Too Moderately Moderate

Monday, January 24, 2011

Today, all the attention among the political elites has turned to President Barack Obama’s widely anticipated State of the Union (SOTU) address.  The general prediction is that the president will press a “centrist agenda” that seeks to balance the twin imperatives of deficit reduction and new job creation.  It would, however, be a serious mistake to assume that any changes in labeling will produce a parallel change in policy.  The main flaw that has dogged Obama’s progressive thinking from the outset is that on domestic issues, he believes that the appropriate path toward prosperity is a combination of new regulation with larger government spending.  Slimming down government through deregulation is a distant third on his agenda.

Illustration by Barbara Kelley

To see the point, think of SOTU as a continuation of the strategy that Obama followed in his well-publicized Wall Street Journal column of January 18, 2011, with its broad centrist appeal.  Well aware of the new political realities, the president’s opening sentence offered an elegant tribute to the “vibrant entrepreneurialism” that has been “the greatest force for prosperity the world has ever known.”

Taken in isolation, these words read like an endorsement of laissez-faire economics.  But in this instance, the appropriate response is caveat emptor—let the buyer beware.  Given that opening theme, we should have expected, therefore, further presidential praise of a system of private property and freedom of contract, protected by a limited government whose chief functions are to control aggression, promote cooperation, and develop infrastructure through a government funded by broad—preferably flat—and low taxes.

But it was not to be. In the next paragraph, President Obama’s emphasis switches to the familiar centrist notion of a “proper balance” that allows the government to deal with issues of “health and safety” and “abuse.”  In principle, no one opposes these objectives. Indeed, just these words were used to limit the scope of government during the constitutional heyday of classical liberalism between, say, 1870 and 1933—before the rise of the New Deal.

Yet the general rhetoric of the president’s op-ed only receives its content from the specific examples included and excluded.  So cautioned, it is instructive to take a tour of the government programs that make a quick entrance and quicker exit from Obama’s column.  Once parsed, the best reading is that Obama remains a devoted friend of big government, committed at most to cosmetic reform, which nothing said in his SOTU address will change.  I will begin with words written by the president and then turn to the topics he consciously leaves unmentioned.

Obama troublesomely begins by featuring the odd trio of child labor laws, the Clean Air Act (“CAA”), and credit card reform.  Child labor laws are (misleadingly) portrayed as a triumph of an earlier era, and it is a fine rhetorical stroke to link their impeccable pedigree to the Clean Air Act, which is riddled with design flaws.  Suffice it to say, the juxtaposition counts as a quiet endorsement of the Environmental Protection Agency’s (“EPA”) current bone-headed effort to regulate carbon monoxide emissions under the current CAA, which places undue weight on pollution from “new” sources, both mobile and fixed, while ignoring more serious pollution from existing sources.  For its part, the Credit Card Accountability, Responsibility and Disclosure Act (“CARD”) represents one of those ill-fated interventions into financial markets that will increase costs and reduce access to credit cards. 

Matters get worse when the president links the term “abuse” with the financial meltdown of 2008 which, for Obama, resulted from a lack of “proper oversight and transparency” in financial markets.  But his argument contains two major flaws.

First, the president adopts a false and imbalanced narrative that ignores, among other things, the role the Federal Reserve’s cheap money policy played in creating the real estate bubble. He also ignores the reckless lending policies of Fannie Mae and Freddie Mac in making and guaranteeing bum loans.  And let’s not forget the banks: no one should give them a clean slate.  They surely did not, for example, understand the excessive levels of risk that were built into some of their financing models.

Second, by buying into this narrative, Obama implicitly endorses the Dodd-Frank legislation that will, if anything, exacerbate the very systemic risk that the law is supposed to curtail.  Dodd-Frank puts inordinate power into the hands of a cabal of key government agency bigwigs, headed by the Secretary of the Treasury who has a virtual veto power over any move that will impose or remove shackles on a wide range of key financial institutions, including all banks with assets of over $50 billion.  Yet Obama countenances the ability of government officials to decide which financial institutions should live or die by circumventing the bankruptcy courts that actually know a little something about this problem. On Dodd-Frank, the president is the champion of the new precarious financial status quo. 

