Thursday, August 21, 2008

Pragmatism as Obama's core economic theory

David Leonhardt has a fascinating piece in the NYT/Magazine on Obamanomics. It is also 8 web-pages long, so here are some interesting tidbits [italics are verbatim quotes]. However, I strongly encourage a reading of the original article.

Obama: “My core economic theory is pragmatism, figuring out what works.

Obama combines the Republican tax-cuts – but for middle class families, families making less than $250k/year – with higher taxes for the well-to-do and investments in infrastructure projects that create more jobs. Combine the higher taxes on the wealthy with a winding-down of the Iraq War, and that makes some headway to reducing the federal deficit (which is lower now at 2.5% of GDP compared to 4.7% in 1992). Still, Obama considers the deficit only one of many long-term problems (“[back in 1993] I probably wouldn’t have been as obsessed with deficit reduction”), with global warming, health care and the aftermath of the housing crisis more important issues. [Shades of “the deficit does not matter”?]
The investment in infrastructure also helps laid-off, ex-manufacturing blue-collar workers who may not be that interested in healthcare or other service jobs even with the option of re-training.

While Chicago School thinking affected him, he says his grandmother had the biggest impact, and the existence of competing theories in his formative years made him “ask questions of both sides and… synthesize approaches.
There is plenty of evidence that this synthesis isn’t merely a part of a candidate’s inevitable tack to the center for a general election. In Obama’s memoir, “Dreams From My Father,” he sympathetically recounts a conversation he had with a Kenyan farmer, in which the man complains both about rich people who won’t pay their fair share of taxes and about burdensome government regulations on coffee growing. In Obama’s second book, “The Audacity of Hope,” he goes further: “Reagan’s central insight — that the liberal welfare state had grown complacent and overly bureaucratic, with Democratic policy makers more obsessed with slicing the economic pie than with growing that pie — contained a good deal of truth.”

Obama campaign's interest in behavioral economics/market friendliness:
Companies have to set aside a portion of their employees' earnings in a 401(k), though the employee can choose to either save more or nothing at all. Make health insurance affordable through government intervention, but then let people (the market) buy it without a mandate. On climate change: auction emission permits, so that companies willing to pay more (Presumably, these would be the most efficient companies, the ones able to produce the most energy (and profits) for a given amount of greenhouse-gas pollution.) can buy them via the free market, rather than giving away permits - McCain's plan - that allows influence peddling. They [auctions] would raise billions of dollars for the government, money that could then be returned to taxpayers to offset the higher energy prices created by the emissions cap. [Compare McCain and Obama on cap-and-trade permits here.]

The Tax Policy Center, a research group run by the Brookings Institution and the Urban Institute, has done the most detailed analysis of the Obama and McCain tax plans, and it has published a series of fascinating tables. For the bottom 80 percent of the population — those households making $118,000 or less — McCain’s various tax cuts would mean a net savings of about $200 a year on average. Obama’s proposals would bring $900 a year in savings. So for most people, Obama is the tax cutter in this campaign. [This includes any changes in corporate tax rates that might affect stockholders.]

The second criticism is that Obama’s tax increases would send an already-weak economy into a tailspin.
See Clinton’s tax hike in 1993 and Bush’s tax-cuts, and their consequences.
At the very least, Clinton’s increases did no discernible economic damage. Rubin, citing academic work on tax rates, made the case to me that rates under an Obama administration would not be nearly high enough to stifle innovation.

Since the dawn of the Age of Reagan, the idea that government spending can be a good thing for the economy has been out of favor, even among Democrats. But it’s now making something of a comeback, particularly within Obama’s camp. His agenda calls for about $50 billion in new annual spending on various investments, including infrastructure, alternative energy and scientific research.
I came to think of this part of Obama’s agenda as the Virginia model, thanks to Tim Kaine, Virginia’s governor, who was one of the first Democrats to endorse Obama. Last year, Kaine began making the case to Goolsbee that the campaign should view Virginia as a model for the rest of the country. In just a few decades, the state has managed to transform itself in precisely the way that economists think the United States now must — to a higher-wage economy with a more-educated population, a place that has prospered even while losing many of its old-line manufacturing jobs. And it did so with a crucial shove from the government.
DOD/DARPA investments in the military complex and the Internet, which led to the tech industry. VA’s per capita income is 7% higher than the national average. [Veepstakes alert! Does this mean Tim Kaine is the VP? I think Obama did say he wanted someone furious about the state of the economy and who would help fix it...]

“Two things,” he said, as we were standing outside the first-class bathroom. “One, just because I think it really captures where I was going with the whole issue of balancing market sensibilities with moral sentiment. One of my favorite quotes is — you know that famous Robert F. Kennedy quote about the measure of our G.D.P.?”
I didn’t, I said.
“Well, I’ll send it to you, because it’s one of the most beautiful of his speeches,” Obama said.
In it, Kennedy argues that a country’s health can’t be measured simply by its economic output. That output, he said, “counts special locks for our doors and the jails for those who break them” but not “the health of our children, the quality of their education or the joy of their play.”
The second point Obama wanted to make was about sustainability. The current concerns about the state of the planet, he said, required something of a paradigm shift for economics. If we don’t make serious changes soon, probably in the next 10 or 15 years, we may find that it’s too late.

No comments: