Obama's Views on Economics

This article by David Leonhardt describes Barack Obama's view of economic policy, and it is very similar to my own. Most of the time, it is best to leave markets alone, to let them work without intervention, and that should be our starting point. But markets fail, and part of the disagreement with those holding more conservative views is over how often markets fail, whether they can easily self-correct when there are problems, and how effective the government is at fixing problems when they exist.

On the last point, I am a proponent of market-based regulation when it is possible to use it. For example, if you want to regulate the profit of a public utility, one way  to do it is through rate of return regulation. Under this approach, prices are set so as to guarantee investors a particular "fair" rate of return. The problem with this is that there is no incentive for the firm to control its costs, the rate of return to investors will be the same whether it is efficient or inefficient. 

An alternative to this approach is to set a price cap and then tell the firm that it can keep some fraction of any profit over a certain amount, with the rest to be returned to its customers through rebates or lower prices. For example, regulators could set a base return of 5%, and anything over that amount is shared equally with taxpayers (you occasionally see these rebates on your phone bill). Thus, if the firm makes 8%, it would keep 6.5%, and 1.5% would be returned to customers. Under this form of regulation, there's an incentive to cut costs - every dollar saved is another dollar in profit - and there's also an incentive to innovate (unlike with rate of return regulation). The price cap, which can be adjusted to target the 5% base rate, prevents the firm from exploiting monopoly power through its pricing behavior. There are important considerations involving commitment by regulators (e.g. they won't change the split when gets gets larger), but the important thing here is that profit is regulated, yet market incentives are preserved.

I bring this up because as I read Obama's economic philosophy I find myself very much in agreement (with some caveats, see below), but the actual policies that are implemented do not always seem to be faithful to the grander vision he expresses in the article. The windfall profits tax is one example that comes to mind (though in other areas, e.g. health care reform, there is at least an attempt to follow market-based regulation principles, though I'd question whether the market failure in the provision of health care can be solved with this particular approach - not every market failure can be overcome through market-based regulation - and universal coverage may require mandates). I also think there has been too much emphasis on behavioral economics due to the presence of economic advisors invested in this approach when it is just one part Obama's belief in market-based regulatory principles rather than command and control.

One place I do disagree is with Obama's belief in the value of some aspects of Reaganomics. I think both Obama and the article give Reaganism too much credit. The article says that, under Reagan:

The government has deregulated industries, opened the economy more to market forces and, above all, cut income taxes. Much good has come of this — the end of 1970s stagflation, infrequent and relatively mild recessions, faster growth than that of the more regulated economies of Europe.

There were some areas in need of deregulation, but to attribute the fall in inflation, the enhanced stability of output, and faster growth to these factors is inconsistent with research pointing to things such as technology and monetary policy as key factors behind the lower inflation rates and enhanced stability we experienced.

Obama echoes this theme:

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.”

The article says:

he also says he believes that there are significant parts of Reaganism worth preserving. So his policies often involve setting up a government program to address a market failure but then trying to harness the power of the market within that program.

As I said above, if that's all he means, I have no problem with this idea, in fact my criticism is that he seems to depart from this when he actually implements policy (however, I do understand he needs to get elected, and that a stronger populist appeal may be needed). But he seems to go beyond this in his embrace of Reaganomics.

Finally, I should also say that I was impressed by what I heard from Obama in terms of his knowledge of economics. He has taken the time to learn about the topic and he has intelligent things to say about it. Better yet, I agree with most of what he says. The contrast to McCain, who doesn't seem the least bit interested in learning about economics and prefers instead to rely on the Phil Gramms in his party to tell him what his positions ought to be, was very clear. [Link to article]

Comments

[john v]

good article. Good comments, Dr. Thoma.

Very enjoyable. I like economics a lot better politics.

I generally agree with your take on Obama's philosophy and it is this take that makes me comfortable with the idea of him winning.

[hari]

Mark - Its funny I just finished reading the long article in the magazine edition. I was impressed with his crtical perspective on the way forward and potential pitfalls...how to balance the next policy paradigm after Regan-Clinton-Bush.

You're right, he does understand the Chicago School. However, he is seriously moving in the direction of European Democrats (may be Swedish style) to refocus American national economic priorities including infrastructure employment, energy, healthcare and education.

[john v]

and now Obama has the Left vote in his pocket, we would do well for himself lean more on this tone in the coming months and at the debates. It'll be good for him, good for national dialog and good Dems to hear who are more used to populist message.

[john v]

HE would do well...

[anne]

http://www.nytimes.com/2008/08/24/magazine/24Obamanomics-t.html?hp&pagewanted=print

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.”

[Wherever is the "good deal of truth," since I would think it would be reflected in general growth and relative middle class well-being beginning with Reagan?]

[anne]

http://krugman.blogs.nytimes.com/2008/07/29/look-whos-talking-2/

July 29, 2008

Look Who's Talking
By Paul Krugman

Annual rates of employment growth, by president:

Johnson 3.8% *
Carter 3.0
Kennedy 2.6
Clinton 2.3

Nixon 2.1%
Reagan 2.0
Ford 1.6
Eisenhower 0.8
Bush I 0.6
Bush II 0.4

There's something happening here.

* Approximations.

[Where is the good deal of Reagan truth?]

[anne]

http://www.cbpp.org/3-27-08tax2.htm

July 29, 2008

Average Income for 2008 Up $60,000 For Top 1 Percent of Households, Just $430 For Bottom 90 Percent: Income Concentration at Highest Level Since 1928, New Analysis Shows
By Chye-Ching Huang and Chad Stone

Average pre-tax incomes in 2006 jumped by about $60,000 (5.8 percent) for the top 1 percent of households, but just $430 (1.4 percent) for the bottom 90 percent, after adjusting for inflation, according to a new update in the groundbreaking series on income inequality by economists Thomas Piketty and Emmanuel Saez. Their analysis of newly released IRS data shows that in 2006, the shares of the nation's income flowing to the top 1 percent and top 0.1 percent of households were higher than in any year since 1928.

Piketty and Saez's data series on income inequality, based on IRS files, is uniquely valuable because it provides detailed information on income gains at the top of the income scale and extends back to 1913.[1]

The new data show:

* 2006 marked the fourth straight year in which income gains at the top outpaced those among the rest of the population. Since 2002, the average inflation-adjusted income of the top 1 percent of households has risen 42 percent, whereas the average inflation-adjusted income of the bottom 90 percent of households has risen about 4.7 percent.

* As a result, the share of the nation's income flowing to the top 1 percent has increased sharply, rising from 15.8 percent in 2002 to 20.0 percent in 2006. Not since 1928, just before the Great Depression, has the top 1 percent held such a large share of the nation's income. In 2000, at the peak of the 1990s boom, the top 1 percent received 19.3 percent of total income in the nation.[2]

* Income gains have been even more pronounced among those at the very top of the top 1 percent. The incomes of the top one-tenth of 1 percent (0.1 percent) of U.S. households have grown more rapidly than the incomes of the top 1 percent of households as a whole, rising by 58 percent, or $1.8 million per household, since 2002. The share of the nation's income flowing to the top one-tenth of 1 percent increased from 6.5 percent in 2002 to 9.1 percent in 2006. This is the highest level since 1928.

Average Income Gains, Adjusted for Inflation, 2002-2006

Dollar Increase
Percentage Increase

Bottom 90 percent

$1,446
4.6%

Next 9 percent

$14,496
10.0%

Top 1 percent

$321,132
41.8%

Top 0.1 percent

$1,809,824
57.6%

In 2006, the bottom 90 percent of households were those with incomes below about $104,400. The next 9 percent were those with incomes between $104,400 and about $376,000, and the top 1 percent were those with incomes above $376,000.

The uneven distribution of economic gains in recent years continues a longer-term trend that began in the late 1970s. In the three decades following World War II (1946-1976), robust economic gains were shared widely, with the incomes of the bottom 90 percent actually increasing more rapidly, on average, than the incomes of the top 1 percent. But in the three decades since 1976, the incomes of the bottom 90 percent of households have risen only slightly, on average, while the incomes of the top 1 percent have soared.[3] ...

[Where is the good deal of Reagan truth?]

[Gene O'Grady]

I kinda get the chills when I read Professor Thoma's stuff about rewarding regulated utilities for cutting costs (if that's a fair paraphrase). I've worked for and with these utilities in both power/water and telecommunications, and I know that cost cutting will begin with safety, systems redundancy, employee training, customer service, and accurate and honest billing, and stop well short of executive compensation.

[save_the_rustbelt]

Early in my career I worked a little with trucking companies and regulated trucking routes.

It was moronic, promoted inefficiency and higher costs, and it was a welfare program for a small cabal of specialized lawyers and bureaucrats.

