I'm a regular reader of Gary Becker and Richard Posner's blog. Becker is a a Nobel Laureate, but he got his for his professional work, not his political connections. Freakonomics is essentially a field he pioneered--the intersection of behavior and economics.
In today's Wallstreet Journal he analyzes the effect the stimulus. Money quote.
In fact, much of the proposed spending would be in sectors and on programs where the government would mainly have to draw resources away from other uses. This type of spending includes adding broadband to rural areas, spending more on health coverage, encouraging scientific innovations, developing renewable energy, as well as many other things.As President Barack Obama recently said, "This plan is more than a prescription for short-term spending -- it's a strategy for America's long-term growth and opportunity in areas such as renewable energy, health care and education." Such spending may encourage long-term growth, but it will have little short-term effect on GDP.
So our conclusion is that the net stimulus to short-term GDP will not be zero, and will be positive, but the stimulus is likely to be modest in magnitude. Some economists have assumed that every $1 billion spent by the government through the stimulus package would raise short-term GDP by $1.5 billion. Or, in economics jargon, that the multiplier is 1.5.
That seems too optimistic given the nature of the spending programs being proposed. We believe a multiplier well below one seems much more likely.
Let me translate.
There are two important things to understand from what he is saying here--the Obama administration is effectively trying to restructure the economy the way they want it--but "investing" tax dollars in industries it favors. This is called "picking winners", and if you think that sounds like track betting, you'd be right. The "investments" are not being made on a value basis, but for political consideration.
Do you have an example Mick? Why yes I do. The Airbus 380 super jumbo. As with the Concorde, Europe insisted on a political symbol of their technological parity with the U.S., and as with the Concorde, the result is an economic disaster. Not only is the A380 a market failure, but it has effectively destroyed Airbus as a serious rival with Boeing. The latter company designed its 787 Dreamliner from purely market criteria and its reception by the world market has been stunning. It has leveraged the Dreamliner technology to update the venerable 747 (which celebrates its 40th anniversary this year) with a model called the 747-8. The effect on Airbus has been problematic. With all its resources going into the symbol of European technological supremacy, it simply didn't have a serious offering for the market sweetspot--a plane with the size and range of the 787. The French and Germans had spent billions to develop very large private aircraft for Gulf State emirs.
Welcome to the command economy. Monuments for politicians, poverty for everyone else.
This is also why I opposed embryonic stem cell research. Private industry had declined to invest in it, and its easy to see why now--there have been no meaningful "products" to come out of the research. On the other hand, adult stem cell research is hot stuff, and unsurprisingly, there is no shortage of private capital for the effort. Democrats saw a political angle--a way to recast abortions from "killing babies" to "saving Michael J. Fox" That may be successful politics, but its lousy economics.
The real key to American economy supremacy is the fact that it claims an out-sized proportion of the worlds profits. The reason for this is because the U.S. develops market winners from new technologies at a rate faster than anybody else. New market winners produce what are called "monopoly rents" which is another way of saying big profits. Do you remember how much the iPhone cost when it first came out? Apple made a killing there. Now of course we have lots of iPhone clones and the price has come down considerable and will drop even more. Within a year or two, I think you'll see hundred dollar iPhone/iPhone clones. That's a natural product cycle--big profits at first, which attracts competition and invest, which drives down prices and subsequently profits. Its also why we don't want to make textiles in this country anymore--no money in it.
The Democrats are probably not far wrong is saying there are monopoly rents on the green energy horizon, but therein lies the rub. In the real world, the technological incarnation that turns out to be the market winner is rarely predictable. Two guys in the garage often win the race, while the highly capitalized and MBA'd ventures sink without a trace. More fortunes have been squandered in the venture capital arena than have been made. The market economy works because like the lottery, lots of people play and someone's number if going to come up.
So now the Democrats think the command economy can play in the monopoly rents game? This is shear fantasy. The only moderate success a command economy has ever had is when they invested in established technologies and created trade barriers to keep a market to itself. You can make machine tools and cars this way, but you can't "command" successful innovation.
Obama's economic transformation is a scary thing and its also a lie. Command economies don't produce long-term growth. Everyone knows this. You can't say, "coal--you're out, solar--you're in, " because there is just no way to predict how things will evolve and which approach ends up the winner. You have to allow all the technologies--clean coal, wind, solar, etc... to compete on a level field and allow a winner to emerge naturally.
Which brings me to Becker and Murphy's ultimate point--the stimulus won't be very stimulating, actually creating 90 cents of economic effect (or less) for each dollar spent. Think about that for a moment--you spend a dollar, and you get 90 cents of value back. Only the government could run a business like this.
George Stephanopolis of ABC news didn't grasp the significance of this either when Michael Steele explained it to him. In the private sector, jobs exist because they produce wealth. Your employer hires people because he can pay them x, and they will produce x+y. y is profit, which the shareholders get as a reward for investing their capital. The more profitable an investment is, the more people they hire to produce more of those profits.
The government's idea of job creation is like you hiring the neighbor kid to mow your lawn. He (or she) mows the lawn, you pay them. They come back next week, you pay them again. The job is an expense, overhead, non-income producing work. You can't generate wealth with it, and neither do you expect to--its a luxury afforded by actual wealth production--a nicely mowed lawn that you didn't have to mow yourself...
Obama's entire middle-class tax cut, building-the-economy-from-the-bottom-up rhetoric is false. Economies don't get built by paying accountants, lawyers and gardeners. They get built by paying software developers, engineers, sales and marketing people, etc...
Why oh why did we nominate John McCain instead of Mitt Romney? Now look at the mess we're in.
Mark moans: It's your fault! McCain beat Romney because 'independents' and Democrats were often allowed to vote in Republican primaries. On 1/13/08 I wrote:
By what rationale do political opponents get to vote for the Republican or Democrat Nominee in some states ? In a tight race, as this may be on both sides, it's possible that the decisive votes for each party's nominee will come from the other side! I hereby claim copyright to the comic and sinister possibilities of a plot based on this idea.I seem to remember that you and Dave were quite blasé about it, but the post and comments are locked away in your secret archive. Anyway it's a crime that the conservative nominee should be picked by squishberals. It's worse than a crime, it's a mistake. Romney's competent eloquence on the economy would have been a big plus versus McCain's ungrounded fumbling in the weeks before the election.
