In his State of the Union Address, President Barack Obama perfectly articulated his vision of economic policy: The government can, and should, subsidize and regulate the demand side of a given market. Health care, day care, college, you name it. It's always about giving real and potential consumers the means (through subsidies, tax breaks, and price controls) to get more of what they want.
At the same time, Obama talked boldly that "tonight, we turn the page," and leave behind the past 15 years of WTF and march boldly into the 21st century. Except that as he long as he's running the show, that's not going to happen. Not as long as he's in that 20th-century mind-set where the state can solve every problem by making goods and services cheaper or more expensive through government manipulation.
It's time, I write in a new Daily Beast column, for Obama—and many ostensibly pro-market types in both the Democratic and Republican parties—to recognize that the first, best way to spur innovation and create broad-based prosperity is by growing the supply side.
We didn't get to cheap hamburgers by subsidizing their purchase through targeted tax breaks to working Americans. Fast-food chains drove down prices and upped quality in their desperate attempts to grab and keep customers.
The same thing is true of all sorts of consumer products and services. When VCRs, home computers, and cell phones first hit the markets, only wealthy people could afford them. Prices tumbled because manufacturers increased the supply and variety, not because the government gave us money to go purchase them. As the economist Joseph Schumpeter wrote in 1942's Capitalism, Socialism, and Democracy, "The capitalist achievement does not typically consist in providing more silk stockings for queens [but] in bringing [silk stockings] within the reach of factory girls."…
The Obama administration is instead throwing up more obstacles to day care options by requiring providers in federal programs to have college degrees. That's even though there's no evidence that such a requirement has any effect on the quality of care. Similarly useless constraints on the possible supply of health care exist. "Certificate of need" laws, which essentially let existing health care providers veto new entrants into the marketplace, are just one example….
Supply doesn't always create its own demand, but we really have little idea as to what goods, services, and technologies are going to emerge and stick around (do you still have a VCR, or even a DVD player?). Which makes it hard as hell to plan to subsidize demand via government programs. It's far better to reduce barriers to innovation and entrepreneurship than to use slow-moving, lumbering subsidy programs to move into the 21st century.
