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Wednesday, July 23, 2008

Reich: McCainomics Versus Obamanomics

Robert Reich characterizes differences in the economic philosophies of Obama and McCain:

A Short Primer on McCainomics Versus Obamanomics: Top-Down or Bottom-Up, by Robert Reich: McCain and Obama represent two fundamentally different economic philosophies. McCain's is top-down economics; Obama's is bottom-up.

Top-down economics holds that:

1. If you give generous tax breaks to the rich, they will have greater incentive to work hard and invest. Their harder work and added investments will generate more jobs and faster economic growth, to the benefit of average working people.

2. If you give generous tax breaks to corporations, reduce their payroll costs, and impose fewer regulations on them, they will compete more successfully in global commerce. This too will result in more jobs for Americans and faster growth in the United States.

3. The best way to reduce the energy costs of average Americans is to give oil companies access to more land on which to drill, lower taxes, and lower capital costs. If they get these, they'll supply more oil, which will reduce oil prices.

4. The best way to deal with the crisis in credit markets is to insure large Wall Street investment banks, as well as Fannie and Freddie, against losses. This will result in more loans at lower rates to average Americans. (Bailing them out may risk "moral hazard," in the sense that they will expect to be bailed out in the future, but that's a small price to pay for restoring liquidity.)

All of these propositions are highly questionable, especially in a global economy. ...[explains why]...

This isn't to argue that top-down economics is completely nonsensical. ... But in a global economy, bottom-up economics makes more sense. Bottom-up economics holds that:

1. The growth of the American economy depends largely on the productivity of its workers. ...

2. The productivity of America workers depends mainly on their education, their health, and the infrastructure that connects them together. These public investments are therefore critical to our future prosperity.

3. Global capital will come to the United States to create good jobs not because our taxes or wages or regulatory costs are low (there will always be many places around the world where taxes, wages, and regulatory costs are lower) but because the productivity of our workers is high.

4. The answer to our energy costs is found in the creativity and inventiveness of Americans in generating non-oil and non-carbon fuels and new means of energy conservation, rather than in access by global oil companies to more oil. So subsidize basic research and development in these alternatives.

5. Finally, in order to avoid a recession or worse, it's necessary to improve the financial security of average Americans who are now sinking into a quagmire of debt and foreclosure. Otherwise, there won't be adequate purchasing power to absorb all the goods and services the economy produces. (As to "moral hazard," the financial institutions that did the lending had more reason to know of the risks involved than those who did the borrowing.)

Listen carefully to the economic debate in the months ahead in light of these two competing economic philosophies. And hope that the latter wins out in years to come.

One difference: I'd include rescuing "too big to fail" financial institutions as bottom up, or at least directed at the typical household, otherwise I wouldn't support these policies. Quoting from the Caballero link below, "the ultimate concern of policymakers ought to be the welfare of households and taxpayers, rather than that of shareholders and management. However the issue is what is the best way of protecting these households and taxpayers during a financial crisis. I believe that the cost ... of providing free partial insurance to some key financial institutions is simply an order of magnitude smaller than the cost of letting the financial crisis run its course."

    Posted by on Wednesday, July 23, 2008 at 02:07 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (14)


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