Sunday’s New York Times Magazine contained an excellent article by David Leonhardt on Obama’s economic philosophy and policy strategy. It’s a very long article (14 pages when you print it out), and that’s because it really does take that long to try to explain Obama’s thoughts on economic policy. Obama’s approach is not stark, rhetorical, and uncomplicated; it’s nuanced, compromising, and thoughtful. Or as Governor Ed Rendell of Pennsylvania explained to the Washington Post’s Jonathan Weisman:
“With people who have a lot of gifts, it’s hard for people to identify with them,” Rendell said. “Barack Obama is handsome. He’s incredibly bright. He’s incredibly well-spoken, and he’s incredibly successful — not exactly the easiest guy in the world to identify with.”…
“He is a little like Adlai Stevenson,” Rendell mused. “You ask him a question, and he gives you a six-minute answer. And the six-minute answer is smart as all get-out. It’s intellectual. It’s well-framed. It takes care of all the contingencies. But it’s a lousy sound bite.”
In other words, Obama’s economic philosophy isn’t quite as easy to explain as McCain’s–which lately seems to be quite straightforward (I think I can paraphrase in a dozen words): “cut taxes and grow the economy; cut spending and shrink the deficit.” As David Leonhardt puts it:
John McCain’s economic vision, as he has laid it out during the campaign, amounts to a slightly altered version of Republican orthodoxy, with tax cuts at the core. Obama, on the other hand, has more-detailed proposals but a less obvious ideology…
Some of the confusion stems from Obama’s own strategy of presenting himself as a postpartisan figure…“My core economic theory is pragmatism,” he said, “figuring out what works.”
…Invoking pragmatism doesn’t help the average voter much; ideology, though it often gets a bad name, matters, because it offers insight into how a candidate might actually behave as president. I have spent much of this year trying to get a handle on what is sometimes called Obamanomics and have come away thinking that Obama does have an economic ideology. It’s just not a completely familiar one. Depending on how you look at it, he is both more left-wing and more right-wing than many people realize.
Here are some of the passages that were of the most interest to me from the Leonhardt piece (but the whole thing is very interesting, so please read it if you can)…
On why Americans are so gloomy, despite the not-so-bad condition of the economy (in aggregate at least):
The fact that the economy grows — that it produces more goods and services one year than it did in the previous one — no longer ensures that most families will benefit from its growth. For the first time on record, an economic expansion seems to have ended without family income having risen substantially. Most families are still making less, after accounting for inflation, than they were in 2000. For these workers, roughly the bottom 60 percent of the income ladder, economic growth has become a theoretical concept rather than the wellspring of better medical care, a new car, a nicer house — a better life than their parents had.
Americans have still been buying such things, but they have been doing so with debt. A big chunk of that debt will never be repaid, which is the most basic explanation for the financial crisis. Even after the crisis has passed, the larger problem of income stagnation will remain. It’s hardly the economy’s only serious problem either. There is also the slow unraveling of the employer-based health-insurance system and the fact that, come 2011, the baby boomers will start to turn 65, setting off an enormous rise in the government’s Medicare and Social Security obligations.
Most of these problems aren’t immediate, which helps explain why they have gone unaddressed for so long. And the United States remains a fabulously prosperous country, relative to almost any other country, at any point in history. Yet Americans seem to realize that something has gone wrong.
On how an Obama Administration might approach deficit reduction a little differently from the Clinton Administration (emphasis added):
To understand where Obama stands, you first have to know that, for 15 years, Democratic Party economics have been defined by a struggle that took place during the start of the Clinton administration. It was the battle of the Bobs. On one side was Clinton’s labor secretary and longtime friend, Bob Reich, who argued that the government should invest in roads, bridges, worker training and the like to stimulate the economy and help the middle class. On the other side was Bob Rubin, a former Goldman Sachs executive turned White House aide, who favored reducing the deficit to soothe the bond market, bring down interest rates and get the economy moving again. Clinton cast his lot with Rubin, and to this day the first question about any Democrat’s economic outlook is often where his heart lies, with Reich or Rubin, the left or the center, the government or the market…
Among the policy experts and economists who make up the Democratic government-in-waiting, there is now something of a consensus. They agree that deficit reduction did an enormous amount of good. It helped usher in the 1990s boom and the only period of strong, broad-based income growth in a generation. But that boom also depended on a technology bubble and historically low oil prices. In the current decade, the economy has continued to grow at a decent pace, yet most families have seen little benefit. Instead, the benefits have flowed mostly to a small slice of workers at the very top of the income distribution. As Rubin told me, comparing the current moment with 1993, “The distributional issues are obviously more serious now.” From today’s vantage point, inequality looks likes a bigger problem than economic growth; fiscal discipline seems necessary but not sufficient.
