What I Learned at McCain University

I attended the economic policy session at the Center for American Progress' "McCain University" briefing session this morning. Gene Sperling and Jared Bernstein did not disappoint and offered incisive critiques of the McCain program. I was reminded how rare it is to find people who both understand the nitty-gritty of economic policy and can explain it in terms that mere mortals can understand.

Gene emphasized the magnitude of McCain's proposed tax cuts, which are directed almost exclusively to the very rich. By the Tax Policy Center calculations he cited, just the income tax cuts on those making over $250K a year would amount to $110 billion a year, and the corporate tax cuts would be another $110-130 billion a year.

He also declared McCain's proposal for massive tax cuts for the rich to be the "mother of all flip-flops" from his responsible opposition to the Bush 2001 and 2003 cuts. He read off what McCain said in 2001:

I cannot in good conscience support a tax cut in which so many of the benefits go to the most fortunate among us, at the expense of middle class Americans who most need tax relief.

Gene also noted that all the arguments that McCain once made against the Bush tax cuts--the need for fiscal responsibility, the wrongheadedness of tax cuts in time of war, and the injustice of tax cuts geared to the rich--are even stronger when applied to McCain's proposals.

Jared gave a very nice presentation, pointing out that contrary to conventional wisdom (among economists at least), the president matters a great deal for economic policy, by affecting three things: 1) counter-cyclical policy, 2) after-tax income distribution, and 3) the regulatory role of government.

For (2), McCain would be a big negative, exacerbating inequality at a time that it has reached its highest levels since the 1920s. On point (3), Jared noted that in March McCain gave an interview that indicated he would be radically opposed to most any form of regulation.

After the initial presentations, there was some discussion of corporate taxes. Gene pointed out that while conservatives like to say that the U.S. has the highest statutory corporate tax rates in the world, what really matters is the effective rates, and the U.S. is in fact right in the middle of industrial countries in these terms. He also mentioned a CBPP paper (which I'll need to find), which showed that even under the most extreme alternative assumptions favored by conservative economists, the tax incidence of the corporate tax is highly skewed to the wealthy, meaning that corporate tax cuts largely benefit just the rich.

Jared also summarized his Huffington Post piece from today, which argues that the whole "hold the line on spending" proposal is just a ruse--Republicans in office always find things they want to spend money on. Consequently, as he says in the post,

under a McCain or any other modern conservative administration, it's not that there would be noticeably less government. It's that there would be worse government. It's not that they'd get rid of FEMA or the Food and Drug Administration. It's that they'd perform less efficiently and effectively.

Gene likened McCain's opposition to earmarks to a guy who buys three Hummers on credit and is making car payments of $10,000 a month, showing up at his house and saying, "I have to stop spending so much money on gourmet peanut butter!"

All in all, it was a useful session. See also today's "Progress Report" from CAP, which hits McCain on economic policy.

Why is McCain Going to Colombia?

I just learned that McCain is going to Mexico and Colombia next week. Mexico, OK, but Colombia? Presumably, the idea is for him to highlight his support for the stalled U.S.-Colombia trade agreement. But do his advisers realize that Colombia is embroiled in a political crisis?

Colombia's president, Alvaro Uribe--the torch bearer for the trade agreement--was only able to run for the second term he's now serving because the Colombian legislature amended the constitution to permit re-election. The constitutional amendment passed by just one vote. Last week, the Colombian Supreme Court sentenced a former congresswoman for accepting favors in exchange for her vote. With that ruling, the Court questioned the legitimacy of Uribe's re-election, and asked the separate Constitutional Court to determine the validity of the amendment.

Uribe's response was to call for the 2006 election to be held again and to ask a congressional committee to investigate the Supreme Court. The idea of a new election might be reasonable if the 2006 election results were in question, but it's not. What's at issue is whether Uribe should have been a candidate at all in 2006. Uribe knows that he would easily win a new vote, because his popularity has skyrocketed due to his government's successes in the fight against the FARC guerrilla group.

