Chart of DJIA
Wednesday, February 2, 2011


Winning the Future-With the Failed Policies of the Past. That’s how the acronym at the top is decoded. The chart shows the decline in the DJIA from its 1929 peak to 1932. The graph over to the left shows the Dow for a longer term. As noted on the chart full recovery didn’t come until 1954. A quarter of a century after the crash, and after a world war and the Korean police action.

The policies that are in place today, deficit spending, and what for want of a better word we can call social engineering are the same programs that were in place at the start of the depression, and that prolonged that depression until the start of World War II.

President Obama’s State of the Union speech merely proposes more of the same.

He starts off with the standard blather, and then pays tribute to American innovation:

“None of us can predict with certainty what the next big industry will be or where the new jobs will come from. Thirty years ago, we couldn't know that something called the Internet would lead to an economic revolution. What we can do -- what America does better than anyone else -- is spark the creativity and imagination of our people. We're the nation that put cars in driveways and computers in offices; the nation of Edison and the Wright brothers; of Google and Facebook. In America, innovation doesn't just change our lives. It is how we make our living.”

Now do you notice anything interesting about his examples? Cars originated in Germany and elsewhere, but it was Henry Ford who got mass production going here. Computers started as a government program, but it was Steve Jobs, Steve Wozniak, and other people who helped move computers out of the office and into the home. Edison and the Wright Brothers were not primarily government contractors. Google is a private company. Facebook was created by a pimply Harvard brat. None of these innovations was created through a government agency.

He follows this up with:

“Our free enterprise system is what drives innovation. But because it's not always profitable for companies to invest in basic research, throughout our history, our government has provided cutting-edge scientists and inventors with the support that they need. That's what planted the seeds for the Internet. That's what helped make possible things like computer chips and GPS. Just think of all the good jobs -- from manufacturing to retail -- that have come from these breakthroughs.”

The transistor originated at AT&T. The Internet started as a DARPA project but its growth was driven by lust (primarily pornography), and by greed as marketers saw a way to reduce dependency on brick and mortar stores (Amazon vs Borders) or of escaping the tyranny of old media (blogs vs The NY Times or The Washington Post). Were GPS not commercialized and marketed to the masses, were it still a tool that belongs exclusively to the military, it would still be expensive.

Then come two paragraphs devoted to investment in technology.

“Half a century ago, when the Soviets beat us into space with the launch of a satellite called Sputnik, we had no idea how we would beat them to the moon. The science wasn't even there yet. NASA didn't exist. But after investing in better research and education, we didn't just surpass the Soviets; we unleashed a wave of innovation that created new industries and millions of new jobs.

“This is our generation's Sputnik moment. Two years ago, I said that we needed to reach a level of research and development we haven't seen since the height of the Space Race. And in a few weeks, I will be sending a budget to Congress that helps us meet that goal. We'll invest in biomedical research, information technology, and especially clean energy technology -‚Äì (applause) -- an investment that will strengthen our security, protect our planet, and create countless new jobs for our people.”

The response to Sputnik was to bewail our loss of scientific superiority vis a vis the Soviets, and to create the National Defense Education Act. This act was not in effect for more than a few years, but its successors, in combination with the draft, which gave deferments based in part on a student’s studies, had the effect of channeling students in directions chosen not by themselves but by the government. Now it is arguable that the various educational acts helped produce more scientists and more scholars, but they also pumped money into the education market, and helped push up the price of college tuition. Thus while they helped one generation of students they hurt succeeding generations. They also, by increasing the number of college graduates and college students, diluted the value of a college education so that now a BA is viewed by prospective employers as the equivalent of a high school diploma from forty or fifty years ago.

The Sputnik moment was when we started talking about the missile gap. When I was in grade school John Kennedy made his run for the presidency. I had moved into high school by the time of the election. I remember that I was concerned about the missile gap. What this talk of the missile gap led to was more spending. Ultimately, and here Sarah Palin was right, it was the increase in spending that led to the collapse of the Soviet Union, which was unable to supply both domestic and military needs.

What Obama is proposing is not investment, but spending.

