

    phil,

    I understand why you attribute Obama’s rhetorical gestures to a love of planning, but I think it would be more accurate to call them “gestures” than “plans”. Our political culture holds Presidents accountable for economic performance and they oblige us with elaborate narratives about how this or that silly legislative bagatelle “grew the economy” or “created jobs”. It’s foolish, but not too be taken literally. He’s just trying to be seen to be doing something constructive. And the audience he’s trying to impress are a pretty mixed bunch.

  14. Even Pavlov’s dogs knew that a slap on the nose discourages the conduct that led to the slap, but the Federal Government and the State of Oregon cannot understand that. They claim they want to encourage new job formation, knowing that small business, innovative entrepreneurs, are the ones to create new opportunities, yet they slap the potential start-up business people in the pocketbook. Government discourages that which they claim to want to encourage. Does that mean they want small business to shrink and look to government-managed larger businesses to do the hiring? There is no innovation in a bureaucratic corporation which is proven in any mercantilist system. The Democrats, who, today, follow Rousseau and Marx, as demonstrated by Comrade Obama’s State of the Union speech, want to manage the entire nation. See claysamerica.com.

  15. BL: Who here said that Obama was a radical? Or even left wing? The idea that the government can spend money more efficiently than the people and make decisions more effectively than the market must be nearly universal among American politicians. Otherwise we would not be approaching the point that government spending exceeds 50 percent of GDP.

    Thanks for the link to the Bush’s Third Term article. There does seem to be a lot of convergence among professional politicians! Perhaps the real problem is us (the voters)!

  16. Well I’m a know-it-all. I’m not ashamed for the following:
    http://fdominicus.blogspot.com/2008/11/obama-silver-bullet.html

    And I asked not to forget:
    http://fdominicus.blogspot.com/2008/10/keep-this-on-record.html

    and here again:
    http://fdominicus.blogspot.com/2008/10/after-decisions.html

    The problems are too many to repeat them here all. Howerver it comes back to a few basis things:
    – worthless money (it’s sheap to produc and it’s not for nothing that it’s name Fiat-money)
    – no effective barrier on new debts.

    You may hate libertarians, but they get it right with the “value” of “paper-money”. So the best you can hope and work for (it’s unimportant whether in the US or elsewhere)
    http://endthefedusa.ning.com/

    With money worth something, but figures on a sheet of paper, you can limit the power of any governement. The saying. “If you control the money you control the state” is as true as ever. It could be that this citation is from Marx…

    You’ll see the first a “governement” try to seize control over is the “monopol” of money. Just see wha happens as the Dollar get under pressure. They dissolved it from changing it into Gold. And not one governement of central bank has tried to push that back.

    So they control the money ….

    The rest is “easy”….

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