More government is ok when it is GOOD government.

[bakho]

Obama still does not do a good job of selling his economic proposal.

Obama fails to answer the question, "How will this proposal work for me?"

Obama needs to convince voters that his proposals will create a lot of new jobs and contrast that with Bushonomics which has not created a lot of new jobs.

[2slugbaits]

I should also say that I was impressed by what I heard from Obama in terms of his knowledge of economics. He has taken the time to learn about the topic and he has intelligent things to say about it.

Uh-oh, that's the kiss of death. Having taken the time to actually learn economics means that it will be a lot harder for him to respond to questions with stupid bumper sticker slogans, which are the kinds bromides that the low information marginal voter wants to hear. And that's the big problem. The high information, attentive voters are already on board with Obama; but that only gets you 45%. To get you over the top you have to speak to the disengaged voters who don't read the newspapers, are poorly educated and are vulnerable to swiftboat type ads.

[Icarus]

Obama is coming across as a simple tax/spend liberal. It doesn't work, and shouldn't.

People making $250k already pay enough (too much) in taxes. We need to focus on reducing our taxes, reducing the federal budget, and reducing entitlements (including military welfare).

[Richard H. Serlin]

Mark,

You write, "This article by David Leonhardt describes Barack Obama's view of economic policy, and it is very similar to my own. Most of the time, it is best to leave markets alone to let them work without intervention". Based on my previous experience with your writings, I don't think you meant this literally. I think what you might have meant is, "Most of the time, it is best to leave markets basically alone with little government intervention, just things like basic anti-trust laws, truth in advertising laws, product safety laws, etc." I think it's important to be explicit here or else a lot of people can interpret this to mean that your against these crucial basic government roles for efficient markets most of the time.

[Monroe]

Obama is a lawyer by training and not an economist (like most pols). His public views are distilled through a coterie of advisors - none of which have blown me away so far (is it ever possible to be both wizened and cutting edge?). Don't expect depth until you're deep in it. Lobbyists / lawyers will game every ambiguity along the way...

[G Green]

Obama has got to do something about the elections. McCain's negativity is working. This country will face more of the same if it continues. Obama supporters, lets step up the campaign. Vote for OBama! Visit WHYOBAMA08.ORG!

[Winslow R.]

"Most Congressional bills envisioned giving away many of the permits to power companies. Economists, by and large, considered this giveaway to be the worst part of the plan. It would require Congress to decide how many free permits each company should get and would set off a frenzy of corporate lobbying.

The alternative was to auction off the permits — to let the market set their value. “If you don’t auction 100 percent of the permits,” Goolsbee told me, “this could be one of the biggest pieces of corporate welfare ever.”"

Next to the current housing mess. ..... Seriously, just because you auction doesn't mean its fair. Goldman Sachs, with their unlimited access to capital, could purchase 100 percent of the permits and have every carbon emitting company in America bowing before them on their knees. Or perhaps giiven the way current 'markets' work, unregulated hedge funds would allow short sellers to print an infinite amount of the credits, sell them, distribute profits and then fail.

Distribute access to money (the only unlimited market as it is not resource constrained) and most of the distributional problems will melt away.

[outsider]

outsider says...

Obama is soft, fuzzy and vague.

Iraq. "get out soon, if, deadline... maybe. but change."

Economy. "rich get too much. got to pay for Government spending, I'll cut your taxes, and change."

Abortion. "too much, women have rights, and change."

This is correct tactics. The campaign hasn't started yet. half the tickets aren't even there yet. Obama hasn't officially been even chosen.

Once this shakes out, his pros and his impeccable instincts will groom his image and positions depending on what happens along the way to November.

McCain is slightly behind and must take chances. Obama must glide until necessary.

All tactics. All polls. As meaningless as Bush's "Compassionate conservatism" or "whoever broke security in the Plame affair will be punished".

[Dickeylee]

Outsider, July-Obama up 9 points, August-McCain up 5 points. That's an extraordinary 14 point swing in 30 days! Zogby's no slouch, either. $20+ Mil in negative ads did the trick, plus an ill-timed "vacation" week in Hawaii, during the outbreak of hostilities, playing right into McCain's bailiwick. Not to mention "above my paygrade"...

