The President's address this week laid out our economic problems pretty clearly. Deficits, loss of global markets we used to own and endemic high unemployment. On top of that, he talked about health care as an economic issue rather than simply an entitlement.
Well after all, 2010 was disappointing in terms of slower than expected economic growth and continuing high unemployment. After the Presidents' party was routed in the November election, it was also for him certainly disappointing politically. A bit bruised, Obama sees the target pretty clearly now, he has to reverse America's economic slide. But can he hit the bulls eye using hand grenades?
His proposals came down to the following. Focused spending on infrastructure, green industry development and education with the idea of increasing employment now and in the future by making America more competitive in the technologies of the future. These grand ideas have been aired and funded already and so far mostly ineffective. Why? Mostly because we waste the money, because no politician expects an outcome for the taxes they spend and because our structural costs are much too high to make these grand proposals a reality.
The President, for instance, has seemingly a good idea in building high speed rail networks (HSR). However, has he or any other politician weighed the cost? California has approved the construction of America's first 400 miles of HSR and now the politicians, construction industry and the parasitical legal profession are busy arguing, suing each other and jockeying for contracts.
The stated cost for the main 400 mile section as sold to California voters was $45 billion but independent estimates are already at $60 billion or $150 million per mile. How can a rail network that costs $150 million per mile be a good idea? The Chinese certainly don't think so and I think they are one of the competitors the President is talking about.
China knows about HSR. They are the worlds' greatest HSR builder. They are well on their way to having built a 16,000 mile HSR network across their country that is due to be finished in 2020. The total cost of this epic venture is $300 billion an amount that will have been spent over about 20 years. Without going into all the benefits China has and will accrue from their investment, I will point out that China's High Speed Rail per mile cost is just under $19 million.
China's $19 million per mile HSR costs 1/8 as much to build as California's $150 million per mile HSR. On top of that, California's High Speed Rail system's technology, design and special equipment will be sourced from abroad. In fact China is now qualified to be a bidder for the project. No bother worrying about creating a US industry building HSR's or about value for money spent.
So here we see once again the waste of money America's political leadership is willing to commit us to. Unfortunately, such is the nature of a cornerstone of the President's proposal. Nice words with no credible execution are not ok or even possible anymore. We just don't have the money.
I think we should be in favor of proposals like High Speed Rail for the efficiencies and freedom from imported oil it promises, but not at these prices. The same issue applies to the Presidents education proposal. His view is that the US doesn't spend enough money on educating its people and if it does, we'll be more competitive. But recent statistics show the US spends 41% more dollars on K-12 eduction than the average developed country.
Since we already spend 41% more than our competitors to educate our kids, why is spending even more going to work? Well the answer isn't at hand because it is worse than that actually. The US ranks 19 out of 20 countries on achievement tests so spending 41% more has only kept us from coming in last. It isn't likely we are going to support spending more money on education with that track record.
Many Americans don't want the government to get bigger (Tea Party's raison d'etre), ie to blow our money and bankrupt us. People don't really believe government can get the job done and this is what President Obama and our whole decision making process have to acknowledge. Public spending has to yield results and if our political leadership won't take responsibility for this, we have to stymie them until the next election. In the meantime, we get broker and broker waiting.
Investment Conclusion: The President's proposals are half measures and avoid reality, adding to long term uncertainty for the economy. Caution warranted
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