May 2008

RealClearPolitics Cross Tabs Blog

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No wonder George McGovern Likes Obama

By Betsy Newmark

Obama offered up this proposal last night in Montana.

Americans need real relief, Obama said, saying he will pass a law to give each family $1,000 a year to help them pay for higher gas prices and other rising costs.

Shades of McGovern's 1972 proposal to give every family $1000 except that Obama has neglected to adjust for inflation.

Why not just cut taxes instead of granting out money to everyone?

McCain's idea of suspending the federal gas tax is equally futile. The prices we're facing today are a result of demand exceeding supply. Giving out money whether through a $1000 grant or through lower federal taxes will just increase demand and keep prices high.

What I don't get is the disconnect between the calls for Americans to use less energy and the efforts to lower gas prices. What could be better suited than high gas prices to get every American to limit his or her gas usage?

Could it be that it just isn't popular for a politician not to have a policy proposal to deal with gas prices when it's the issue that most people are ticked off about. There is nothing Obama or McCain can do about increased demand in India or China and they're not going to support increased drilling here in the United States. So they come up with these band aid proposals that maybe sound good on the campaign trail but would do little to reduce the price of gas or the demand for more gas. So Obama adds to his proposal by saying that the federal government will fund research into alternative forms of energy.

Obama pledged to spend $150 billion over 10 years on alternative energy such as wind, solar and biodiesel, a move to rid this country's dependence on foreign oil and one he said would put millions of Americans to work.

As James Pethokoukis recently pointed out in a comment targeted at Hillary Clinton's idea that fighting global warming would benefit the economy, this is a replay of Frederic Bastiat's "Broken Window Fallacy."
And with that, Clinton seemingly stumbled into the classic economic trap known as the Broken Window Fallacy. As described by the French economist Fredric Bastiat, the fallacy imagines some punk kid chucking a rock through a store window. A bad thing, right? Yet a contrarian onlooker offers that the troublemaker may have actually helped the economy because now the storeowner will have to hire a glazier, who will make money replacing the window. Then the glazier will use that money to buy bread from a baker, who then might buy shoes from a cobbler. And the "multiplier effect" goes on and on, creating a more prosperous economy.

But Bastiat points out that such reasoning ignores the hidden costs to the shopkeeper, who was forced to spend money on windows instead of something else that may have had higher value to him or society, like a new suit or investing in a start-up tech firm. As the great economics writer Henry Hazlitt once put it:
The glazier's gain of business, in short, is merely the tailor's loss of business. No new "employment" has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.

It is certainly unlikely that spending money on climate change will be the "win-win" free lunch Clinton describes, anymore than natural disasters or wars are economic free lunches, even though they seem to spur economic activity. (Indeed, dealing with climate change is often called the "moral equivalent of war.")

Last year, the British government released a review on the economics of climate change, authored by economist Nicholas Stern. It concluded that we should spend 1 percent of the global economy every year to avoid the worse effects of climate change. Now even if you take Stern's numbers as correct--and many think he overestimates the economic risks of doing nothing--he still advocates spending $700 billion a year on a supposed problem, dough that might have a better return on investment if spent elsewhere.

If climate change "creates" 10 million new jobs over the next decade, who is to say those jobs would not have been created anyway, in the nanotechnology industry or healthcare or business consulting or some industry we have yet to imagine? We may need to spend money to deal with global warming, but to think of it as an actual independent economic gain is a stretch.

Betsy blogs at Betsy's Page