From the beginning of his presidency, I’ve wanted President Obama to succeed. He was my professor in law school, and while I frequently disagreed with his take on things, I liked him very much.
On the eve of his inauguration, I wrote on TOTM that I hoped he would spend some time meditating on Hayek’s The Use of Knowledge in Society. That article explains that the information required to allocate resources to their highest and best ends, and thereby maximize social welfare, is never given to any one mind but is instead dispersed widely to a great many “men on the spot.” I worried that combining Mr. Obama’s native intelligence with the celebrity status he attained during the presidential campaign would create the sort of “unwise” leader described in Plato’s Apology:
I thought that he appeared wise to many people and especially to himself, but he was not. I then tried to show him that he thought himself wise, but that he was not. As a result, he came to dislike me, and so did many of the bystanders. So I withdrew and thought to myself: “I am wiser than this man; it is likely that neither of us knows anything worthwhile, but he thinks he knows something when he does not, whereas when I do not know, neither do I think I know; so I am likely to be wiser than he to this small extent, that I do not think I know what I do not know.”
I have now become convinced that President Obama’s biggest problem is that he believes — wrongly — that he (or his people) know better how to allocate resources than do the many millions of “men and women on the spot.” This is the thing that keeps our very smart President from being a wise President. It is killing economic expansion in this country, and it may well render him a one-term President. It is, quite literally, a fatal conceit.
Put aside for a minute the first stimulus, the central planning in the health care legislation and Dodd-Frank, and the many recent instances of industrial policy (e.g., Solyndra). Focus instead on just the latest proposal from our President. He is insisting that Congress pass legislation (“Pass this bill!”) that directs a half-trillion dollars to ends he deems most valuable (e.g., employment of public school teachers and first responders, municipal infrastructure projects). And he proposes to take those dollars from wealthier Americans by, among other things, limiting deductions for charitable giving, taxing interest on municipal bonds, and raising tax rates on investment income (via the “Buffet rule”).
Do you see what’s happening here? The President is proposing to penalize private investment (where the investors themselves decide which projects deserve their money) in order to fund government investment. He proposes to penalize charitable giving (where the givers themselves get to choose their beneficiaries) in order to fund government outlays to the needy. He calls for impairing municipalities’ funding advantage (which permits them to raise money cheaply to fund the projects they deem most worthy) in order to fund municipal projects that the federal government deems worthy of funding. (More on that here – and note that I agree with Golub that we should ditch the deduction for muni bond interest as part of a broader tax reform.)
In short, the President has wholly disregarded Hayek’s central point: He believes that he and his people know better than the men and women on the spot how to allocate productive resources. That conceit renders a very smart man very unwise. Solyndra, I fear, is just the beginning.