In practical terms, the new consensus means that the policies of an Obama administration would differ from those of the Clinton administration, but not primarily because of differences between the two men. “The economy has changed in the last 15 years, and our understanding of economic policy has changed as well,” [advisor Jason] Furman says. “And that means that what was appropriate in 1993 is no longer appropriate.” Obama’s agenda starts not with raising taxes to reduce the deficit, as Clinton’s ended up doing, but with changing the tax code so that families making more than $250,000 a year pay more taxes and nearly everyone else pays less. That would begin to address inequality. Then there would be Reich-like investments in alternative energy, physical infrastructure and such, meant both to create middle-class jobs and to address long-term problems like global warming.
All of this raises the question of what will happen to the deficit. Obama’s aides optimistically insist he will reduce it, thanks to his tax increases on the affluent and his plan to wind down the Iraq war. Relative to McCain, whose promised spending cuts are extremely vague, Obama does indeed look like a fiscal conservative. But the larger point is that the immediate deficit isn’t as big as it was in 1992. Then, it was equal to 4.7 percent of gross domestic product. Right now it’s about 2.5 percent.
During our conversation, Obama made it clear that he considered the deficit to be only one of the long-term problems requiring immediate attention, and he sounded more worried about the others, like global warming, health care and the economic hangover that could follow the housing bust. Tellingly, he said that while he admired what Clinton did, he might have been more open to Reich’s argument — even in 1993. “I still would have probably made a slightly different choice than Clinton did,” Obama said. “I probably wouldn’t have been as obsessed with deficit reduction.”
(Well, that’s why a future Obama Administration surely will be hounded by those of us who are “obsessed” with deficit reduction–just like a McCain Administration would be…)
On how Obama likes to hang out with economists (weird, huh?):
From the beginning, Obama has sought out academic economists, rather than lawyers or former White House aides. His first economic adviser, Austan Goolsbee, is a young University of Chicago professor who shares Obama’s market-oriented Democratic views. This summer, Obama added Furman, who has a more traditional background, having worked for both the Clinton administration and the Kerry campaign. But he, too, has a Ph.D. in economics, from Harvard.
As anyone who has spent time with Obama knows, he likes experts, and his choice of advisers stems in part from his interest in empirical research. (James Heckman, a Nobel laureate who critiqued the campaign’s education plan at Goolsbee’s request, said, “I’ve never worked with a campaign that was more interested in what the research shows.”) By surrounding himself with economists, however, Obama was also making a decision with ideological consequences. Far more than many other policy advisers, economists believe in the power of markets. What tends to distinguish Democratic economists is that they set out to uncover imperfections of the market and then come up with incremental, market-based solutions to these imperfections. This helps explain the Obama campaign’s interest in behavioral economics, a relatively new field that has pointed out many ways in which people make irrational, short-term decisions.
On the Obama campaign’s thoughts on addressing global warming through carbon permits (which I agree strongly with, as do most economists, no matter their political persuasion):
The best example of [Obama's "market friendly"] approach, however, may be his climate policy. By last year, Democrats in Congress essentially agreed that to reduce greenhouse-gas emissions, the government should place a nationwide cap on these emissions and then issue tradable permits giving companies the right to produce them (thus the term “cap and trade”). 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.” With Congress making the decisions, the power companies with the best political connections might get the permits. With a full auction, the permits would end up with companies willing to make the highest bids. 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.
The auctions would have another big advantage too. They 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.
On the redistribution of the tax burden that is really the centerpiece of the Obama economic platform:
The most tangible way that today’s economy feels unfair is the lack of real income growth for most families…
What Obama blamed the current administration for, he said, was aggravating these trends with the tax code. To a large extent, Obama’s own economic agenda revolves around reversing Bush’s tax policies and then going a bit further in the other direction. Here, more than in his regulatory approach, Obama stands on the left side of the Democratic Party, but not exactly in the traditional tax-and-spend ways…
…All told, Obama would not only cut taxes for most people more than McCain would. He would cut them more than Bill Clinton did and more than Hillary Clinton proposed doing. These tax cuts are really the essence of his market-oriented redistributionist philosophy (though he made it clear that he doesn’t like the word “redistributionist”). They are an attempt to address the middle-class squeeze by giving people a chunk of money to spend as they see fit.
