The new conventional wisdom is that investments in “green” technologies will somehow jumpstart the sputtering American economy.

President-elect Obama is promising to invest heavily in “green-collar” jobs. Minnesota Governor Tim Pawlenty has proposed an expansion of his Job-z enterprise zones program to include “green” projects. The assumption is that the recipe for success in today’s world is to add government subsidies to government regulations and the result will be jobs.

No doubt in some limited sense that will be true, in the sense that subsidies and regulations will steer investment from one area of the economy to another. But that’s no recipe for economic vitality; it’s a recipe for economic inefficiency.
Government clearly has a role in setting environmental policy. A cleaner environment is a public good, and the free market has imperfect mechanisms for preventing levels of pollution that are unacceptable to society. So clearly there is nothing inherently wrong with government regulation to ensure cleaner water, air and food.

But there is something profoundly dishonest about the current discussion regarding “green” jobs. Almost without exception environmental regulations add costs and reduce the number of jobs available. We accept these costs because the benefits of a cleaner world outweigh them, adding to our quality of life. At least that’s true when cost-benefit analyses are done to ensure that this is the case.

The new mantra of “green –collar” jobs turns this formula on its head. Environmentalists and some politicians are now arguing that government regulations and subsidies will somehow add to our economic efficiency and to the number of jobs available, and there is precious little evidence to suggest that it’s true.

Sure, investment in green technologies will create some jobs that everybody will be able to see. But the costs involved will reduce the number of jobs elsewhere in the economy. The coming regulation of greenhouse gases will undoubtedly cause massive ripple effects in the American economy as energy prices rise and corporate investment is diverted to comply with the new regulations. The costs of compliance will be enormous.

There may be many good reasons to go “green”—although not without rigorous cost-benefit calculations to ensure that the costs associated are worth the benefit. But stimulating economic growth is certainly not one of them. Government regulations and government subsidies will do far more harm to the economy than can be recouped by the creation of new jobs.

Other reads:

Kenneth Green explodes the myth of “green-collar” jobs.

David Strom is a Senior Policy Fellow at the Minnesota Free Market Institute

Minnesotans and the nation are facing one of the worst recessions in decades. And that means two things for government: falling revenues and higher spending.

Revenues go down for obvious reasons. Wages, corporate profits, and sales all go down, and with them the taxes the government collects on them.

And spending goes up because the government safety net, especially health care, expands to cover more and more people as their economic situation deteriorates. Add to the larger number of people needing assistance the high growth rate of health care expenditures and you have a recipe for much higher spending.

Taken together these forces are projected to increase the already projected $1 billion budget deficit for next year (the legislature’s budget for this year left that big a hole for the next) to a staggering $4.8 billion. Add to that the more than $400 million hole that has opened up for the current budget and the State Legislature will be faced with closing a $5.2 billion gap in the State’s finances when it returns in January.

By any measure, those numbers are scary. State spending for the next budget cycle (Minnesota budgets for 2 years at a time) is projected to be $36.7 billion, making the deficit equal to 14% of the budget.  The size of the shortfall is equivalent to over $2000 for every Minnesota taxpayer.

Minnesota faced deficits about that large in 2003, but with a major difference: after years of flush years in the late 90’s there was a lot of money in various State accounts to tap in order to close the budget gap.

This time the cupboards are bare. There simply is no more money to tap into, leaving lawmakers with only two places to go in order to solve the problem: cutting spending and raising taxes.

So what does that mean for the average Minnesotan?

Well, no matter who wins the upcoming budget battle next year, projected State spending will take a hit. Even Democrats admit that raising taxes won’t be able to plug the huge hole in the budget. For instance, raising the top tier of the income tax from 7.8% to 8.8% would only generate about $250 million.

Raising taxes on the “rich” just isn’t going to cut it with a deficit this large. Spending cuts—and pretty big ones at that—are going to have to make up the bulk of the budget solution.

Governor Pawlenty has ruled out tax increases as part of the solution, although he left some wiggle room for compromise by allowing that some “non-tax” revenues might be part of the solution. Expect to see an increase in the “health impact fee” on tobacco, for instance. Expect the Democrats to push some form of sales tax increase or expansion of the sales tax to other items.

So what programs might be facing the budget axe? With education taking up the lion’s share of the budget, it is hard to imagine a solution that doesn’t include some cuts there. K-12 alone makes up 40% of the budget, and if you add in higher ed spending fully 50% of State spending goes to education.

Health care takes up another 28% of the budget, and is by far the fastest-growing part of the budget. It was projected to grow by over 21% in the next 2 years, and will certainly take the brunt of the cuts. Health care spending has been going up by double digits for years, making it both the fastest growing part of the budget and the ripest area for spending cuts.

Conservative legislators, while seemingly marginalized by their small numbers this year, may just have a disproportionate impact on the eventual budget solution. State Senator Geoff Michel and State Rep. Laura Brod have proposed privatizing some State Government functions, such as running the airport and the lottery. Leasing the airport alone could raise billions of dollars (Chicago leased Midway airport for $2.5 billion and most airports in Europe are run by private operators).

Since 1960 in only three years has Minnesota’s State budget actually shrunk (1983, 1986 and 2004), while in 18 of those years the budget increased by double digits in a single year. With belts being tightened by families across the State it makes sense that next year’s budget should be the fourth in 40 years to actually decline.

Believe it or not, it has only been a few weeks since the Administration and Congress created the Office of Financial Stability to manage the Troubled Asset Relief Program, or what normal people just call the “bailout.”

In the intervening 6 or so weeks, Treasury Secretary Paulson and his crack staff have spent not one dime—not one—doing what Congress authorized: the purchase of “toxic assets” from financial institutions. Instead they have spent the staggering sum of $290 billion injecting capital into banks and other financial institutions, triggering a cascade of companies to transform themselves into banks to get their hands on the freely flowing federal dollars.

This turnabout—and economists are divided on its wisdom—is unfortunately just the first in what will prove to be a long series of redefinitions of what it means to bring “financial stability” to our sputtering economy. The current economic crisis which started in the financial industry is quickly metastasizing into a full-blown recession that will undoubtedly trigger a painful restructuring of the American economy.

Unfortunately, the impulse to fight that restructuring is going to impose huge costs on both the American taxpayer and in the long run the American worker. Whatever the merits of massive government intervention to prevent the breakdown in the financial structure that undergirds our capitalist system, what is happening now is nothing less than an attempt to usurp the enormous powers of the US government to pick winners and losers in the American economy.

The program to save the financial sector from implosion has quickly transformed into grand plans to restructure the American economy.

There is no pretense anymore that the government is desperately trying to save capitalism from a once in a century crisis; what is happening right before our eyes is an attempt to hijack the US government to save companies from their own bad judgments.

Already we see the car companies lining up for their share of the “Financial Stability” pie. American Express has turned itself into a bank to get into the action. States and local governments are lining up for their piece of the pie. And Lord knows what other businesses and industries will soon be lining up in Washington DC to get their cut of the bailout cash.

Few policymakers doubt that the government has an interest in helping avert the worst effects of a deep recession. The Federal Reserve has massive powers to inject liquidity into the financial system to juice up the economy when things slow down too much, and Congress has already spent billions of dollars this year on a “stimulus package” to jump-start the economy. There is lots of argument about the optimal monetary and fiscal policies, but most mainstream economists recognize that government plays a big role in shaping the economic landscape.

But bailouts are not just another policy tool in the economic toolkit. Rather than being a form of economic medicine, bailouts are more like life support for failing corporations.

By picking winners and losers, and not just shaping the playing field and the rules of the game, government officials distort economic outcomes in an especially damaging way.

Bailing out the car companies, for instance, will simply put off the day of reckoning when the Big 3 will have to restructure their business arrangements and labor contracts that are at the root of their current distress.

Government money will not make the Big 3 competitive with their nimbler competitors. What it will do is put the auto companies under the thumb of government regulations even more than they already are. And the same will be true for the growing list of industries that could soon be lining up in Washington DC for their piece of the bailout pie.

Recessions are never welcome and it’s inevitable that policymakers put a lot of effort into avoiding their worst effects—severe declines in GDP and upticks in unemployment—but bailouts take away the one truly positive effect that recessions do have: wringing out the inefficiencies and misallocations of capital that build up in the good times.

If the new majority in Washington goes down the path they seem determined to follow—using the power of the federal government to prop up companies that desperately need new management and restructuring—the only return we will get on our investment will be a longer recession and even more corporate welfare in our economic life. Europe went down this path in the 1970s and it almost broke their economies.

What we are witnessing today is the rapid development of a bailout culture. The Democratic Congress and its allies in the incoming Obama Administration appear to be living up to Ronald Reagan’s description of liberal economic policy: “If it moves, tax it; if it keeps moving, regulate it; if it stops moving, subsidize it.”

Unfortunately for Republicans, it was George W. Bush who starting moving the economy down this path.

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David Strom is a Senior Fellow at the Minnesota Free Market Institute

Does the Obama victory last Tuesday signal a sea change in American politics or simply a normal and expected shift in partisan control after eight years of Republican rule?