Uribe's reaction is what you would expect from a populist dictator,--someone like Uribe's nemesis, Venezuelan president Hugo Chavez--and there have been calls for him to resign. In light of his popularity, Uribe will undoubtedly stay, but Colombia's political institutions will be increasingly frayed, and Uribe's image abroad will suffer. In particular, I think there's now little chance the U.S. Congress will approve the trade accord while Uribe is in office, regardless of whether McCain or Obama wins, since Uribe's authoritarian moves have given opponents of the agreement a whole new argument against it.

Which is all to say that McCain's visit is ill-advised. I'm sure he'll be asked repeatedly for his take on the crisis, and there's no right answer to that question. If he says he supports Uribe, he's backing an emerging dictator. And if he criticizes Uribe, he'll have to explain why he still supports signing the trade accord, despite Uribe's anti-democratic behavior. All of this makes me think the McCain people who scheduled this trip aren't the brightest crayons in the box. Recall that these are largely the people who weren't good enough to get jobs in the Bush administration.

Meanwhile, Obama's chief adviser for Latin America, Dan Restrepo (who is Colombian American) recently gave an interview (in Spanish) with Colombia's leading newsweekly. When asked if Obama would accept Uribe's invitation to visit Colombia during the campaign, he replied that Obama has said he's thought about visiting Latin America during the campaign, but that it's not easy. I think it is extremely unlikely that before the election Obama would follow McCain's lead and walk into the political minefield of a visit to Colombia.

McCain University

I'm planning to attend the first panel of this event at the Center for American Progress Monday morning. It will consist of "know thine enemy" briefings on McCain's positions on the economy, health care, global warming, and national security. Here's the lineup for the first panel:

Panel I: Economic Policy

McCain 101: James Kvaal, Domestic Policy Advisor, Center for American Progress Action Fund

Featured Panelists:
Jared Bernstein, Director of Living Standards Program, Economic Policy Institute
Gene Sperling, Senior Fellow, Center for American Progress Action Fund

Moderated by:
Robert Gordon, Senior Fellow, Center for American Progress Action Fund

I don't know James Kvaal or Robert Gordon. Jared and Gene are some of the sharpest economic policy people around, so I'm looking forward to hearing what they have to say. I'll report back afterwards.

New Obama Economic Advisers

This Reuters list includes some new names: Laura Tyson, Robert Reich, and Peter Henry. Paul Volcker is now mentioned as a "top economic adviser" rather than just a supporter. I'll update our comprehensive list of Obama economic advisers and supporters, which is here.

Who Pays the Corporate Tax?

Some time ago, I promised a commenter I would write up something on the incidence of the corporate income tax. The Tax Policy Center saved me the trouble with a post today which crisply summarizes the issue:

Clearly, somebody must pay the tax. It could fall on shareholders, employees, customers, or a combination of the three. It could even affect asset income or wages more broadly, cutting returns for investors who own non-stock assets or reducing compensation for workers at firms outside the corporate sector.

Economists agree on the incidence of some taxes—the individual income tax falls fully on people who earn the taxed income, for example—but reach different conclusions on others, including the corporate income tax. For a long time, the conventional wisdom held that the corporate tax burden landed on all owners of capital, not just corporate stockholders. Some—but not all—models show that, under certain circumstances, much of the tax can fall on workers. TPC follows the Congressional Budget Office’s practice of assigning corporate tax incidence to all owners of capital in proportion to their income from capital.

The CBO justifies its assumption as follows:

Less agreement exists on the incidence of corporate income taxes. Firms pay the tax on their net profits according to a schedule of four rates that reaches 35 percent for annual taxable income over $10 million. Ultimately, however, that tax is borne by households, either as higher prices for the goods they buy or lower income from work or investments. Economists disagree on whether people bear the tax as shareholders in corporations, owners of all capital assets, employees, or consumers. Nonetheless, a survey of the economics literature on the issue indicates a dominant view that the corporate income tax reduces the return to all capital, and thus the burden of the tax falls on all owners of capital assets. Accordingly, CBO allocates corporate income taxes as both income and tax liabilities to households in proportion to their income from interest, dividends, rents, and capital gains.

