Political speech ignores economic realities

Raymond Keating
Raymond Keating

Economics and politics obviously overlap. Specifically, they should converge when policy is made.

But economics and politics definitely are not the same. Economics is rooted in substance — trying to understand and explain how the economy works, including how policy affects the economy. Meanwhile, politics can be rooted in substance, but it just as easily can be rooted in pandering, preying on fears, clichés and emotion.

As an economist, it’s not easy to write about President Barack Obama’s recent speech at the Democratic convention. That speech was very short on substance regarding the economy and economic policy. This was a purely political speech, in the sense that substance was lacking.

But there were a few tidbits worth mentioning:

n First, the president took a shot at his Republican opponents regarding tax cuts. He said: “‘Have a surplus? Try a tax cut. Deficit too high? Try another. Feel a cold coming on? Take two tax cuts, roll back some regulations, and call us in the morning!”

That’s amusing, but it actually reveals a disturbing hostility to tax and regulatory relief. The president obviously fails to grasp the difference between the incentives at work in the private sector — such as entrepreneurship and investment geared to serve consumers and disciplined by prices, profits and losses — and the incentives at work in government. That is, to drain resources from the private sector and to spend and to regulate according to the biases of politics. Missing this fundamental difference leads to excessive taxation, regulation and government spending that damages the economy.

Second, the president declared: “After all that we’ve been through, I don’t believe that rolling back regulations on Wall Street will help the small businesswoman expand or the laid-off construction worker keep his home.”

Again, the president misses an Economics 101 connection. As we have seen over the past few years, costly, misguided regulation of the financial industry does, in fact, translate into reduced credit being available for small businesses, which destroys jobs or places jobs at risk, including those held by construction workers.

Third, President Obama said, “I’ve signed trade agreements that are helping our companies sell more goods to millions of new customers — goods that are stamped with three proud words: made in America.”

For the most part, the president has been absent on the international stage in terms of advancing free trade. The trade agreements he signed were actually negotiated under the previous presidential administration. It was only after being handed a hefty defeat in the November 2010 elections that Obama got around to signing those.

Fourth, Obama proclaimed: “After 30 years of inaction, we raised fuel standards so that by the middle of the next decade, cars and trucks will go twice as far on a gallon of gas.”

However, the president failed to mention that these regulations raise the price of cars, reduce vehicle choices for consumers, increase deaths on the road as manufacturers are forced to build lighter and smaller vehicles and wind up making no dent in gasoline consumption as people can and do drive farther.

Fifth, continuing on the energy front, Obama asserted: “We’ve opened millions of new acres for oil and gas exploration in the last three years, and we’ll open more. But unlike my opponent, I will not let oil companies write this country’s energy plan, or endanger our coastlines, or collect another $4 billion in corporate welfare from our taxpayers.”

Reality tells a different story. The president has excluded most offshore areas and most federal lands from oil and natural gas exploration and development, slowed offshore permitting, pushed a regulatory agenda hostile to all forms of carbon-based energy and called for jacking up taxes on domestic oil companies, which, of course, will only increase energy costs. Again, the disconnect from Economics 101 is disturbing.

Finally, it is worth noting the following declaration by the president: “We honor the strivers, the dreamers, the risk-takers who have always been the driving force behind our free enterprise system — the greatest engine of growth and prosperity the world has ever known.”

We can all agree on this. Indeed, the risk takers that drive innovation, growth and job creation should be honored. But this needs to go beyond mere political rhetoric and take the form of real, substantive policymaking rooted in sound economics. That, unfortunately, has not been the case in recent years.