Obviously none of us knows yet, but there are ample clues to suggest that there is less than meets the eye in the Obama victory, and that liberal Democrats should tread lightly in pushing the more radical parts of their agenda.

Despite the fact that Democrats not only won the White House by a comfortable margin but also made significant (if not stunning) gains in both Houses of Congress, there is little evidence to suggest that the ideological or policy views of the electorate have changed much in the past few years.

Barack Obama won by a convincing margin—6% of the popular vote—but a quick look at past elections shows how unremarkable a margin that is. Franklin Roosevelt won his first election to the White House by nearly 18%, Lyndon Johnson won his by nearly 23%, and Ronald Reagan’s margin in 1980 was almost 10%. Obama’s victory margin is more in line with William McKinley’s in 1900 or Bill Clinton’s in 1992. These were hardly transformational elections.

A quick look at the exit polls—which by the way skew heavily toward Democrats—shows that voters have not suddenly signed onto the liberal political agenda. Despite significant gains for Democrats at the polls, only 22% of voters describe themselves as liberals, while 34% are self-described conservatives. The balance, 44%, consider themselves political moderates, which covers a pretty wide spectrum of political beliefs.

These numbers are essentially the same as in 2004, which was a pretty good year for Republicans. Which of course begs the question, what happened to change the electoral outcome so much in 2008?

The 2008 election wasn’t a referendum on basic political ideology as much as a repudiation of the failures of the outgoing Administration. The public perception of George W. Bush as a failed President determined the outcome of this election. The issue at the top of the public’s mind was competence, not ideology. If anything was remarkable about the outcome of this election it was the fact that McCain remained competitive despite widespread disapproval of the Republican record over the past eight years.

The outcome of the 2008 election was determined by relatively small shifts in the electorate. A few conservatives defected from the Republican ticket, and enough political moderates decided to give Democrats a chance to prove their competence. And unlike Reagan’s election in 1980, Obama ran a campaign that tended to blur rather than highlight his ideological differences with his opponent. Vague promises of “hope” and “change” were simply layered on top of a promise to improve upon Bush’s perceived record of failure.

Democrat success in the 2008 elections was based largely upon the damage done to the Republican brand, not some overwhelming shift in the sentiments of the electorate. This fact does not preclude the possibility that Democrats could build upon their successes to create a new and lasting ruling coalition, but there is scant evidence that they are anywhere close to doing so yet.
This is a time of danger and opportunity for both political parties. Democrats have been given a chance by dint of their (albeit slim) electoral victories to prove that their agenda can improve average Americans’ lives. If they manage to do so, which would require holding in check the forces pushing for a dramatic leftward swing in economic and foreign policies, they have the opportunity to win over skeptical Americans who voted more against Republicans than for Democrats. The biggest danger they face is in believing their own press and assuming Americans are hungering for a much more liberal government. Americans want better government not bigger government.

Republicans will be tempted to lie in wait and hope that the Democrats choose to follow a path of lurching leftward, creating an opening for effective opposition. While this could turn out to be a successful electoral strategy over the next four years it still fails to address the fundamental problem that conservatives and Republicans face the next few years: building a brand and an agenda that a substantial majority of Americans would embrace on their own merits.

Republicans need to do what they have manifestly failed to do over the past several years: translate the core principles that animate the Party into practical policies that a majority of Americans can recognize as addressing the problems they face day to day. Ronald Reagan won not just because he clearly articulated conservative principles that appealed to average Americans, but by translating those principles into policies that appealed to the wide swath of non-ideological voters who determine election outcomes.

Republicans lost this election because voters didn’t believe that they could understand or identify with their everyday concerns. Rebuilding an electoral majority will require more than smart opposition to failing or extreme Democrat policies; it will require putting forth a coherent conservative agenda that average Americans can easily understand and embrace.

I’ve never understood why people who have little faith in the workings of the market assume that government can magically do things better.

It’s bizarre when you think about it. It’s as if businessmen are irrationally driven by greed and the desire for power and prestige, but those in government are extremely wise and only concerned with the common good. Since when did we get such an exalted view of politicians?

First let’s get something straight: believing in the superiority of markets to government direction of the economy doesn’t mean that you have to have a blind faith that markets work perfectly or even well all of the time. Instead, those of us who place our faith in markets are guided by the belief that over the long haul a market-driven economy will perform much better than one where the heavy hand of government guides the outcomes.

Contrary to what many seem to believe, the current financial mess is a great example of why so much faith in the government is misplaced. That’s not to say that all the players in the market have covered themselves in glory, but only that so far the interventions by government have caused a great deal of damage during this time of turmoil.