[save_the_rustbelt]

U.S. will keep losing jobs until '09, U-M economists say

By JOHN GALLAGHER • FREE PRESS BUSINESS WRITER • August 20, 2008

The U.S. economy will continue to lose jobs for the rest of this year before seeing a turnaround next year, University of Michigan economists forecast today.
Advertisement

U-M’s annual summer outlook on the U.S. economy predicted job losses nationally of 700,000 this year followed by a gain of 900,000 jobs next year and 2.6 million new jobs in 2010.

[Dickeylee]

Please Rusty, 3.5 million new jobs in the next two years? Your better half sneaking you home some Oxy?

[donna]

If America is stupid enough to elect McCain, it will pay the price. And then 2012 will be the Democratic landslide that buries the Republicans forever.

They would be smart to let Obama win and take the fall for the coming crash...

Most ARM mortgages reset in 2010, remember.

[save_the_rustbelt]

Dickey:

I don't make the news, I just cut-and-paste it. I thought the 2010 number was too high but about 1M.

And my pharmacy ration comes in a bottle from Lynchburg, Tennessee.

[spencer]

Rusty, I just remind you it was the Democrats under Carter, not the Republicans that deregulated trucking.

[anne]

This Administration is properly considered definitively Reagan-like in economic policy, but looking to the beginning of the expansion in November 2001 to what can be taken as the end in December 2007, this is the only expansion we have experienced in which real household income will be found in a few days to have been lower at the close than at the beginning. *

http://www.epi.org/printer.cfm?id=3086&content_type=1&nice_name=webfeatures_econindicators_income20080821

[anne]

http://krugman.blogs.nytimes.com/2008/07/29/look-whos-talking-2/

July 29, 2008

Look Who's Talking
By Paul Krugman

Annual rates of employment growth, by president:

Carter 3.0 *
Clinton 2.3

Reagan 2.0
Ford 1.6
Bush I 0.6
Bush II 0.4

* Approximations.

[Credit for relative American economic dynamism, then, would seem to go to policies of a Bill Clinton rather than those of Ronald Reagan or George Bush carrying through Reagan-like policies.]

[anne]

Limiting the scope of "government" efficiently in terms of growth, would appear to be far more a take from Carter and Clinton than Reagan and George Bush. To the extent that Bush continued a Reagan-like philosophy, I would suggest our relative economic performance has shown the philosophy most problematic.

[anne]

We will have the census data complete for 2007 in coming days, and find just how exceptional the economic expansion from November 2001 has been. Since job creation has gone negative in every month since December 2007, we can take this as the close of the expansion even if there is no technical recession. Likely we will find an expansion, complete with repeatedly lowered taxes and low interests rates and important military spending increases, that has failed to increase real median income, which has never happened during an expansion, and left poverty as high or higher than when the expansion began. *

http://www.cbpp.org/8-21-08pov.htm

[save_the_rustbelt]

Spencer:

Yes, I knew that, and should have given credit where due. This is one case where deregulation seems to have worked.

I'm less certain, but didn't Carter start the deregulation of the airlines?

[anne]

"I'm less certain, but didn't Carter start the deregulation of the airlines?"

Yes.

[Mark Thoma]

Deregulation has populist roots. The argument was that regulations helped firms preserve monopoly power and raise prices. So deregulating was a way to make the industries competitive and lower prices for lower classes.

[SanFranciscoJim]

faster growth than that of the more regulated economies of Europe.

This is not really true, you know. The European economies have done as well as the US in media per capita income for quite a while. The US economy has grown faster, but that is mostly because of population growth. What growth we have seen has gone to the top decile, as noted before.

If you take out France, even overall per capita GDP has kept up with the US, with a much flatter income distribution.

[Real Person from the Real World]

I don't think this country can take more of Bush economics. While there are problems with Obama, we need to make changes. Maybe a small change here and there will make the next steps more obvious. Everyone wants Obama to spew out exactly what, where, when, how, and how much, and wants to dam him if he can't. How can he directly address these things on a virtual basis? Not easy for him, or anyone. Again, while there are things I don't like, ultimately, you have to trust in his humanity, and how he discusses things. He says what he has to, given the situation, but from what I have read about him, he is always willing to look at both sides, and his policies seem to be headed in the right direction. If he is a mistake, well, vote him out 4 years from now, and keep in mind, McCain may be the bigger mistake.

[Barry]

Tom, all caps doesn't make anybody think you're smarter.

[anne]

Through the Clinton years an average of 225,000 jobs a month were created, through 96 months. Job creation never slowed as unemployment declined to levels considered nearly impossible not too long before they were reached.

