Some Questions about The Speech

I was going to post something else today, but the president-elect's speech on the economy begs discussion. I'm going to be excerpting heavily and trying to make sense of the often self-contradictory contents.

We start 2009 in the midst of a crisis unlike any we have seen in our lifetime – a crisis that has only deepened over the last few weeks. Nearly two million jobs have now been lost, and on Friday we are likely to learn that we lost more jobs last year than at any time since World War II. Just in the past year, another 2.8 million Americans who want and need full-time work have had to settle for part-time jobs. Manufacturing has hit a twentyeight year low. Many businesses cannot borrow or make payroll. Many families cannot pay their bills or their mortgage. Many workers are watching their life savings disappear. And many, many Americans are both anxious and uncertain of what the future will hold.

I haven't verified the statistics, but this all rings true. A quick side note on the twenty-eight year low in manufacturing. We have a very productive, but high cost labor force and the second highest corporate tax rate in the world. Is there any doubt why our manufacturing has gone off-shore? No statement yet on the causes of the crisis, but we're getting there next.

This crisis did not happen solely by some accident of history or normal turn of the business cycle, and we won’t get out of it by simply waiting for a better day to come, or relying on the worn-out dogmas of the past. We arrived at this point due to an era of profound irresponsibility that stretched from corporate boardrooms to the halls of power in Washington, DC. For years, too many Wall Street executives made imprudent and dangerous decisions, seeking profits with too little regard for risk, too little regulatory
scrutiny, and too little accountability. Banks made loans without concern for whether borrowers could repay them, and some borrowers took advantage of cheap credit to take on debt they couldn’t afford. Politicians spent taxpayer money without wisdom or discipline, and too often focused on scoring political points instead of the problems they were sent here to solve. The result has been a devastating loss of trust and confidence in our economy, our financial markets, and our government.

Well, the statement of who's to blame for this fiasco is certainly inclusive. It does, however, seem to place more responsibility outside Washington than the truth would allow. Blaming politicians for unwise, undisciplined spending doesn't tell the whole story.

Those politicians do much more than spend, they also legislate. As one example among many, Congress created the Community Reinvestment Act intended to end the process of "red-lining" in the lending industry. It then went on to actively encourage the unwise lending Mr. Obama decries as the fault of the banks. It further created both FannieMae and FreddieMac which got the credit crisis really rolling by packaging the sub-prime loans encouraged by Congress into derivative securities which were widely believed to have an implicit government guarantee. Then, in the face of rapidly rising energy costs, exacerbated in no small degree by decades of Congressional prohibitions on the exploitation of domestic energy sources (all the while promising to do something about America's dependence on foreign oil), those least able to absorb those costs started to default on their loans. The collapse of institutions heavily invested in those derivative, and now worthless, securities soon followed, again exacerbated by government mandated accounting practices specifying that asset values set at current market prices.

Now, the very fact that this crisis is largely of our own making means that it is not beyond our ability to solve. Our problems are rooted in past mistakes, not our capacity for future greatness. It will take time, perhaps many years, [emphasis mine] but we can rebuild that lost trust and confidence...

I'll certainly agree that this was a created crisis, and if the "our" refers collectively to Washington politicians, I'll also agree. I do not, however, accept any other blame. I've worked hard, lived within my means, and saved for a rainy day so I wouldn't have to ask for a hand out unless I really needed it. (like after six months of unemployment the last time I applied for government aid fifteen years ago)

Now, pay particular attention to that "perhaps many years" clause. Let's see what else he has to say about time-lines. In the same paragraph he says this,

...And we are still the nation that has overcome great fears and improbable odds. If we act with the urgency and seriousness that this moment requires, I know that we can do it again.

That is why I have moved quickly to work with my economic team and leaders of both parties on an American Recovery and Reinvestment Plan that will immediately jumpstart job creation and long-term growth.

So, we seem to have a moment which will last for years while we rebuild trust and confidence, the loss of which helped to cause our current troubles, but through the now wise actions of the very same people who, while they thought they were acting wisely at the time, got us into this mess, will now immediately get us out of it. Did I get that right? Anyway, continuing on.

