Posted by: bmeverett | August 15, 2008

Obama’s Energy Plan

On August 4, Barack Obama outlined his energy plan in Lansing, Michigan. Senator Obama is a great orator, particularly in front of adoring crowds, but this critical speech by The Man Who Would be King tells us a lot about him and his world view. The very first conclusion we can draw about Obama is that he never studied economics. His speech is a nice compendium of most of the economic myths and fallacies that dominate our public discourse. Over the next week or two, I’ll address these myths one at a time.

(In case you think I’m being too partisan here, John McCain’s energy plan isn’t very much better. We’ll get to him later.)

Here goes.

Myth #1: Our economic situation is DESPERATE!

Senator Obama tells us:

Our economy is in turmoil and our families are struggling with rising costs and falling incomes; with lost jobs and lost homes and lost faith in the American Dream.

Wow! Desperate times call for desperate measures, I guess. If you believe this assessment of our current situation, of course you’d be willing to cast aside the free market institutions that have ensured our freedom and prosperity for the last two centuries and throw a Hail Mary pass to Karl Marx. Couldn’t be worse than it is now, right? But are things as bad as Senator Obama claims?

Let’s take income. According to the National Bureau for Economic Research, the US has suffered 32 recessions in the last 150 or so years. Between 1854 and 1919, the average economic expansion lasted 27 months while the average recession lasted 22 months. In other words, the economy was in recession almost as often as not. The Great Depression of 1929-33 lasted 43 months, followed by another 13-month recession in 1937-38.

Since World War II, we’ve done much better. The average post-war expansion has been 57 months, while recessions have averaged only 10 months. Since July of 1990 (336 months ago), we’ve had exactly 16 months of recession. Over this period, the US economy has grown by 64%, adjusted for inflation. How bad is the current recession? Well, we’re not even in one yet. Barack Obama is telling us to expect one.

Is it true, as Senator Obama says, that incomes are falling? If we take the simplest measure of income – GDP per capita – then Senator Obama is simply wrong. Income per person has increased about 35% in inflation-adjusted terms since 1990. The common statement that incomes have fallen relies on two fallacies. The first is measurement of family or household, rather than individual income. Take the case of a family with husband and wife earning a total of $100,000 and a 22-year old son living at home and earning $30,000. Total household income is $130,000. Suppose that the son gets a better job paying $50,000 and moves out of his parents’ basement into his own apartment. We now have two families earning $150,000 – an average family income of $75,000. Do we really believe this family’s situation has deteriorated?

In 1940, the average family size in the US was 3.7. It’s now approaching 2.5. Demographics and divorce rates account for some of this change, but increasing wealth explains some as well. As we get richer, it’s easier for young people to live on their own, a trend parents like to encourage.

A second fallacy is measuring only wages without including benefits. Over the years, labor unions in particular have demanded that more of their members’ compensation be in the form of benefits and less in cash. It seems the height of chutzpah to then complain about stagnant cash incomes. A related problem is part-time work. Some argue that part-time work is a hardship that limits income. Many people (including many parents, retirees and this writer) in fact choose part-time work.

It’s not clear what data Senator Obama is using when he makes these claims, but he ought to be clear what he means.

How about unemployment, currently at 5.7%? Does that mean widespread suffering and hardship? In the Great Depression, unemployment reached 25% and did not fall below 15% until World War II. The average since 1980 has been 6.1% with unemployment reaching a high of 9.7% during the 1982 recession. Most economists believe that there is a minimum unemployment rate consisting of people who are temporarily looking for work because they have been laid off or because they want to live somewhere else or just because they want something better to do. There are also some people with limited skills who find unemployment compensation an attractive alternative to working. In any case, 5.7% is better than the average over the last 30 years or so.

Senator Obama was, of course, making his speech in Michigan, home of the highest unemployment rate in the country at 8.5%. Michigan is also a high-cost, high-tax state with the most problematic major city in the US. Detroit is a mess, only in part because of the decline in the automobile industry. Poisonous race relations and incredible mismanagement have also been major contributors. Follow the current travails of Detroit’s mayor if you want some proof. I’m sure Michiganders would love to have the federal government give them some of other people’s money, as Senator Obama promises, but the rest of us should not regard that prospect with any joy.

Finally, how about foreclosures? On an individual scale, a foreclosure is a tragic event with a family, forcibly in some cases, losing their home. But how bad is the problem on a national scale? In the second quarter of 2008, approximately 1 homeowner out of every 171 was in mortgage default. That’s a lot of people – 740,000 to be exact – but 99.4% of all homeowners are not in default. Some homeowners were conned by unscrupulous lenders, but others simply borrowed more than they should have or provided inaccurate information to their banks. Banks have also been pressured by politicians to increase their lending in low-income minority neighborhoods. How many defaulters are in each category? We just don’t know. What’s the right level of foreclosures? Zero?

Overall, Senator Obama’s characterization of the US economy as the end of the American dream seems histrionic at best. The US economy is like a patient visiting the doctor with a cold. It’s unpleasant, but nowhere near life-threatening. We expect doctors to have both the knowledge and the integrity to tell us to drink fluids, get plenty of rest and wait till it’s over. Senator Obama is like a doctor telling his patients that they’re all going to die if they don’t undergo immediate major surgery. Too bad we don’t expect more of our public servants.


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