Where 225,000 jobs were created each month for 96 months through the Clinton years, 160,000 jobs a month were created during the finest 52 months of the Bush years. Unemployment was higher during these 52 Bush months than during the last 52 Clinton months, but job creation was far poorer.

[anne]

The Bush expansion is exceptional in that it is the weakest expansion since 1945, no matter low taxes and low interest levels and increasing government defense spending while social spending just about held. Beyond the poor Bush expansion in general, beyond the poor employment expansion, the effect on middle class workers is especially troublesome when benefits are looked to. Health care benefits being continually eroded through these Bush years.

[anne]

Interestingly enough, unemployment levels through the Bush expansion years have presented a problem in that labor force participation rates were relatively low compared to the Clinton years. There was plenty of room for job creation, and as studies have shown women really would have worked if the jobs were there, but Bush job creation was startlingly poor.

Tra la, tra la.

[anne]

http://www.cbpp.org/8-9-05bud.htm

April 22, 2008

How Robust is the Current Economic Expansion?
By Aviva Aron-Dine, Chad Stone, and Richard Kogan

The 2001-2007 Expansion

The Gross Domestic Product, consumption, net worth, non-residential investment, wages and salaries, and employment all grew less rapidly than during other comparable expansionary periods.

Labor market progress was especially weak, with employment and wage and salary growth far below average and, in fact, lower than in any previous post-World War II expansion. Employment grew at an average annual rate of only 0.9 percent since November 2001, as compared with an average of 2.5 percent for the comparable periods of other post-World War II expansions. In addition, real wages and salaries grew at a 1.9 percent average annual rate in the 2001-2007 expansion, as compared with a 3.8 percent average annual rate for the comparable periods of other post-World War II expansions.

Corporate profits fared exceptionally well.

The sole exception to the 2001-2007 period's lackluster performance was the growth of corporate profits. They experienced average annual growth of 10.3 percent, as compared with average growth of 7.4 percent for other comparable post-war periods.

Growth Rates Measured from Trough

GDP
Consumption
Non-Residential Fixed Investment
Net Worth
Wages and Salaries
Employment
Corporate Profits

Current Expansion

2.9%
3.0%
3.7%
3.5%
1.9%
0.9%
10.3%

Post-War Average

4.3%
4.0%
6.0%
4.1%
3.8%
2.5%
7.4%

1990s

3.3%
3.2%
7.6%
4.0%
2.7%
1.9%
8.0%

Growth Rates Measured from Peak

GDP
Consumption
Non-Residential Fixed Investment
Net Worth
Wages and Salaries
Employment
Corporate Profits

Current Expansion

2.6%
3.0%
1.8%
3.2%
1.3%
0.6%
9.0%

Post-War Average

3.4%
3.6%
3.7%
3.9%
2.9%
1.7%
3.8%

1990s

2.8%
2.8%
6.4%
4.3%
2.3%
1.5%
8.1%

[anne]

http://www.commonwealthfund.org/publications/publications_show.htm?doc_id=700868

August 20, 2008

Seeing Red: The Growing Burden of Medical Bills and Debt Faced by U.S. Families
By Michelle M. Doty, Sara R. Collins, Sheila D. Rustgi, and Jennifer L. Kriss

Overview

Analysis of the 2007 Commonwealth Fund Biennial Health Insurance Survey * finds the proportion of working-age Americans who struggled to pay medical bills and accumulated medical debt climbed from 34 percent to 41 percent, or 72 million people, between 2005 and 2007. In addition, 7 million adults age 65 and older had these problems, bringing the total to 79 million adults with medical debt or bill problems. All income groups reported an increase. Families with low or moderate incomes were particularly hard hit, as were adults who had gaps in health coverage or those underinsured. Because of medical bills or accumulated medical debt, an estimated 28 million adults reported they used up all their savings, 21 million incurred large credit card debt, and another 21 million were unable to pay for basic necessities. Sixty-one percent of those with medical debt or bill problems were insured at the time care was provided.

* http://www.commonwealthfund.org/publications/publications_show.htm?doc_id=700872

[anne]

The idea that the problem with the Bush years was that they were so good economically that we could not have expected better is comical, by the way. Again, the Bush years are a culmination of conservative policy application, a culmination of Reagan-like policy application, which is why I object so much to Obama continually giving credit that is not due to the economics of Reagan. *

* I am also distressed that Obama does not have a health care policy that will allow for universal insurance coverage.