It needs to be remembered that the government produces very little that is tangible. The main products of the government are:

  1. Furniture. This is produced in the federal prison system, and is used in government offices. In addition to the furniture a number of other items, including bullet proof vests, are also produced through Unicor. (Google map image of Federal Pen at Atlanta, GA.) Printed products. Books, reports, studies, etc., all geared to showing the need for more government action so that bureaucrats can enjoy their perks.
  2. Nuclear bombs. These were produced at the Pantex plant in Amarillo, Texas under the auspices of the Department of Energy. Various parts are manufactured elsewhere. In all fairness it should be noted that the plant has not produced a nuke since the 1990s. For the most part, it has been disassembling our current inventory. (Google map image of Pantex plant in Amarillo.)
  3. The furniture is for the internal use of the government, and would not be bought by anyone for themselves to begin with. The printed products would serve better as lumber for houses than as paper for bureaucrats. As for the nukes, you and I will never use them, and they remain the playthings of governments.

    “With more research and incentives, we can break our dependence on oil with biofuels, and become the first country to have a million electric vehicles on the road by 2015.“

    There are several problems with this:

    Oil deposits exist in relative abundance, Biofuels have not been developed to such an extent that they can effectively supplement, much less replace, oil. When the government has directed spending towards ethanol or similar schemes the result has been a market distortion that hurts instead of helps. Corn for ethanol, for example, means less corn for animal feed, and less corn for human consumption. The result has been higher prices on beef, and less corn for export to other countries. Electric vehicles are expensive and inconvenient. If you want to commute from say Reston, VA to DC, a distance of about 25-30 miles, you have to charge your car every night. With a gas powered car, you gas it up while you’re out doing your grocery shopping. Increased reliance on electric cars means increased reliance on an electrical grid that may not be able to supply the needed power. As to expense, you can buy a gas powered car for as little as $8-10,000. A GM electric car starts at around $40k. Which would you rather buy?

    Public education in this country is largely a failure. Obama admits as much in his speech.

    “if we want innovation to produce jobs in America and not overseas -‚ then we also have to win the race to educate our kids.

    “Think about it. Over the next 10 years, nearly half of all new jobs will require education that goes beyond a high school education. And yet, as many as a quarter of our students aren't even finishing high school. The quality of our math and science education lags behind many other nations. America has fallen to ninth in the proportion of young people with a college degree. And so the question is whether all of us ‚ as citizens, and as parents ‚ are willing to do what's necessary to give every child a chance to succeed.”

    Actually the most important innovations in the late 20th century, the personal computer and its operating systems, were not the products of degreed individuals (Steve Jobs & Steve Wozniak, both dropouts. Bill Gates, a Harvard dropout.) Further, while HR departments may require degrees, that doesn’t mean that the job actually requires a degree. Frequently the degree is more a badge of suffering completed than it is of intellectual achievement.

    The schools that have produced good results are public charter schools, private, particularly parochial, schools, and home schools. The ones that have failed are the standard public schools. Now it would be good business to put your money on your strengths, charter schools, and private schools, Instead the administration cut off funding to DC’s voucher program, and it now proposes to throw money at the failing public schools. All this does is provide welfare to a bloated and entrenched bureaucracy.

    “America is the nation that built the transcontinental railroad, brought electricity to rural communities, constructed the Interstate Highway System. The jobs created by these projects didn't just come from laying down track or pavement. They came from businesses that opened near a town's new train station or the new off-ramp.”

    The transcontinental railroad created by the Pacific Railroad Act of 1862 was federally subsidized, but it was subsidized through payments to the railroads that promoted inefficiencies. Loans to the railroads were based on mileage and terrain: “$16,000 for each mile of flat prairie land, $32,000 per mile for hilly terrain, and $48,000 per mile in the mountains.”* Burton Folsom provides more details of the financial boondoggle that was the transcontinental railroad in Chapter 2 of his The Myth of the Robber Barons.

    Obama wants to subsidize high speed rail. Now there is not enough demand for regular rail to support Amtrak, which is the primary, if not the sole, supplier of long distance rail transportation services. So he wants to bring an unwanted product to areas where demand does not exist. There is a word for companies that try this approach: bankrupt.

    The only way that high speed rail, which would probably be more convenient than flight, and less scary to those who dread being off the ground, can succeed is if the existing rail infrastructure is completely destroyed, say in a conventional war. The odds of that happening are fantastically low.

    On the corporate tax front he says:

    “&hellipover the years, a parade of lobbyists has rigged the tax code to benefit particular companies and industries. Those with accountants or lawyers to work the system can end up paying no taxes at all. But all the rest are hit with one of the highest corporate tax rates in the world. It makes no sense, and it has to change.

    “So tonight, I'm asking Democrats and Republicans to simplify the system. Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years ‚Äì- without adding to our deficit. It can be done.”