Here's another post from TPC describing a conference on the topic, highlighting the fact that there is much disagreement. Here is a 1996 CBO paper by EconomistMom Diane Rogers which reviews the literature up to that point on the topic. I have tried unsuccessfully to find information on either the TPC or CBO website spelling out exactly what the CBO assumption means for the incidence of the corporate tax. We know that ownership of capital assets (and thus the corporate tax incidence, under the CBO assumption) is concentrated among the wealthy, but how concentrated? Can anyone point me to some data on this?

McCain's Jobs Program: EBay

McCain on Ebay:

The presumptive Republican presidential nominee regularly asserts that 1.3 million people worldwide "make a living off EBay." He holds up the figure as evidence the world's largest Internet auctioneer is a model for job and economic growth.
....
"Ask Meg Whitman [former EBay CEO and McCain campaign co-chairman] how many there was 10 years ago, when she took over of the CEO of EBay -- it was in the thousands," McCain, 71, said after citing the 1.3 million jobs figure at a town-hall meeting in Westport, Connecticut, on April 9. "It's called an information-technology revolution, and it's not that much different as far as its effects worldwide as the industrial revolution was."

The reporter who wrote the article took McCain up on his suggestion and did ask Meg Whitman, who said that McCain has it wrong. As this Slate article explains, the 1.3 million figure comes from a study which estimated how many people use EBay as EITHER a primary or secondary source of income. "Secondary source of income" means making some money--any amount of money. The bulk of these are very likely people like my grandmother, who buys and sells a couple hundred dollars worth of books a year through EBay. She'd be surprised to hear that McCain is holding up her hobby as a model for job growth.

The article has quotes from economists and others ridiculing McCain's suggestion that EBay is a model for boosting employment. (Since McCain has acknowledged elsewhere that he doesn't know how to use a computer, I wonder if even understands how EBay works.) McCain repays the sentiments with his own dis on economists:

He has shown increasing disdain for any economist who questions his policy prescriptions. Earlier this month, he lashed out at critics of his proposal for a summer gas-tax holiday.

``You know the economists?'' McCain said June 12 at Federal Hall, near the New York Stock Exchange. ``They're the same ones that didn't predict this housing crisis we're in. They're the same ones that didn't predict the dot-com meltdown. They're the same ones that didn't predict the inflation that's staring us in the face today.''

As Greg Mankiw notes with an usually sarcastic tone, it's a good thing McCain saw all this coming in his crystal ball.

Reader Mailbag: Various Questions from Hawaii

A reader writes in the following (I've put points and questions to which I'll respond in bold):

I was moved to write to you after reading a short article about John McCain's proposal to use Ebay entrepreneurs as the model for creating new jobs for the US economy. I have a hard time believing that a serious candidate for President of the United States could be this profoundly ignorant on economics.

A couple of questions for you (and Senator Obama's position/solution) about some economic issues that I have encountered recently.

I have been job hunting over the last month, since I graduated from University of Hawaii with a BS (!) in Civil Engineering last month. Two weeks ago I visited a local engineering-architecture firm here in Kailua-Kona (Hawaii) to apply for a job. they informed me that the now have outsourced all of their engineering work to China, merely having the finished design drawing CADD files and documents emailed to their clients here. The CEE 490 (senior project) class I had last year did have two guest speakers who warned us about the need to be able to compete "in an open marketplace" with civil engineers based in India and China, and that outsourcing is becoming a major source of cost-cutting for companies trying to stay competitive and in business both here in Hawaii and the US mainland.

It seems to my very economically-ignorant mind that removing the hope of getting a decent-paying job here in the US would pretty much remove the major motive for students to major in civil or other kinds of engineering in a university. Certainly I (and I am sure pretty much all of my classmates as well) plan to "cash in" on the huge investments we have made in our degrees by getting a good-paying, secure job from it. Is that being "selfish" or "greedy"?

Since I am now 42, not married (hope that will change soon though), have no kids, and would make around $40,000 to 45,000 per year, would I be considered "rich" and subject to the proposed tax increases? (My mom, who is leaning towards McCain, tells me that I would be considered "rich and successful" and thus a target for increased taxation and "punishment for being successful" by the Obama Administration).