Whatever the cause of the credit crunch—and I believe that any fair analysis would show that both government and irresponsible players in the marketplace share the blame for the troubles we are in—we can easily see that much of what government has done over the past few months has made things worse, not better.

Take the bailouts. We have heard much about how government intervention was critical to prevent a credit market meltdown—and we will never know what might have happened had things been left to their natural course—but what we haven’t seen yet is much in the way of positive results from the Trillion or so dollars that are getting pumped into the economy.

So what has all the government activity intervening in the markets done for us? So far the record has been appalling. Stocks have slumped farther and faster since government interventions began in earnest, credit market conditions worsened, and investor and consumer confidence dropped like a rock. You can pretty much date the time the credit crunch became a crisis to the week that Lehman Brothers was allowed to fail but AIG was bailed out: it became abundantly clear that government had no idea what it was doing or why.

So far the government interventions we have seen have been ill-thought-out, ill-timed, and have sent contradictory signals to the market. Far from smoothing things over and reassuring consumers and the market, Washingtonpolicymakers have created even more confusion and uncertainty than existed before they got involved. Markets responded as they always do when things are uncertain: private investors pulled back and consumers stopped spending, ensuring a serious recession. So while it’s possible that the right set of government interventions might have prevented or ameliorated this crisis, the wrong ones so far have done real damage.

The biggest mistake that people make when they assume that government can engineer better economic outcomes than markets can is to link the power of government—which is enormous—with the assumption that sufficient wisdom accompanies such power.

In reality power and wisdom are rarely tightly linked, and the greater the power the less likely it is that anybody or any institution could have the wisdom and the knowledge to use it properly. One of the great advantages of free markets is that power and knowledge are generally dispersed widely, usually limiting the damage that any individual or set of mistakes can make on the system as a whole. In fact, it’s when market players get too big and too powerful that things go seriously awry.

Ironically, the reason government officials felt obliged to intervene in the current market mess was the likely bankruptcy of financial institutions that were “too big to fail”—in other words, their failure imperiled the financial system as a whole. The same principle of course applies to government itself. Mistakes made by government ripple through the economy and can imperil the entire economic system (think of the mistakes that led to the Great Depression, which was worsened greatly by bad decisions in government).

In an ideal world the right policies at the right times might help stabilize markets when they are gripped by panics or manias. But government officials are as imperfect and as likely to make mistakes as any market actors, and as likely to have personal axes to grind—with the additional problem that their power is potentially absolute.

The problem with investing too much power in the hands of government can be boiled down to this: no person or institution is wise enough, or can be trusted with the kind of power available to government unleashed by constraints.

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^{This commentary was originally published at Townhall.com. Comments welcome there.}

By now everybody has heard of Joe the plumber. It was Joe that Barack Obama told that it was government’s job to “spread the wealth around”—Joe’s wealth—in order to build the economy from the bottom up.

Joe was worried because Obama’s plans to increase taxes on the “wealthy”—him—in order to give “tax breaks” (really just government checks) to people who make less than he does. Obama argues that doing this will somehow help create wealth from the “bottom up” instead of the “top down.”

The only problem is that economies don’t really work that way. Job creation and the real sources of wealth generation have never and will never come from government taking money from some people in order to give it to others.

Think about it: most people’s income in America comes from having a job. A few of us run businesses large or small and, and even fewer of us are the truly “wealthy” who don’t have to worry about money at all.

But for most of us, our daily bread comes from having a job. And Barack Obama’s tax plan is a direct assault on the job creation on which our well-being depends. Because, like it or not, no check from the government can possibly replace the paychecks on which we rely. And in general the healthier the business we work for is, the healthier our paycheck is likely to be.

Obama’s “Robin Hood Economics” is based entirely upon the idea that taking money from job creators and giving it away to preferred groups will somehow “spread the wealth around.” That’s simply bad economics. In reality, taking money away from the small- and medium-sized businesses that Obama counts among the “wealthy” will hobble the engine of job creation and ultimately hurt our own income.

It might be nice to get that government check in the mail, but the price we will pay is fewer jobs, slower economic growth, and less investment and innovation in the economy. That’s what you’ll get by raising taxes on the so-called “wealthy.”

Obama’s plan boils down to one thing: the path to a better economy is through wealth redistribution. But by focusing on propping up people’s income he is putting the cart before the horse. Before you can have income to redistribute you need to have wealth created in the first place. By attacking wealth creation Obama is just setting up the American worker for winding up worse off than before.

