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New Ideas from a New President, or More of the Same?

chile-flag.jpgThe Chileans are perplexed with us. On a recent visit to Santiago, Chile, I was talking with a colleague who said, “You were the ones that taught us about the free markets, and now here you are abandoning those principles and moving toward socialism.”

He has a point. I get the growing sense that we are witnessing the transition of our economy from a “market economy” to a “political economy.”

While I’ve been pleased with President Obama’s cabinet selections to date, his January 9 speech at George Mason University was unsettling. Obama suggested the private sector is incapable of righting the economy. His answer is unprecedented government intervention. “Only government can provide the short-term boost necessary to lift us from a recession this deep and severe. Only government can break the cycle that is crippling our economy.”

The action he sees government taking is to spend trillions of dollars. He says that without the most massive government spending plan in history, “a bad situation could become dramatically worse.”

Maybe he is right, but this all sounds similar to the failed policies of the Bush administration and previous Congress. In September 2008, Treasury Secretary Henry Paulson was telling us that without a $700 billion bailout plan to buy toxic paper the credit markets would seize up and the stock markets collapse.

Congress passed the bailout. What happened? The credit markets continued to seize up and the stock market collapsed.

Not a drop of that money hit the economy until November. On December 10, an oversight panel created by the bailout legislation reported that none of the initial $350 billion spent went to purchase toxic paper or to prevent further foreclosures. Further, the panel found that because the Treasury failed to create a system to track how the bailout funds were being used, they couldn’t determine if the money was actually used to increase lending and unfreeze credit markets.

It didn’t take long for the original bailout plan to become what most Americans feared: another well-intentionedobama-biden.jpg, expensive government boondoggle. What confidence can we have that the new administration’s solutions won’t be more of the same?

The problem, according to Obama, is lack of spending. “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.” He is right, at least in the short term. However, more spending is no long-term solution. It was over-borrowing and over-spending that got us into this mess in the first place.

The notion that only the government, by borrowing and spending trillions of dollars, can lead the way out of this recession is frightening. Where is the government going to get this money? Since government creates no wealth of its own, it has only two sources of money: printing more or taking more from its citizens through higher taxes.

Higher taxes mean less spending, which does nothing to solve the problem. Printing money results in inflation. I suspect we will see both in the future. Neither will be good for the economy in the long run. Instead, they may create a recession that could linger for years, which is exactly what Obama wants to avoid.

binoculars.jpgEncouragingly, Obama did say in his speech that individuals, by borrowing money they could not repay, shared some of the blame for the crisis. I think he is doing what he believes to be best for the country. I wish him well and hope he succeeds with the many challenges facing him, including the economy. History suggests, however, that his proposed government intervention is not the best long-term solution.

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One Response to New Ideas from a New President, or More of the Same?

  1. Kevin Condon January 22, 2009 at 9:55 am #

    Good analysis, Rick. Prudent fear, too. Personally, I like the guy, but he’s got a lot of looney friends and current congressional leadership is very left. I think all Presidents have to govern from the center right to get two terms, because that’s where the country is. If that is his plan, congressional leadership will be his biggest obstacle. If not, we’re screwed. Your friend in Santiago will be right. We’ll be wondering what in the world we have done.