In case you are wondering why someone as old as I am just graduated, I had to get my degree at UH after a job-related shoulder injury in October 2003 caused the doctors to insist that I get into a "non-physical" career.

I don't own any property right now but am planning to save up for a house hopefully in the next 5 years or so. So I am interested in wise investing and want some money after taxes to save for this goal.

I have heard some clips on the Rusty Humphrey talk-radio show that Obama's campaign would like to nationalize the oil companies and "other industries" as well. Is this true?

I am not sure what to make of an Obama Administrations' economic and other policies. Could be really good or really bad (depending on who I listen to).

I do know that a McCain Administration would be at best a continuation of George Bush's economic and other policies. I don't think we can handle much more of that kind of unrestricted "globalization" and deficit spending.

I do know that by the time I retire in 25 years from now (age 67), Social Security will be only something that I read about in a history book. I know I will never collect a cent of what I had paid into that system. At least I helped pay for my parents' generation and the Baby Boomers that followed them....

What do you think of former US Comptroller-General David Walkers' warnings on possible bankruptcy/insolvency of the US Government in the next 20 to 30 years if current spending trends continue? What if anything would an Obama Administration do about it?

I will probably buy gold and maybe even foreign currencies to try to shield myself a little against this possibility.
.
Would I have to pay reparations for slavery or other past injustices? My parents immigrated from Switzerland to the US in 1956.
Sincerely,
R.

Dear R,
These are all thoughtful questions. I will try to respond briefly.

Outsourcing This is a difficult issue to which there's no easy answer, and neither Obama nor McCain would do anything to reduce outsourcing. With or without outsourcing, you're better off with more education. The right policy is not to try to reduce outsourcing but 1) to improve education across the board, and 2) to weave a stronger social safety net, so that people who lose out in the face of globalization still have a good wage, health care, and the promise of a decent retirement. Obama has proposals that address all of these points, while McCain is offering almost nothing. On health care in particular, Obama would make sure health insurance is offered to everyone and take some steps to reduce costs. As I explain here, McCain's health care care proposal is to make your health care benefits taxable to try to kill the current health care system.

Taxes: Your income puts you in the middle quintile (20%) of the income distribution. While of course your taxes vary with your particular situation, according to the analysis described here, people in the middle quintile would have lower taxes (i.e. higher after-tax income) under Obama's proposals.

Will Obama nationalize companies? This is talk radio hysteria. Obama has never suggested that he would nationalize companies, and there is zero indication that he would even think about doing so.

Social Security: The financing issues around Social Security have been greatly exaggerated by the media and by right wingers who have been looking for an excuse to get rid of the whole system. In fact the government's own projections--which many economists think are too pessimistic--show the program fully solvent and able to pay 100% of benefits through 2041. After that, it could pay 78% of expected benefits, with no changes to the current system. Social Security needs a few tweaks, not an overhaul, and Obama has suggested he would work on this, first by extending the payroll tax to those making over $250K.

The much bigger problem is the projected shortfall in Medicare, driven by increased health care costs. I think it's fair to say that neither Obama nor McCain has a serious plan to deal with this problem, but Obama at least has a few cost-reduction proposals that will help. Here's an analysis which explains some of these issues.

Will there be reparations for slavery under Obama? Based on my quick research, despite what some right-wing websites say, Obama has never said he favors reparations. When the issue came up in 2004 during a debate and his opponent--Republican Alan Keyes--announced his own position in favor of reparations, Obama said "The legacy of slavery is immeasurable, but the best strategies for moving forward would be vigorously enforcing our anti-discrimination laws in education and job training."

Obama's Tuition Tax Credit, Part II

Several commenters on this post on Obama's Tuition Tax Credit proposal objected to my suggestion that the supply curve for higher education is flat, in both the short and long runs.

The main objection centered around the political economy of funding public schools: state legislatures and school officials might increase tuition or decrease other student aid if new federal aid were introduced.

This is a fair point and it argues for putting aside the Econ 1 theory and going to the empirical analysis.