Obama hopes that we’ll notice the nice check we get in the mail, but fail to notice that over time job and wealth creation have slowed in our economy, making us all less well off.

Wealth redistribution schemes are a scam. By taking from the “rich” and giving to the “poor” the people in power get to appear to be the good guys, even as they hurt you. Handing out checks is a good way to get credit for making people better off. But it doesn’t take a genius to see that long-term prosperity can never be built on a foundation of wealth redistribution simply because it requires taking the money from wealth creation.

Less wealth creation means less wealth in the long run. You wind up with an economy with fewer jobs, fewer choices for workers, and even more dependence upon government for everybody.

Believe it or not, one of the most striking facts about theU.S.economy over the past 25 years has been the relative stability it has enjoyed—until all hell broke loose the last few months.

That may be difficult to believe today, given the severity of the strains on the financial system and the reigning panic in Washington and Wall Street. But until recently economists stood in wonder at the relative stability and prosperity of the American economy over the past couple of decades.  

Ever since Fed Chairman Paul Volker wrung inflation out of the economy in the late 70’s and early 80’s, the United States and much of the Western world has enjoyed what most economists consider a golden age. Fed Chairman Ben Bernanke and other economists dubbed this age “The Great Moderation.”

What made this period unique was the combination of robust economic growth, tame inflation, short and mild recessions, and low unemployment. Periods of economic growth and decline during these 25 years were smoother and less disruptive than at any time in history, and the crises the economy faced were easier to contain and did less serious damage than in the past.

During this time crisis after crisis hit the economy: the Savings and Loan Crisis, the “Asian Flu,” the Russian default on their debt, the bursting of the dot com bubble and even the September 11^th attacks. Each of these was damaging, but none of them tipped our economy into a 1982 or 1973 style recession, and certainly no threat of a crisis as severe as the Great Depression. In fact, the USeconomy pretty much hummed along despite these crises. At no period in history had an economy been able to sustain such serial shocks without serious consequences such as soaring unemployment and declines in GDP.

It was this stability in the economy that earned former Federal Reserve Chairman Alan Greenspan the title “Maestro”—reflecting the common belief that after nearly a century the Federal Reserve had finally mastered the art of managing the economy’s ups and downs.

These days there is little talk of the great moderation, except perhaps to wonder what happened to it. A sense of crisis, perhaps panic, rules the day. The stock market has recently experienced declines comparable to the recession of 1937, and each government attempt to stem the bleeding seems to inspire more panic. Economists seem to agree that a painful recession will hit America’s economy, and are arguing more about how long and severe it will be rather than whether it will come.

What can explain such a sudden reversal of both our fortunes and of economic opinion?

Perhaps one answer is the “great moderation” itself.

History has shown that the price of economic stability is usually economic stagnation. The price for economic growth is allowing for “creative destruction” which breeds a certain level of instability. Stability and predictability are the enemies of dynamism, and countries which seek them ultimately pay with slower economic growth. Until recently it seemed impossible to have both a dynamic economy with strong growth and a stable economy with relative predictability and security.

During the “great moderation” it seemed that we could have our cake and eat it too—dynamic economic growth and relative stability and predictability in the economy. It seemed that the Federal Reserve had found the magic formula for sustaining economic growth while avoiding serious dislocations in the economy. 

But now it seems that the very success of these policies imposed an unseen cost—the creation of a new kind of moral hazard. The very success of the Fed invited investors to assume that economy could bear almost any shock and keep right on humming, as it had during the financial crises that hit during this 25 year period. The apparent success of the Fed in moderating economic swings seemed to mean reduced risk for investors. The apparent reduction in risk in turn fed an appetite for what in earlier times seemed to be high-risk investments.

Risk, it appeared, had begun to disappear from the financial system. Everybody believed that the Fed knew how to keep the economy humming and ensure that crises could be turned into mere hiccups. Even a crisis as severe as the dot com bubble in which $5 Trillion of wealth evaporated only triggered only a mild recession.

Viewed in this light, the seemingly successful policies of the past few decades helped set us up for the severity of the crisis we face today. The excessive risk-taking of the past decade was spurred on by the success of the Fed in moderating the costs to the economy of prior crises. The Fed’s earlier successes have led us to the current morass.

Unsurprisingly there turns out to be no magic bullet for eliminating the business cycle. Even a period of successful Fed management of the economy has its own potential dangers, the fruits of which we are seeing today. We can only hope that the tools the Federal Reserve and Treasury have at their disposal are up to the task of keeping our economy afloat as it works through the effects of the excessive risk-taking of the past quarter century.

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 David Strom is President of the Minnesota Free Market Institute