SOTU–A Preempitve Response
by Noah Glyn | Rutgers University
What He’ll Say:
In the State of the Union address, President Obama will surely remark on the improved economic conditions. After all, unemployment is down, GDP or national income is up, and interests rates and inflation are relatively low. He will remind us–as he always does–of the mess he inherited. He will argue that we need to raise taxes on the wealthy, and he will introduce some short-term economic stimulus that, if enacted, would have a minimal effect on the economy and job creation. As National Review columnist James Lileks sarcastically wrote, “Ask any employer, and you’ll hear the same lament: We’d love to hire people, but we need an inexplicable modification of the tax code exquisitely calibrated to provide a tiny incentive.” There’s nothing new under the sun, Ecclesiastes lamented, and nothing’s new in Obama’s rhetoric–lots of blame, lots of class warfare, and no solutions.
Obama supporters will argue that the economy has turned around under his watch. Certainly, they’ll say, you must give credit where credit’s due.
Well, no. The U.S. economy has slowly recovered, because consumption has risen. Consumption’s up at the expense of savings. Not only have public savings shrunk under the Obama administration, but the Federal Reserve has expanded monetary policy so there are negative real interest rates. In other words, interest rates are so low (yields on 10 year Treasury bonds are at 1.86 percent) that inflation will likely eat away whatever interest is earned from savings. When people expect inflation to occur, they save less and spend more. When people spend more, aggregate demand increases, and economic activity occurs. This graph shows how the U.S. savings rate has decreased:
Since people expect inflation to lower the true value their savings, they save less and spend more. So yes, Obama is correct–our economy is showing signs of growth, but he had very little to do with it.
What it all means:
Does anyone really think that it’s a good thing that Americans are saving less? Actually, yes. The President of the Federal Reserve Bank of New York, William Dudley, argued that the U.S. should continue to boost consumption, even if it’s at the expense of savings.
Savings, though, are needed for investments, and investments are needed for long-term growth. According to economic theory, savings is one of the most important contributors to economic growth, and that proposition has been thoroughly tested and proven true.
The U.S. isn’t simply trading savings for consumption. We’re trading our long run economic prospects to achieve short-term growth.
Why I’m Depressed:
It’s hard to go anywhere without hearing about greed. Occupy Wall Street protested greed in the financial system. Liberals lecture about greedy Republicans who protect greedy millionaires and billionaires. What’s happening in D.C., though, is even worse. The United States government is actively seeking to lower the amount we save, because doing so will help the economy right now. Greed is when someone looks after their own interests at the expense of somebody else. How else can you describe what the government is doing? It isn’t just leaving bundles of debt for people my age to pay off; it’s forcing people to save less, and to, therefore, invest less. Less investment means less innovation, and less innovation means a declining standard of living.
This goes beyond any Federal Reserve policy. Behind all the policies is a philosophy that says spending will always create growth, and we don’t need to concern ourselves with the future, because, as John Maynard Keynes put it so well, in the long run we’re all dead. It then promises to take care of us, from the cradle to grave, so that we don’t have to bear responsibility for our own actions. It’s a philosophy that infantilizes a population–who needs to save money when the government will pay for your college loans, provide health insurance, and subsidize your housing and food?
Barack Obama is the older guy who grabs countless college students by the elbow and advises, “Enjoy college while you can!” He winks and continues, “Once you get out, you’ll have real responsibilities.” Except it goes beyond college. Can’t find a job? No problem–keep your parents’ health insurance until you’re 26. Can’t pay off your student loans? Don’t worry, I’ll take care of it. This philosophy pushes off real responsibilities indefinitely. You know, the boring ones like paying your bills.
You’ll often hear people remark that government spending is unsustainable. It is, but more importantly, it’s unhealthy for society to trust the self-anointed and so-called experts to meddle in our lives.
Which brings me back to President Obama. It doesn’t matter which words he chooses for his speech. We have already heard the same speech time and again. Yet people will hear the President’s message, rise up and applaud…again.
Enough.Noah Glyn is an Agostinelli Fellow at the National Review, and a candidate for a master's degree in public policy from Rutgers University. He writes from a conservative perspective on economic, cultural, political, educational and foreign policy issues.