    He’s speaking of the corporate tax rate here, but he might as well be talking about the individual tax system. The miserable tax code is a bipartisan effort, and it is not just the evil corporations that have brought this about. Everyone is guilty. People wanted a graduated tax to soak the rich, and benefit the little guy. That this is a pretty naked form of envy was irrelevant. Homeowners wanted relief from their mortgage payments, so a deduction for mortgage was included. Sick people, people with expensive, chronic diseases wanted relief, so there’s a deduction for medical expenses. The same with capital gains, children, credit card interest, and all of the myriad deductions and credits that have made up the tax code, and that still make it up.

    Note that he talks about reform of the corporate tax structure, not reform of the overall tax system. What is needed is not tinkering with the system, but a complete replacement. The corporate tax, fopr starters, is an illusion. When the taxes are paid, assuming that the corporation has not been able to find a way out of them, they are passed on to the consumer in the form of higher prices. So if you got rid of the corporate tax, and did not replace it with some other form of taxation, you would see an increases in both savings and expenditure. Business decision making would flow in more rational directions.

    Were the tax code to be reformed so that there was a flat tax, one in which there were no deductions, no credits, just a simple, non-graduated tax of x%, TurboTax would be simple enough that even a Treasury Secretary could use it. If he did well in fourth grade math, he wouldn’t even need TurboTax. The point of a flat tax, aside from putting accountants and lawyers out of business, is that it would allow intelligent decision planning on the micro level. Money would flow in directions decided by the individual, not some bureaucrat who is using out of date information.

    We also have a promise of a review of regulations. The problem is not just with the regulations, but that the regulatory agencies exist in the first place. Take the FCC. Please. Now I’m not sure that I understand all the issues involved in Net Neutrality, but what I do know is that when a government agency makes a proposal that the proposal, regardless of its effectiveness in other respects, is designed to redirect power away from individuals and towards bureaucrats. The FCC, which had no regulatory authority over the Internet, and was directed by Congress not to implement such policies, went ahead and issued orders to force Net Neutrality.

    Take the Department of Energy. That is somehow supposed to secure our energy independence. The only thing it actually does, however, is oversee the dismantling of nukes at Pantex. I could go on, but unfortunately after listing the first few in the alphabet soup of federal agencies I usually fall asleep at the keyboard..

    The regulatory agencies exist not to benefit the public, but to ensure jobs for bureaucrats. Failure is built in to every agency. Were agencies to succeed in their tasks, eliminating homelessness, reducing poverty, they would be in the same position as The March of Dimes after the Salk and Sabin vaccines were developed. They would have no purpose, and would have to go out of business.

    I say let them go out of business now.

    Obama said that to win the future we had to ensure that we weren’t buried under a mountain of debt. He then turned around and submitted a budget with no substantial cuts and an enormous deficit.

    Can anyone say hypocrite?

    Obama proposes a restructuring of the government:

    “In the coming months, my administration will develop a proposal to merge, consolidate, and reorganize the federal government in a way that best serves the goal of a more competitive America. I will submit that proposal to Congress for a vote, and we will push to get it passed.”

    Unless it is to be more than tinkering with a few parts of the government, every agency from Agriculture to Veteran Affairs needs to be asked to justify its existence. A nation that has ceased to be rural may well be able to do without a Department of Agriculture. It can certainly do without a Department of Education. TSA has an atrocious track record in terms of catching potential terrorists, while it has an excellent one when it comes to harassing grannies. The UN is a haven for terrorist apologists, their mistresses, and their call-girls. Withdraw, kick it out of New York, and sell the building for use as a homeless shelter or something productive. Fannie, Freddie, Sallie, and Ginnie, any group that sounds like a person, should be shutdown. Just go through it with a nice big pen. It won’t matter if you accidentally delete an extra agency or two or three, or more. They’re basically useless, and exist to inhibit productivity and innovation. Get rid of them.

    In the time since the State of the Union address was given events have been moving in a dramatic pace in the Middle East. I’m like most people and don’t really know what’s going on, or who is wearing the white turban or fez over there, but I do know that Team Obama has not been doing what it should. It has not been ensuring that our sole ally in the region, Israel, is secure, and it has not been working to ensure that if democracy comes to the region it is not “one man, one vote, one time.”

    Obama cannot win the future with the failed policies of liberalism, and it will not be won until an aggressive approach is taken towards the budget, and towards the active promotion of democracy and tolerance overseas.

    * Burton W. Folsom, Jr., The Myth of the Robber Barons, 18.