Anyone who has been on Drudge Report the last few days will know of the Obama-Rush feud in which Obama asked congressional minority leaders to stop adhering to Rush’s advice and politics. Well Rush has responded to the President’s criticisms through National Review Online being that his show doesn’t operate on weekends. Without going into the specifics of the response, one particular phrase really stood out for me:
“Obama was angry that Merrill Lynch used $1.2 million of TARP money to remodel an executive suite. Excuse me, but didn’t Merrill have to hire a decorator and contractor? Didn’t they have to buy the new furnishings? What’s the difference in that and Merrill loaning that money to a decorator, contractor and goods supplier to remodel Warren Buffet’s office?”
Why didn’t I think of that? This perfectly demonstrated the utter inconsistency in how the left seems to approach economic matters. Subscribing to this crude Keynesian framework of all marginal deficit spending will entail a multiplier effect which will be the catalyst of “priming the pump” of aggregate demand.
I am not really qualified to comment on the validity of the multiplier effect and whether the inflationary pressures along with mounting debt are worth the tradeoff. In another post, it might be necessary to point out the additional public choice issues that arise such as bureaucratic inefficiencies in determining highest values at the lowest costs, rent-seeking problems, incentive problems, red tape, bloated oversight, and other governmental problems that, even if the Keynesian theory is entirely true, would limit its effectiveness.
What is so amazing about what Rush has pointed out is that Obama is entirely correct about being angry with Merrill Lynch and yet the President doesn’t seem to make the connection with his greater stimulus. Government does not possess the ability to effectively identify value. This is because value, with the exception of clearly defined public goods, can only be understood by its profitability. Lowering unemployment cannot be understood as a virtue in itself- it must be tied to productive growth. The tribes of thousands of years ago always had full employment- every single person worked, and yet it would be ridiculous to call those times prosperous relative to ours.
But to view every single marginal dollar spend as equal is complete economic ignorance. North Korea, for example, in an act of proving economic and social prowess, created plans to federally finance a massive epic building (I forget the name). They employed thousands of workers and tons of capital and resources. In the end because of no market price mechanism for conveying the best way to produce this building at the lowest price, it was never completely finished and is considered one of the ugliest sky scrapers ever constructed. But people had jobs!!! – all at the expense of foregone resources, squandered capital, and wasted tax dollars. By and large the American plan doesn’t include much public design of projects so it’s not entirely analogous (or maybe it does? I don’t know. If that is the case it will be even worse). But nonetheless, how is the government to know where to throw the money? If its goal is to get people working again, shouldn’t Obama praise Merrill Lynch for stimulating the decorating business so they can hire more people and those people can spend money in other industries and then they can hire more people and so on and so on as the multiplier theory tells us.
But Obama nailed it. Dollars can be wasted. A dollar spent doesn’t necessarily increase economic value and most of the time doesn’t. Hopefully he will display this same brilliance when it comes to his dear stimulus.
(I am in a huge hurry writing this and only have 15 minutes so I hope it sounds logical. If anyone doesn’t understand a certain point its probably not you but me and I will fix it later)