Monday, November 30, 2009

Obama isn't the only one who has lost his way

In an article in the Financial Times (, economist Jeffrey Sachs of Columbia University says that "Obama has lost his way on jobs". Sachs states that the Obama solution is a Keynesian approach which focuses on consumer spending. He notes that consumer and investment demands are too low for full employment. As he states, the administration has "gone about this with a combination of near-zero interest rates, massive Fed financing of mortgages and various consumption incentives, such as rebates for new home buyers and cash for clunkers." I presume he means federal financing of mortgages since the Fed hasn't stooped to that yet. Sachs must think that these are permanent states and he may be right since the administration's policies have been job and investment killers. He also finds the Republican solution of lower taxes to be lacking. The reason is interesting. It is that the amount of money that the federal government collects in taxes only covers the outlays on social security, medicare, medicaid, veterans benefits, defense and interest on the debt. All the other expenditures are financed on borrowed money. He contends that this results in critical areas (all the rest of the budget) being critically underfunded. Therefore a tax cut is impractical. Note that it is reasonable to assume that an increase in taxes would mean that his critical areas would be better funded but the increase in taxation would discourage investment rather than encourage it as he contends. His solution calls for three parts. First, promote greater exports through dollar depreciation. This is astounding since it is precisely what the Bush administration and the Obama administration have been doing. This has led to capital flight from the United States and slowed business investment domestically. Sachs should know this but apparently doesn't. Second, is a "massive expansion of education spending and job training." Well this country has done exactly that over the past three decades. What Sachs wants is even more spending. Instead he should insist that what is spent is spent to achieve the objectives of increasing education and increasing skill levels. We spend enough now. We don't spend it wisely. If the money were spend on schools that work like charter schools or Catholic schools rather than public schools, then we could achieve better results. Third, he favors a spurring of investment in "areas of high social return that are currently blocked by the lack of clear policies. The conversion to a low-carbon economy would create jobs in the short run, a more productive economy in the medium run and US technological leadership in the longer run." Where to begin? One, most studies have shown that "green" jobs are not sustainable and do not provide a long run boost in employment. Two, there is absolutely no evidence that conversion to low-carbon technology is more productive. Rather, most studies show just the opposite - that low carbon technology is higher cost and less productive. Three, US technological superiority stems from the US economic system being profit based rather than government subsidized. Sachs has obviously bought the global warming kool aid and his solutions follow from that. However, when viewed from my perspective, Obama is not the only one who has lost his way.

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