I’m wondering if Barack Obama’s State of the Union speech will discourage private investment. Obama promised a range of economic planning initiatives, including support for favored exporters, additional support for the residential housing market, and subsidies for renewable energy. It is uncertain as to whether Congress will approve new spending or regulations, but in the mean time consider the perspective of a Jane Businesswoman. Suppose that Jane invested in washing machines last summer, having gotten a good deal from a manufacturer. But then the Federal Government launched Cash for Clunkers, which induced all of Jane’s customers to max out their credit borrowing to buy new cars and take advantage of the Clunker windfall. As none of Jane’s customers could afford to buy a car and a washing machine during the same season, she took a beating on the investment.
How can Jane feel comfortable investing in something other than the industries that are now going to get special favors from Congress? No problem, you might think. She can invest in renewable energy. But so are all of the other people chasing the new government handouts. Then what happens if Congress does not follow through? The investment in renewable energy becomes a loss as well.
Could it be that any promise of government economic planning will reduce private investment until the subsidies are either implemented or definitively rejected? If so, perhaps the government should do its economic planning in secret and then announce new initiatives when they are enacted, the way that electronics and software companies do with their new products (early announcements tend to depress sales of the existing product).
This is indeed the problem of stimulus that involves central planning: government choosing winners and losers.
That’s not to say there isn’t a role for government stimulus. Friedman talks a lot about government providing “market signals” and letting the private sector deal with resource planning and maximizing efficiency in the markets in which the government chooses to provide signals.
Industry subsidies are not market signals. They’re handouts.
The whole notion of supporting residential housing is preposterous in and of itself. “We want citizens to pay *MORE* for their single largest budgetary item.” How does that make any sense at all?
Honestly, as long as central banks are holding rates at near zero, disastrous policies with unintended consequences that create collateral damage in the private sector will be a dime a dozen. After what’s occurred over the last decade, how can any rational person not conclude that cheap money promotes malinvestment?
I’m dumbfounded why Obama chose not to *change* the economic team: Bernanke, Summers, Geithner. They all failed. CFIT, and here we treat them like Sully.
Madness.
I guess it depends on whether you trust your government and how predictable you think it is. “Implemented” in the Netherlands does not always mean “forever”.
We’ve had subsidies for companies and consumers for years. Businesses complain about the government changing the rules (and subsidies) all the time. Existing or new government just keep tweaking/abolishing the plans, making it hard for a business to decide on a long term investment on green energy.
We’ve had tax deduction of mortgage interest since 1914. It might have distorted the prices in the housing market, but the deduction was predictable. Thanks to the credit crunch, our government now also has to find ways to gain income, the deduction is under pressure. So yes, many people are now hesitant to buy a house (combined with worries about the economic future of course).
This administration will do one thing for small businesses: it will squeeze them up, us since I am part of the of them, even more to re-distribute money to their special interests voting pool that they hope they will keep them afloat: subsidized “poor” classes, unions, some multi billionaires progressivist (but do not call them lobbies please it is forbidden actually is an heresy (worst than trying to explain that Mac computers also have viruses but that Apple prohibits you to call them viruses) all combined in federal centered humongous projects that have no chance to deliver anything. Totally missed and ignored has been the message from the people of the (loyal to the democrats) Commonwealth of Taxachusetts. There is no grasp no basic understanding of the fundamental of the economy. How the US can compete in prices against China (that is cheating in any way they can to keep the prices and cost at that level despite having cheap labor or shall I call it for what it is slavery) on same products? You need to make the people of your country poorer… US needs to deliver quality innovation not cheap products. Here we have another Carter, better at PR though and with the small particular that he thinks himself at the FDR or Lincoln level… and in order to accomplish his dreams he is firmly convinced that there is an infinite wallet to support him. The thing is after Carter there was a Reagan but I don’t see one around now.