This book chapter takes a close econometric look at the effects of the Hope and Lifetime Learning Tax Credits, enacted in 1997, on several outcomes, including state support for higher education and college tuition. The Obama proposal amounts to an expansion and modification of the Hope Tax Credit, so its effects can be taken as a likely indication of the impacts of Obama's initiative.

The main empirical strategy in the paper is to compare states with lots of students eligible for the credit to those with few eligible students, presuming that if the credit had an impact, it would be in the states with many eligible students. Overall, the results are mixed. My summary would be 1) some evidence of decreased state support for 2-year colleges and weak (only in particular specifications) evidence of increased tuition for 2-year colleges, 2) no evidence of any effect on state support for public 4-year schools and tuition at either public 4-year schools or private schools. Unfortunately, the author didn't clearly present the magnitude of the impacts, and I'm having a hard time deciphering these magnitudes from the many specifications in the tables. Commenters are welcome to make an attempt!

Jim Webb on the Criminal Justice System

I'm reading Jim Webb's excellent new book A Time to Fight. One of the best chapters deals with the criminal justice system. He comes up with figures that even I found shocking (and I have published research on some of these issues). A sampling:

-- "... a black male without a high school diploma now has a 60 percent chance of going to jail during his young adulthood and ... a black male with a high school diploma has a 30 percent chance."

-- "... in 2005 112 million Americans above the age of twelve indicated that they have used illegal drugs at some point in their lives. This amounts to 46 percent of our entire adult population."

-- "When the 2006 high school seniors were asked which drugs they were able to 'obtain easily,' 85 percent indicated that they had no problems finding marijuana, 47 percent said the same about cocaine, 39 percent said crack, and 27.4 percent said they could easily obtain heroin."

-- "Although drug use among the races is statistically about the same, a 2006 ACLU report indicates that African Americans, with about 12 percent of our population, account for 37 percent of those arrested on drug charges, 59 percent of those convicted, and 74 percent of all drug offenders sentenced to prison."

My favorite section is the following passage:

Even as I write these words, it is virtually certain that somewhere on the streets of Washington, D.C. and eighteen-year-old white kid from the Maryland or northern Virginia suburbs is now buying a stash of drugs from an eighteen-year-old black kid. The white kid is going to take that stash back to the suburbs and make some quick money by selling it to other kids (of all different ethnic backgrounds) from his high school or college or inside his social circle. His chances of getting caught once he clears the black kid's neighborhood are pretty slim. The black kid, lured to the street corner by a similar motive of making some quick cash, is probably going to keep selling drugs until he either gets shot or is caught and arrested. Since his neighborhood is more than likely a high-traffic area for drugs, it is natural that local police and other drug enforcement officials will periodically target it. Thus, his chances of getting caught are pretty high. And once he's caught he will go to jail, to be replaced by another eighteen-year-old black kid. And then the cycle will repeat itself.

The probability is also high that the white kid will soon stop his risky little side business. It is even higher that the other suburban kids who are buying drugs from the white kid will remain legally unaffected by their behavior and will go on to college. After college, many will end up as high-degreed professionals, some of them as lawyers. As they grow older, they will look back on their drug use as recreational and joke about it, laughing it off as a mere phases, just one more little rebellion on the way to a responsible adulthood.

On the other hand, as soon as he is arrested the black kid will enter a hell from which he may never recover. This hell is so familiar to many black communities that it has evolved into an ugly but predictable way of life. It is a hell that will affect his family, his community, his future employability, his rights of citizenship, and even the way he interrelates with individual members of the rest of our society. The American criminal justice system not only stigmatizes those who become enmeshed in it; it also ensures that most of them will never be free from that stigma from the moment they first walk into the inside of a prison cell.

In addition, prison life will change the black kid, harden him, mess up his mind, and redefine his self-image. And after he is released from prison, the black kid will be dragging an invisible ball and chain behind him for the rest of his life. The normal flow of his educational and social life has been interrupted. Prison has become his entryway into adulthood. Few employers of consequence will want to hire a convicted felon. Very few reentry programs are available to help him move into a responsible future. The odds are two-thirds that he will be rearrested within three years, and they are better than fifty-fifty that he will be back in jail during that same period.

