Monday, March 02, 2009

Chairman Obama And His Great Leap Forward

Backyard steel smelters worked so well in China, why not do the equivalent here?

I am forever trying to remind people that it is not governments -- and certainly not the likes of Obama and Axelrod -- but entrepreneurs that drive growth and it is savings that fuel it. The link between the two is indissoluble, though largely overlooked. Now Obama intends to strangle both through the use of higher taxes, more regulations and vastly increased government spending. This means that those who do not pay federal taxes at the moment will nevertheless pay heavily for his feckless policy of spend, regulate, tax and borrow.

By doubling the tax on capital gains he will be confiscating billions of dollars that were destined for investment. Most people simply do not understand the role that capital gains play in fuelling investment, even though it is investment that increases real wages by raising the ratio of capital to labour which in turn intensifies the demand for labour. (Republicans need to get this fact across to the public). The lower the real demand for labour the lower will be real wages. But in Obama's leftwing universe this is called "fair", even though it does not include his rich pals*.

By attacking savings he reduces the opportunity for entrepreneurship. As venture capital shrinks -- thanks to capital gains taxes -- so will the number of profitable investments that can be undertaken, regardless of the number of willing entrepreneurs. (This is something that Reagan fully understood).

His cap and trade policy is not just an additional tax on production but a savage attack on capital accumulation. By diverting hundreds of billions of dollars into solar and wind power he will be dissipating capital while simultaneously destroying masses of fixed capital, particularly among energy intensive industries and coal-fuelled power stations. (I am assuming that he is serious about implementing this program).

His regulatory policy will price coal-fuelled power stations out of business. That's a mass of capital gone for a start. The so-called green alternatives that he intends to subsidise have insurmountable technical and economic inefficiencies that result in massive diseconomies of scale. What this means is that these wind and solar farms suffer from increasing average costs, meaning that the more you produce the greater the unit costs of production will be. The opposite holds for centralised power stations.

Even well informed critics of Obama's crushing energy policy have not grasped the severe damage it would do to the country's production structure. The idea that this could be overcome with subsidies is laughable. Imagine what would happen to aggregate demand once his politically imposed energy costs had devastated production. It would make for a good disaster movie.

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