Obama, the Democrats, and the Economy–continued

(This is a continuation of my post on the election and the economy from several days ago. At that time, I focused on energy and trade; in this update, I also talk about small business, the demonization of entire industries, the micromanagement of innovation, the proposed elimination of the secret ballot in union elections, and corporate tax policy.)

I think that an Obama administration, combined with a Democratic-controlled Congress, would do grave and long-lasting damage to the American economy. Several specific points:

1)Energy. The Democrats, and the vast array of “activists” whom they enable, have demonstrated hostility to all practical forms of energy production and distribution. This is not just a matter of oil & gas drilling: as we have discussed many times on this blog, the U.S. electrical system faces a problematic future. There is every likelihood that, under a Democratic administration/Congress:

a)The building of new coal plants would go from “difficult” to “impossible”
b)The building of nuclear plants would continue to be virtually impossible
c)Even the building of new natural-gas-fired plants would be severely delayed by environmental lawsuits and regulatory maneuvering based on the CO2-is-a-pollutant theory.

Solar and wind, beloved of Democrats, have their uses, but they also have their limitations. I see no evidence that either Obama or the Dem Congressional leadership has any interest in understanding the technical and economic factors that govern the extent to which these technologies can be practically employed. The intermittent nature of wind and usable sun, the difficulty of storing electricity, the supply-chain constraints which govern the large-scale introduction of any new technology–there is much less interest in these things than in the glib repetition of catch-phrases. And even the use of environmentally-blessed technologies will be greatly inhibited by environmentalist protests against the transmission lines required to connect these systems to the cities that need their power. These activists would, of course, gain great impetus from a Democratic administration.

Obama talks a lot about the middle class. The existence of a large and affluent middle class is enabled by widely available and reasonably priced energy, especially electricity. If electric rates are driven up by a factor of 2X or 3X, as is entirely possible with Democratic policies, there will be not only a direct effect on consumers, but an effect on virtually all workers as U.S. businesses–especially manufacturing businesses but also things like data centers–become less competitive.

Lenin once remarked that “Communism is Soviet power plus electrification.” Our present “progressives” seem more interested in de-electrification. Where the New Deal (and the Soviets) wanted to build hydroelectric dams, today’s “progressives” are, for the most part, more interested in destroying them.

Remember, electrical infrastructure is a long-leadtime item, and if we dig outselves into a deep hole in this matter, it will take a long, long time to dig ourselves out.

No one should kid themselves that because gasoline prices are on a downtrend at the moment the gas-price problem is solved. Even if economic stagnation in the U.S. persists for a long time, a recovery in the Far East will drive demand–and, absent new supply, prices. Drilling in the U.S. is important not only for gasoline and diesel supplies but for supplies of natural gas–this commodity also comes from wells, and often from the very same wells that produce oil. This is something that Nancy Pelosi, with her apparent belief that natural gas is not a fossil fuel, does not appear to grasp.

2)International Trade. There has been, understandably, a lot of concern about jobs lost to the offshoring of business activities, especially in manufacturing. But it’s important to understand that international trade also creates jobs. If you work at Boeing or Caterpillar, for instance, exports are very important to your employment future–and countries are much more able to buy your products when their economies are thriving. The ability to sell products/services to the U.S. has, of course, been a major factor in the economic success of countries like China and India and their consequent ability to buy jetliners, tractors, and other things from the U.S.

Democrats seem to think that trade is something that Americans do for other countries, kind of like a global welfare system. They tend to underplay trade’s benefits to Americans–the attitude often being “we send our jobs to China and all we get back is cheap t-shirts at Wal-Mart.” The reality is that we get plenty other than cheap t-shirts. What would a PC or laptop cost if all manufacturing (including that of all components) had to be done in the U.S.? I haven’t reviewed any manufacturing bills of material for such products lately, but I’m fairly confident that prices of a domestic-only product would be much higher. The same is true of a wide array of consumer products–there are many things that are broadly affordable to Americans that would, absent imports, be available only to the relatively affluent.

One of the things Obama talks about is using tax policy to punish companies that move jobs offshore. How would this actually work in practice? Consider an example: GE makes CAT scanners and other high-end medical equipment in Milwaukee, as well as in other places. Many of the components that go into these products are sourced from other countries, including China and Mexico. Suppose GE had been effectively required to get all these components domestically, either by making the parts themselves or by acquiring them from domestic suppliers. The finished products would cost much more, and, in international markets, would likely be uncompetitive with similar products made by (for example) Siemens. This would not be good for employment in Milwaukee, or anywhere else in the United States.

Democrats like to talk about working cooperatively with other nations, but this does not seem to be their actual view in the case of trade, as evidenced in the high-handed attitude toward Columbia and in Obama’s comments about NAFTA, which caused considerable dismay in Canada.

I am not a free-trade absolutist–I’m not absolutely opposed to tariffs and other import restriction under all circumstances. I do believe that trade is on balance a net benefit to the U.S. and also to the billions of people throughout the world that it has helped to raise out of poverty. And I’m very concerned that the Democrats’ extreme politicization of trade–to the point of demagogy–threatens to undermine the competitiveness of American business, cost American jobs, raise prices for everyone, and possibly set off a global trade war.

Most economists agree that the Smoot-Hawley tariffs were a major factor in bringing about the Great Depression.

