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Obama's Economic Mirage

By Robert J. Samuelson
Monday, April 13, 2009

President Obama has made no secret of his vision for America's 21st-century economy. We will lead the world in "green" technologies to stop global warming. Advancing medical breakthroughs will improve our well-being, control health spending and enable us to expand insurance coverage. These investments in energy and health care, as well as education, will revive the economy and create millions of well-paying new jobs for middle-class Americans.

It's a dazzling rhetorical vista that excites the young and fits the country's mood, which blames "capitalist greed" for the economic crisis. Obama promises communal goals and a more widely shared prosperity. The trouble is that it may not work as well in practice as it does in Obama's speeches. Still, congressional Democrats press ahead to curb global warming and achieve near-universal health insurance. We should not be stampeded into far-reaching changes that have little to do with today's crisis.

What Obama proposes is a "post-material economy." He would de-emphasize the production of ever-more private goods and services, harnessing the economy to achieve broad social goals. In the process, he sets aside the standard logic of economic progress.

Since the dawn of the Industrial Age, this has been simple: produce more with less. ("Productivity," in economic jargon.) Mass markets developed for clothes, cars, computers and much more because declining costs expanded production. Living standards rose. By contrast, the logic of the "post-material economy" is just the opposite: Spend more and get less.

Consider global warming. The centerpiece of Obama's agenda is a "cap-and-trade" program. This would be, in effect, a tax on fossil fuels (oil, coal, natural gas). The idea is to raise their prices so that households and businesses use less or switch to costlier "alternative" energy sources such as solar. In general, we would spend more on energy and get less of it.

The story for health care is similar, though the cause is different. We spend more and more for it (now 21 percent of personal consumption, says Brookings economist Gary Burtless) and get, it seems, less and less gain in improved health. This is largely the result of costly new technologies and the unintended consequence of open-ended insurance reimbursement that encourages unneeded tests, procedures and visits to doctors. Expanding health insurance might aggravate the problem. Many of today's uninsured get health care for free or don't need much because they're young (40 percent are between 18 and 34).

Together, health care and energy constitute about a quarter of the U.S. economy. If their costs increase, they will crowd out other spending. The president's policies might, as he says, create high-paying "green" or medical jobs. But if so, they will destroy old jobs elsewhere. Think about it. If you spend more for gasoline or electricity -- or for health insurance premiums -- then you spend less on other things, from meals out to home repair. Jobs in those sectors suffer.

The prospect is that energy and health costs may rise without creating much gain in material benefits. That's not economic "progress." Rebating households' higher energy costs (as some suggest) with tax cuts does not solve the problem of squeezed incomes. Given today's huge and unsustainable budget deficits, some other tax would have to be raised or some other program cut.

And collective benefits?

What defines the "post-material economy" is a growing willingness to sacrifice money income for psychic income -- "feeling good." Some people may gladly pay higher energy prices if they think they're "saving the planet" from global warming. Some may accept higher taxes if they think they're improving the health or education of the poor. Unfortunately, these psychic benefits may be based on fantasies. What if U.S. cuts in greenhouse gases are offset by Chinese increases? What if more health insurance produces only modest gains in people's health?

Obama and his allies have glossed over these questions. They've left the impression that somehow magical technological breakthroughs will produce clean energy that is also cheap. Perhaps that will happen; it hasn't yet. They've talked so often about the need to control wasteful health spending that they've implied they've actually found a way of doing so. Perhaps they will, but they haven't yet.

We cannot build a productive economy on the foundations of health care and "green" energy. These programs would create burdens for many, benefits for some. Indeed, their weaknesses may feed on each other, as higher health spending requires more taxes that are satisfied by stiffer terms for cap-and-trade. We clearly need changes in these areas: ways to check wasteful health spending and promote efficient energy use. I have long advocated a gasoline tax on national security grounds. But Obama's vision for economic renewal is mostly a self-serving mirage.

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