Friday, February 20, 2009

Why are we repeating an obvious mistake?

The best judge of how best to spend a person's money is that person himself, not the government.

Such an obvious truism. My inner libertarian instinctively nods in agreement. But many obvious statements prove to be not quite so true when closely examined. If there's ever been a clearer demonstration of the falsity of this statement than the last five years, I can't imagine what it would be.

Every economy is a mix of public and private goods. Even the most ardent communist economies have had some level of private markets at work, even if they were underground. And every government exists to provide some sort of common good for its citizens, even if it's only something as basic as national defense. The key to a prosperous economy is a matter of finding the right mix.

In recent years, the US has been governed with the philosophy that we need to move more goods into private hands. This philosophy saw its fullest expression in the latest round of tax cuts in 2003. Since 2003, the US has had its lowest levels of taxation since the beginning of the Great Depression. If the idea that the economy will always do best by moving more money under private control to spend as they see fit has merit, then we should be enjoying incredible prosperity at this point. And while we did experience a brief period of economic growth, it's clear this growth was experienced purely as a result of easy credit and people living beyond their means. The excess money released into the economy was used by investors to pour into financial derivatives that have mostly gone up in smoke. It was used by consumers to buy horribly overpriced assets that have now returned to more reasonable prices and erased that extra money from the economy.

By moving too many goods and too many choices about the production of goods into private hands, we have wound up with a terribly dysfunctional economy that is in worse shape than any American economy in decades by pretty much any measure. Yet, in attempting to fix the economy we're going to devote almost half the money in the stimulus package to MORE TAX CUTS! What are we thinking?! Did we not learn from anything from the last time around? It was only six years ago!

We need intelligent spending to fix the economy. More big-screen TVs, gas-guzzling SUVs, and over-priced homes are not going to fix the economy. Productive assets are what is needed. And over the last decade, private investors have proven just how irrational they can be in identifying productive assets. For the economy to recover, we need to invest in transportation, communication, and energy infrastructure. We need to invest in education to make workers more productive and innovative. We need to invest in a regulatory environment that rewards real increases in productivity, not simply inventive ways to cut corners and not get caught. Unfortunately, these types of things have gone underfunded for decade because they don't mesh well with private investment. The major innovations of recent decades...Internet, satellite technology, microchip technology...were the result of massive government investment in the early stages of development until these products reached commercial viability. But at this point there's not much in the pipe for the next round of real economic expansion. It could have been renewable energy, but funding for that was nearly eliminated for a couple of decades and so we remain years away from those technologies being marketable and "ready for prime time."

By devoting so much money to tax cuts instead of productive spending, we're simply repeating the same mistakes that got us to this position in the first place. I'm all for reaching across partisan lines, working together, and compromise, but there do come times when truly great leaders must recognize the sensible course of action and pursue it despite objections. I hope President Obama has not compromised too much when a resolute commitment to doing the right thing is what is really needed.


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