3)Democratic hostility to small business. To be more specific, Democrats are hostile to what I call the aspirational small business. If you want to run a small restaurant, or a plumbing service consisting of yourself and maybe one helper, then the Dems are mostly okay with that. It’s when you begin to dream about growing the business into something significantly larger that they begin to have real issues with you…as demonstrated by Barack Obama’s snideness about the idea of a plumber earning $250,000 per year. In the world of the “progressives,” workers are workers, and people who run things should be those who have ridden the educational conveyor belt all the way from kindergarten through graduate school. The degree to which American prosperity has been created by people who have started small–and built something large–is really something that they fail to grasp. The belief that the economy will consist of increasingly large enterprises which become more and more invulnerable to competition, with small business playing a minor role (pace J K Galbraith, among others) persists despite all evidence to the contrary.

With a Democratic administration and a Democratic Congress, you can expect regulatory and tax policy that make it increasingly difficult for small businesses to grow. And the small business that becomes a larger business has, historically, been an important source of social mobility for immigrants and others who were not in a position to attend “elite” colleges.

If you are a plumber who is content to be a one-man show, then–especially if you are a union member–the Democrats will say nice things about you, and may not do you too much directly targeted harm (although their policies on things like energy will harm you along with everybody else). If you are a plumber who wants to build something bigger, then these are not your friends.

4)Demonization of entire industries. Right now, the Democrats are demonizing the oil industry, but, inevitably, other industries will come into their sights over time.

Punitive tax policies against the oil industry would have one primary result: they would reduce the supply of oil. If tax rates increase, then the hurdle rate–the threshold that must be exceeded for a given new production project to makes sense–will increase, and fewer projects will get done. This is true for the refining sector as well as the production sector. The result: reduced supply and higher prices.

The same is true for other industries that would, over time, be found politically convenient as targets of demonization.

5)Micromanagement of innovation. According to Obama’s website: “Obama and Biden will create an Advanced Manufacturing Fund to identify and invest in the most compelling advanced manufacturing strategies.” What if the government had established an Advanced Computing Fund, circa 1976, to “identify and invest in the most compelling computing strategies?” What is the likelihood that unknown individuals like Mr Gates and Mr Jobs, without political connections, would have been chosen as recipients of investment? Isn’t it much more likely that the money would have gone to IBM, AT&T, and various Beltway companies skilled at extracting funds from the government? Wouldn’t the personal computing and networking industries have likely been strangled in the cradle, or at least greatly delayed?

An interesting example of micromanagement can be found in Obama’s proposal to “Create New Job Training Programs for Clean Technologies: The Obama-Biden plan will increase funding for federal workforce training programs and direct these programs to incorporate green technologies training, such as advanced manufacturing and weatherization training, into their efforts to help Americans find and retain stable, high-paying jobs.”

Do Obama & Biden really think that, for example, learning to be a welder on wind-turbine towers is really all that different from learning to be a welder working on oil refineries or on steam power plants? Do they think that the work of an electrical engineer tying a solar power facility to the grid is based on a whole different set of principle from that of an EE tying a steam or hydro plant into the grid? What we have here is, again, planning based on the politically-hot buzzwords of the moment rather than on serious analysis of resource needs. And this sort of thing is an inherent consequence of economic micromanagement.

I knew someone who, circa 1999, wanted to create a light-manufacturing business and looked at a local-government incentive program which provided cheap facilities to “high technology” businesses. Since his business involved machining rather than software or electronics, he was informed that he was not eligible. (This was a clean business; there were no environmental issues.) I’m pretty sure that most of the “high tech” companies that were subsidized by this local government are no longer in existence. Expect a lot of this sort of thing with government micromanagement.

6)Elimination of the secret ballot in union elections. The Democrats want to eliminate the secret ballot in union elections, substituting a “card check” procedure which would leave workers open to intimidation.

I’m not opposed to unions (in the private sector–public employee unions are a whole different matter), but the elimination of the secret ballot would shift the balance of power considerably. The most serious implication of this would be the growth of restrictive work rules, reducing productivity–and, therefore, real incomes–across the entire economy. As Shikha Dalmia says:

Companies’ biggest fear is that unions will foist rigid workplace rules upon them–just as they did on the former Big Three automakers–preventing them from quickly redeploying their workforce in response to shifting market conditions, crimping their productivity and global competitiveness.

(Economics aside, the civil-liberties implications of eliminating the secret ballot in this context are very serious.)

7)Corporate taxes. Democrats seem to think that corporations can be used as bottomless reservoirs of tax revenue without any negative impact on people…or, at least, people who are potential Democratic voters. In actuality, corporations are not the final payers of corporate taxes. The impact of good or bad things that happen to a corporation is always eventually passed through to individuals:

—customers
—shareholders
—employees (including executives as well as other workers)

For most corporations, the compensation paid to executives is actually a pretty small part of the overall financial pie. Most of the cost of increased corporate taxes would be reflected in higher prices, lower wages, and/or lower net income for shareholders…the latter effect, of course, being reflected in lower stock prices and mutual fund values.

But the real impact of increased corporate taxes would be felt in reduced competitiveness with foreign companies–many advanced countries aready have corporate tax rates that are significantly lower than those in the U.S.

For all their talk about “global perspectives,” the Democrats seem to have are hard time remembering that we are not, and cannot be, an economically-isolated country.

(more in the next day or two)