Prosperity, stability, security – these are things people generally desire. Obama did a great job alluding to these ends in his State of the Union speech a couple of days ago. Unfortunately, a disastrous problem arises when you choose the wrong means to achieve desired ends. The mistake of choosing the wrong means occurs when people have the wrong ideas about the cause and effect relationship between the means and ends. Obama’s economic agenda is a perfect example of this problem. His State of the Union address typifies this problem of using the wrong means to achieve the stated ends of prosperity and economic recovery. Most of what he talked about made apparent his ignorance of economic calculation. Obama is completely lost on the role of profits and losses in the economy.
On Economic Calculation:
Obama talked a lot about manufacturing jobs and high-tech jobs. He apparently wants to see more of these in the US. I question this goal of his. Who is Obama to decide that America is the best (most efficient) place to manufacture cars? Who is Obama to decide that America is the best place to assemble iPhones? What rational basis does this man have to decide that America should manufacture more goods within its borders instead of importing them?
The truth is that he has absolutely no rational basis for these assertions. Only entrepreneurs guided by profit and loss can make resource efficient decisions regarding the technicalities of production such as where a good should be produced. Entrepreneurs seeking the highest possible return on their investment guide resources into their most efficient uses. This is not to argue that cars or iPhones emphatically shouldn’t be produced in the US. What this means is that no one can know this information outside the profit and loss framework of the market economy.
Obama also stated that he wanted to get Detroit-made cars onto the streets of Seoul. But what about the car manufacturing jobs in Korea!!! If Obama thinks America should produce a bunch of cars, why not Korea too? The inability of Obama to rationally answer this question should illustrate the unreasoned nature of his entire proposal to get more manufacturing jobs into the US. His agenda is nothing more than an appeal to the unexamined, popular opinions of the masses.
Additionally, Obama referenced the large supply of natural gas in the US and stated that his “administration will take every possible action to safely develop this energy.” Really? His administration is going to lead the way in natural gas development? This was just after he got done talking up his support for the innovation created by entrepreneurs. Why not let entrepreneurs on the free market, the people with real incentives to produce in a way that satisfies consumers, develop natural gas technology?
He then praised the government-funded research that resulted in the technology to extract the natural gas. This praise of government-funded research is, however, entirely misplaced. The resources put to use in researching that technology could not have been efficiently allocated. We know this because economic calculation is not present outside the profit and loss framework of the free market. Once again, the only people who can efficiently allocate resources are entrepreneurs. This is because they use profit and loss as their guide. If a good is profitable to produce, this indicates that consumers value that use of the resources more so than alternative uses of the resources. In this way, entrepreneurs searching for profit improve the material well-being of humanity.
An entrepreneur considering whether or not to produce something must consider all the costs associated with that production process. These costs include research and development. If he doesn’t think he can make more money than he puts into research, he won’t do the research and society will be better for it. Societal wealth is squandered in government research labs because they aren’t geared toward satisfying the real, demonstrated preferences of consumers. As is the case with all things green, government funding for research is allocated based on political considerations rather than considerations of consumer satisfaction and the betterment of mankind. The private-public partnership Obama gives such high praise is a nightmare of waste and resource misallocation. This type of partnership between the state and private enterprise is more commonly known as fascism.
The building projects Obama wants to engage in suffer from the same problem of economic calculation. The government has no way of knowing whether or not their building projects add or subtract to societal wealth. The result is that they bid away scarce resources from entrepreneurs who actually satisfy the demonstrated preferences of consumers.
According to Obama, outsourcing jobs to foreign countries “weakens the economy.” This is a completely fallacious statement. What really weakens the economy is the regulations and taxes within the US that make foreign countries more profitable to operate a business in. Outsourcing is merely consequence of an overbearing, wealth-destroying government. Entrepreneurs only outsource because they are eager to earn the highest return on their investment and satisfy consumer preferences.
Modifying tax codes to make outsourcing less appealing to entrepreneurs will have one of two consequences. The first possibility is that Americans will have to pay more for products that could be more efficiently produced overseas. This is only a possibility if Americans can afford to pay the higher price. This brings us to option number two.
The second possibility is that the products simply won’t get produced. If consumers do not value a product more than the cost of the land, labor, and capital required to produce it, no entrepreneur will produce it. If the business can’t produce at price consumers are willing to pay, all the American jobs that were the initial goal of the tax reform would be lost or diverted into other, less wealth producing activities. As a result of the tax, society would lose out on the product, the foreign jobs, and the residual, managerial jobs left in America. This is yet another demonstration of how futile attempting to correct the ill effects of past interventions with new ones really is.
Both the increased price of the product and the total shut down of the company will result in a net loss of jobs, and more importantly wealth. Wealth creation is the real goal of the economy. Much of our socio-economic interactions with others exist because they make our lives easier and more enjoyable. If jobs were the goal, I could simply throw a brick through a window, bingo, job created. Now the victim of my hypothetical vandalism will employ a glazier to replace the window. Unfortunately, the full set of consequences arising from the destructive act mean that society will now only have a window instead of a window and whatever the victim would have bought with that same money.
The higher prices Americans will pay for non-outsourced goods mean that they will have less money to spend on other things. The result is a decrease in the overall amount of goods they can consume. This will also result in fewer overall jobs in the economy. If, due to restrictions on outsourcing, I have to spend $50 for a pair of American made jeans instead of $20 for the Chinese made jeans, I will no longer be able to spend $30 on other goods. Whoever would have produced that $30 worth of goods I would have bought is now out of a job.
Obama’s State of the Union address was a catastrophe of economic fallacies. Not only were his ends and means completely misaligned, he (predictably) demonstrated no knowledge of how resources are efficiently allocated in the economy (economic calculation, profit and loss). The result is a country straying further and further from free market principles. The effect of eschewing those good ideas (free market ones) will be a continued recession and stifled economic growth.