It’s a plan that represents not just new policy, but a whole new approach to meeting our most urgent challenges. For if we hope to end this crisis, we must end the culture of anything goes that helped create it – and this change must begin in Washington. It is time to trade old habits for a new spirit of responsibility. It is time to finally change the ways of Washington so that we can set a new and better course for America.

Well, this is something that I can agree with wholeheartedly. I would love to see a spirit of responsibility in Washington. Perhaps we could hope to see some acknowledgment of policies which have failed around the world, along with those which have actually worked. At this point in the speech, I have high hopes for meaningful change. Let's see how we're going to get there.

There is no doubt that the cost of this plan will be considerable. It will certainly add to the budget deficit in the short-term. But equally certain are the consequences of doing too little or nothing at all, for that will lead to an even greater deficit of jobs, incomes, and confidence in our economy. It is true that we cannot depend on government alone to create jobs or long-term growth, but at this particular moment, only government can provide the short-term boost necessary to lift us from a recession this deep and severe. Only government can break the vicious cycles that are crippling our economy – where a lack of spending leads to lost jobs which leads to even less spending; where an inability to lend and borrow stops growth and leads to even less credit.

That is why we need to act boldly and act now to reverse these cycles. That’s why we need to put money in the pockets of the American people, create new jobs, and invest in our future. That’s why we need to re-start the flow of credit and restore the rules of the road that will ensure a crisis like this never happens again.

Not much to disagree with here, other than knowing that for the goverment to put money in the pockets of some people, it has to take it from others, typically those who would otherwise have that money to invest. If government helped cause the problem, surely government can help us get out of it. How does Mr. Obama see that happening?

That work begins with this plan – a plan I am confident will save or create at least three million jobs over the next few years. It is not just another public works program. It’s a plan that recognizes both the paradox and the promise of this moment – the fact that there are millions of Americans trying to find work, even as, all around the country, there is so much work to be done. That’s why we’ll invest in priorities like energy and education; health care and a new infrastructure that are necessary to keep us strong and competitive in the 21st century. That’s why the overwhelming majority of the jobs created will be in the private sector, while our plan will save the public sector jobs of teachers, cops, firefighters and others who provide vital services.

This is where I have some trouble with the plan. Government doesn't invest, it spends. I could go on with a paragraph by paragraph dissection of the speech, but you get the drift of where it is heading. Now, I'm not an economist, so perhaps someone smarter than I can explain a few things I have questions about.

If there is a private sector credit crisis, how will government borrowing money to pay for the planned increases in spending do anything to make private capital more generally available? Doesn't the government actually compete for private capital? It seems to me that if I, as an investor, choose to put my money into treasury notes or government bonds, that money is no longer available for investment in corporate stock or a bank where it could be used to finance job growth or expansion. If that's the case, just how will private loans become easier to obtain?

Further, if the government chooses to print more money rather than borrow it, doesn't that punish those who invest looking for a good rate of return at the expense of those who borrow? Wouldn't that discourage the availability of private capital for investment rather than encouraging it? Doesn't it also punish those who've tried to save for their own needs while rewarding the profligate?

Finally, wouldn't cutting corporate and individual tax rates have a broader and more immediate effect on the economy than future spending by the government? Doesn't government spending, by its very nature, pick winners and losers in the economy? How is this more effective at stimulating the economy as a whole than allowing individuals and corporations choosing for themselves what is best for their individual situations?

One last quote.

I understand that some might be skeptical of this plan. Our government has already spent a good deal of money, but we haven’t yet seen that translate into more jobs or higher incomes or renewed confidence in our economy. That’s why the American Recovery and Reinvestment Plan won’t just throw money at our problems – we’ll invest in what works. The true test of the policies we’ll pursue won’t be whether they’re Democratic or Republican ideas, but whether they create jobs, grow our economy, and put the American Dream within reach of the American people.

I saw a statistic the other day which said that each dollar of taxes cut produces three dollars of increased economic activity, while each dollar of increased spending produced only forty cents. So, I ask one simple question; why are we talking about massive increases in government spending when we know it's not the most efficient way to accomplish the stated goals?