He would then pay for the cuts, at least in part, by raising taxes on the affluent to a point where they would eventually be slightly higher than they were under Clinton…
…As ambitious as Obama’s proposals might be, they would still leave the gap between the rich and everyone else far wider than it was 15 or 30 years ago. It just wouldn’t be quite as wide as it is now.
If all that talk about how well the rich have been doing (how fast the rich people’s “economic pie” has been growing) reminds you of Warren Buffett, well…
Warren Buffett, an Obama supporter…if anything, might argue that he wasn’t going far enough to change the tax code. “If you talk to Warren, he’ll tell you his preference is not to meddle in the economy at all — let the market work, however way it’s going to work, and then just tax the heck out of people at the end and just redistribute it,” Obama said. “That way you’re not impeding efficiency, and you’re achieving equity on the back end.” He continued by saying that he thought there was some merit in Buffett’s argument. But, he said: “I do think that what the argument may miss is the sense of control that we want individuals to have in determining their own career paths, making their own life choices and so forth. And I also think you want to instill that sense of self-reliance and that what you do will help determine outcomes.”
On the supply-side arguments that raising marginal tax rates on the rich would stifle economic growth (a favorite McCain, the presidential candidate, argument):
When Bill Clinton raised taxes on upper-income families in 1993, his supply-side critics insisted that he would ruin the economy. As we now know, Clinton presided over the longest economic expansion on record, the fastest income growth most workers had experienced in a generation and the disappearance of the federal-budget deficit. His successor, Bush, then did exactly what the supply-siders wanted, cutting upper-income tax rates, and the results were much worse. Economic growth wasn’t quite as strong or nearly as widespread, and the deficit returned. 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.
And on Virginia’s “success story” and how Obama’s economic view is influenced by it:
I came to think of this ["investments"] 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.
For much of the 20th century, Virginia was a poor state, but after World War II, with the cold war under way and the military growing, well-paying defense contractors began to sprout up around the Pentagon, in northern Virginia. By the 1970s, Darpa, the Pentagon’s research arm, began working on a computer network, which soon spawned a new form of communication: electronic mail. That computer system eventually became the Internet, and Northern Virginia suddenly had the beginnings of a brand-new industry. In recent decades, Virginia has also invested money in the port near Norfolk and has vastly expanded its colleges and universities. Today the state’s per-capita income is 7 percent higher than the national average.
The trick for someone trying to replicate Virginia’s success is figuring out which investments to make…
So how does Senator Obama himself try to summarize his economic view to David Leonhardt, in what Gov. Rendell would refer to as a “six-minute sound bite”? This way:
I asked Obama whether he thought he had been able to tell an effective story about the economy during this campaign. Specifically, I wondered, did he think he had a message that compared with Reagan’s simple call for less government and lower taxes.
[Obama] paused for a few seconds and then said this:
“I think I can tell a pretty simple story. Ronald Reagan ushered in an era that reasserted the marketplace and freedom. He made people aware of the cost involved of government regulation or at least a command-and-control-style regulation regime. Bill Clinton to some extent continued that pattern, although he may have smoothed out the edges of it. And George Bush took Ronald Reagan’s insight and ran it over a cliff. And so I think the simple way of telling the story is that when Bill Clinton said the era of big government is over, he wasn’t arguing for an era of no government. So what we need to bring about is the end of the era of unresponsive and inefficient government and short-term thinking in government, so that the government is laying the groundwork, the framework, the foundation for the market to operate effectively and for every single individual to be able to be connected with that market and to succeed in that market. And it’s now a global marketplace.”
“Now, that’s the story. Now, telling it elegantly — ‘low taxes, smaller government’ — the way the Republicans have, I think is more of a challenge.”
It strikes me that Obama trying to talk about his economic philosophy is a lot like my trying to define “fiscal responsibility”–what I consider one of my “big projects” for this fall. You can’t explain it in short and simple terms without short-changing and oversimplifying the issues. Being honest about the tradeoffs and the nuances tends to require six-minute lectures–not just 20-second soundbites. Like the movie I.O.U.S.A. warns at its conclusion: beware of politicians that talk of policies that sound too good (and simple) to be true–they probably are.