Before that realization can sink in, however, the president reclaims his mantle as the agent of change by announcing a comprehensive executive branch review of those excessive regulations that stifle innovation and job creation.  But the grand gesture that goes rule-by-rule always falls short.  All programs to thin out the regulatory weeds ultimately fail unless they excise entire programs, root and branch.  Incumbent bureaucrats know how to play rope-a-dope.  They just wait until the reformist impulses pass, and then return to their usual expansionist habits. 

The president can't simply thin out the regulatory weeds. He must excise entire programs entirely, root and branch.

If Obama is serious, he has to announce the elimination of the ethanol subsidy or the Consumer Product Safety Improvement Act that requires thrift shops to use the best available technology to remove minute quantities of lead from buttons.  On the first, he could embarrass the Republican farm-state senators.  On the second, he could resist the legislative hysteria that created a new and unnecessary program in response to a few inexcusable lead-contaminated Chinese imports that could have been dealt with in a dozen less intrusive ways.

But Obama turns timid.  The only specific regulation that was “wisely” removed was the EPA’s decision to treat saccharin as a dangerous chemical when the Food and Drug Administration (“FDA”) had licensed it for use.

The real scandal in this area was not mentioned at all.  What Obama should have said is that the Congress or the FDA should promptly lift the long-term ban on cyclamates, which offer a far safer and more effective sugar substitute than saccharin.  The original ban on cyclamates rested on some dicey studies that indicated that very high concentrations of cyclamates could induce cancer. Under the 1958 Delaney Amendment to the food and drug laws, cyclamates were dutifully banned in 1969.  And banned they remain today in the U.S.A., although they are in use in at least 55 countries.  Here is the kind of “dumb” health regulation overkill that could be easily repealed.  But on this matter, there is only presidential silence. 

Worse still, the president did not mention the serious bottlenecks that the FDA imposes on the development of new drugs.  But his thinking on this issue is made all too clear with the administration’s recent proposal to spend additional federal millions to fund a new federal research center to help develop new medicines.  The proposal is in response to the appalling slowdown in the development and approval of new medicines by the FDA, which dropped to a low of 20 drugs this year. One recent survey of 40 countries had the United States dead last when it came to the rate of change in innovation capacity over the past decade.

Private research funds have started to decline, because of the low rate of return.  Yet none of this is mentioned.  Left unanswered is how the government will either compete or cooperate with private firms. This is anyone’s guess, but we can expect the familiar pattern that systematically prefers government subsidy to deregulation. The one bright note here is that the president announced long overdue efforts to simplify the rules needed to bring medical devices to market. The FDA rules have added years of unnecessary cost and delay, for no additional safety benefit, compared to the processes used in the European Union.

Finally, the president supports the various groups that have sought to create “one aggressive new standard” to fuel economic regulation, without asking whether this elaborate system of regulation makes sense when prices and taxes are again available to control consumption and pollution. The sorry coalition of various stakeholders—auto-unions, states, and auto-makers—indicates that the old corporatist politics of the New Deal are alive and well. Yes, there is a pro-union agenda here, for by forcing American companies to make the small cars at which they do not excel, the fuel economy standards preserve union jobs that would melt away in a more competitive world.  There is no “victory” for American consumers who can purchase fuel-efficient vehicles in the absence of regulation.

Free trade? Tax reform? Obamacare? The so-called centrist president has remained ominously silent on these key points.

Then there are the topics Obama leaves unmentioned. Not a word on free trade;  not a word on sensible tax reforms; not a word of opposition to pro-union organizing laws like the now moribund Employee Free Choice Act; not a word on undoing the grotesque structures of his Patient Protection and Affordable Care Act, also known as Obamacare.  In perhaps his most telling sentence, the president affirms his long-standing administrative “goal” of finding the right balance between growth on the one hand, and safety, health and equity on the other. This homily is in unity with his grand strategy of striking a moderate pose while pushing his extreme agenda. 

In Obama’s column, a few peripheral concessions masquerade as a tribute to free enterprise.  That is at least until the lead story of the Wall Street Journal was published four days later which trumpeted: “Obama to Push New Spending” on “infrastructure, education and research” on proven losers such as the “renewable-energy sector . . . .” 

Accompanying that article is a picture of the president admiring a General Electric turbine while talking about green jobs with GE CEO Jeffrey Immelt, the new head of President Obama’s Council on Jobs and Competitiveness.  This is all brilliant, in a perverse sort of way.  But as a harbinger of SOTU, beware.  The likely result is for Obama to talk right, and to move left, an act that the president has by now mastered.