Wednesday, January 26, 2011

On the state of the union

I do not listen to political speech. I have more important things to do (like watch the Ohio State (Go Bucks!) - Purdue (my brother's school) basketball game. I can always read the text later and read the pundit's comments. Last night was the state of the union address and the President asked for more billions in government spending. Only he did not call it "spending". Instead he used the word "investments". Like "revenue" before it, "investments" means something completely different when uttered in the context of government. Consider the definition of "revenue". Investopedia defines revenue as "the amount of money brought into a company by its business activities". Consider then its definition of government revenue as principally money received from taxation - meaning of course that no business activity was required to earn "revenue" in the case of government. Thus revenue is the result of meeting consumer demand for business and the result of expropriation by the government. Similarly, "investment" means something completely different when it is utter by a politician. When "investment" applies to business it is "the act of utilizing money or capital in an enterprise with the anticipation of profit." However, when a politician says "investment" it means spending. The President's speech asked for more "investments" in education, infrastructure, scientific research and renewable energy. Did any of the pundits as what has happened to all the previous "investments" made by other administrations? For instance, how much has been "invested" in education? I dare say trillions and what has been the return on that "investment" - merely among the lowest achieving students in the developed world. "Investments" in renewable energy mean subsidies that have cost us billions and have resulted still in losses for private companies and governments (see Massachusetts). An ironic by-product of renewable energy subsidies has been a rise in world food prices and the world's poor made worse off as their food prices and energy costs go up. It has also ravished Dafur and helped finance the Rwandan genocide. We have "invested" at least one trillion dollars in infrastructure over the past three administrations. So what happened to the money? How was it used? How could we have a crumbling infrastructure having spent $1 trillion? If indeed our infrastructure is crumbling then someone needs to go to jail. The market could not sustain the losses from such "investments" and would have abandoned each long ago. Another ironic point is the President's advocacy of research in scientific research when he has abandoned the manned space program. More times than not, the government funds losers and is incapable of picking winners - only the market can do that. So "investments" in scientific research will be research in the areas favored by politicians and not those generated by the market. However, Obama simply does not get it - nor does any of his inner circle of advisors. Up to now, Americans invented and then went abroad to manufacture due to the hostile regulatory climate in this country toward manufacturing and the high cost of labor. History tells us that R&D tends to flow to the source of manufacture. It is true that the Asians do not seem particularly inventive but that does not mean that innovative Americans won't migrate to Asian in order to be more hands on with the final product. Instead of throwing money down the rat hole of high speed rails, the President could spur economic growth with minimal government spending by making the country business friendly. Eliminating the corporate income tax, reining in the EPA, eliminating the capital gains tax and a reduction in the regulatory burdens of business will do more to stimulate economic growth than all the additional billions in "investments".


michael said...

I get the Rwandan reference with the Dodd-Frank Wall Street Reform and Consumer Protection Act, but can you explain the relation to the Dafur conflicts?

Michael Colonnese 09'

Anonymous said...

Professor Black,
I stumbled upon your blog and have admiration and respect for your writing. I do have respectful disagreements with some of your writings and your views on President Obama's State of the Union address.
When President Bush and congress started talked about "investing" in 2004 the tobacco buyout (H.R. 4520)was the result. For ten years the federal govenment is paying $9.6 billion to growers not to grow tobacco. While many republicans would hail this as," the buyout did away with regulating how much could be grown". It in fact pays farmers not to grow a crop for 10 years. However, this was called investing by Senator Mitch McConnell (R-KY).
In your article you talk about only the market picking winners and losers. How soon we all forget that bailouts are not a thing of the last few years. In 1970, Penn Railroad asked President Nixon for assistance and although he granted it, the measure was defeated in Congress. Again under President Nixon Lockheed Martin applied for aid under the Emergency Loan Guarantee Act due to their failure meaning significant job loss and it was granted! Under President Ford Franklin National Bank was bailed out for $1.75 billion by the Federal Reserve. In 1984, under President Reagan (who many view as a conservative) the Continental Illinois Bank and Trust Company the Federal Reserve stepped in and replaced their top executives. Again, another republican administration that stepped into private business and told them how to operate. Then in 1989 under President Bush there was the savings and loan failures. There, reform was put BACK into place to provide regulation because of deregulation that had occured less than a decade earlier. The point with those examples bailouts began under republican administrations and the last round began under President Bush with Bear Stearns.
Big corporations fail because they were allowed to get too big. These corporations have one thing in mind and that is showing a profit so that they continue to attract investors. I firmly belive that you should be able to make as much money as you can, as long as you do it honestly and ethicly. However, history has shown that the less regulation a company has on them the more risks their willing to take.
The last part of your article I wish to comment on is "investing" in education. While other countries choose to only educate their best and brightst, we educate everybody, so we are not comparing apples to apples. We can only invest so much in our schools when as many as 25 students beg for the individual attention of one teacher. There needs to be some accountability at home.
Again, I enjoyed your work and look forward to reading more.

H.A. Black said...

Michael, The genocide in Dafur is said by many to be financed by the mining of minerals used in the electric car batteries. It is also said that the mining is ravishing the environment there and in Rwanda.

Dear Anonymous, You are absolutely correct. Both parties have been doing this for years and both should be condemned for doing so. I was once told by an old schoolmate who ended up in the Senate that I could be consistent because I was a professor. He could not be because he was a senator.