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It’s Not about Growth at All

Robert Russell of George Mason University writes of the Obama economic vision:

The short-term vision is that massive amounts of borrowed money can be spent effectively by the federal government to get us out of a recession. . .

The longer-term vision is that energy independence, restraining health care costs and improving education are keys to long term growth. This is a weird vision. Energy independence as a goal unto itself is bad for long term growth. Paying more for wind power in the name of energy independence is costly, not productive. And if I heard him correctly, he crowed about spending $15 billion on alternative energy innovation. That is not a lot of money for one of the three legs of the growth stool.

It’s nice to talk about restraining health care costs. America doesn’t get its money’s worth from its health care expenditure but that’s because it’s highly subsidized. To keep those subsidies in place and cut costs requires some serious rationing. The American people aren’t going to like that. But either way, it’s not a growth policy.

The third leg of the stool, education, is essential to long-run prosperity. Unfortunately, the federal government has shown little ability to improve it. Spending more money is unlikely to help. There is little evidence it has helped in the past. Introducing more competition via charter schools and vouchers is a good idea, but the teachers will fight such changes and the teachers are a powerful Democratic constituency.

The longer-term vision is not just “weird” — it is counter-factual. Countries with a larger share of the GDP devoted to government spending (and corresponding higher tax rates) have lower levels of growth and higher unemployment. There is lots of evidence for this. Honest.

That’s the bait-and-switch here. In the guise of somehow getting through the recession or making sure it doesn’t come back (or something), the Obama team is embarking on a set of policies that almost inevitably will lead to a worse economic outlook. We are now beyond the New Deal temporary stimulus argument because these are permanent (and sweeping) changes which the Obama team is proposing. You can, if you like the model of Western Europe, have a high-tax country with very large domestic spending. Or you can have a vibrant free market, with the benefits of higher personal wealth and low unemployment. But we haven’t seen many (any?) instances in which a country was able to manage both.

If government is going to claim more and more of our resources and restrict business activity through higher taxes and more regulation there will be less resources for the private sector and less wealth generation. So we should be honest. The “longer-term” vision isn’t about growth at all — it’s about the things Obama wants to trade for our opportunity to grow.