By the time the white kid reaches fifty years of age, he may well be a judge. By the time the black kid reaches fifty, he will likely be permanently unemployable, will be ineligible for many government assistance programs, and will not even be able to vote.

If the laws against drug use were uniformly enforced, just for starters half of Hollywood would be in jail instead of half of Harlem. And for all the money and effort we have spent on the war against drugs, we have not been able to crack the problem at is sources--where it is grown and manufactured--or, most tellingly, at its destination--America's seemingly insatiable demand for the product.

He goes on to call for a shift of resources from imprisonment to crime prevention and drug treatment. While he does say that "the time has come to stop locking up people for mere possession and use of marijuana," he stops short of calling for drug legalization. Obama has spoken eloquently on these issues, and one can hope that an Obama-Webb administration would make a serious move for reform of the criminal justice system.

Reader Mailbag: Distributional Effects of Tax Policy

A reader writes:

Can you design a calculator that captures basic from me that I used in my 2008 tax forms - and gives me three pieces of information:

- My approx taxes last year (verifies the accuracy of the calculator)
- My taxes under the Obama plan; and
- My taxes under John McCain plan.

If I earn less than 250K I should see savings under Obama plan and increases under McCain plan.

I have three different answers:

1) No, this is far beyond the duty and talents of an unpaid, pseudonymous econ-blogger who should be enjoying his week of vacation in the sun rather than writing this blog post.

2) The figure I included in this post shows changes in after-tax income by income quintile under the McCain and Obama proposals.

3) Looking at the near-term tax incidence of candidates' proposals is really the wrong way to decide who you're going to vote for. That's because both proposals--and especially McCain's involve huge deficit financing. Based on the Tax Policy Center's projections, McCain relative to Obama would add an additional $1 trillion to the national debt over ten years. That $1 trillion will have to be paid back, with interest, by you or your kids. Once you take those future payments into account, the effect of taxes on income looks worse for everyone.

Bill Gale and Peter Orszag produced this compelling analysis in 2004 of the long-term effects of the Bush tax cuts by quintile, taking into account that tax cuts financed by borrowing translate into less services or higher taxes later on. Under different assumptions, they found that the tax cuts made those in the bottom 80% of the population worse off. Peter is now at the Congressional Budget Office, so he's not doing this kind of work these days. Maybe Bill will consider producing a similar analysis for the McCain and Obama proposals?

Obama's Tuition Tax Credit

A reader wrote in to ask:

Obama's comments about a tuition tax credit yesterday have me confused. Don't we already have that already, more or less? Is this an additional credit? Is it refundable so starving students can use it? Won't universities just at least eat up part of it with increased tuition above what they would do already?

From the Obama website:

Obama will make college affordable for all Americans by creating a new American Opportunity Tax Credit. This universal and fully refundable credit will ensure that the first $4,000 of a college education is completely free for most Americans, and will cover two-thirds the cost of tuition at the average public college or university and make community college tuition completely free for most students. Obama will also ensure that the tax credit is available to families at the time of enrollment by using prior year's tax data to deliver the credit when tuition is due.

How about existing tuition tax credits? According to this site from the National Association of Student Financial Aid Administrators, the existing Hope Scholarship Tax Credit paid a maximum of $1650 in 2007. Unlike Obama's proposed new credit, the existing Hope credit is not refundable. The existing credit also phases out at higher incomes. It's not clear if Obama's new credit would be additional to the Hope credit.

As for the last question--will the new credit cause tuition to increase, partially eating up the value of the credit?--I'm glad you asked! This is a question to which we can bring to bear the mighty power of Econ 1 reasoning. The extent to which tuition increases depends on the supply and demand elasticies for education, i.e. how steep the curves are. A good guess is that the demand for higher education is downward sloping while the supply curve is pretty flat. In the short-term, schools can always squeeze in a few extra students, while in the longer term there's plenty of scope to hire new teachers and establish new schools. (Note that his analysis applies to higher education in general, not to very specific goods, e.g. a law school education at Harvard, for which the supply is highly inelastic.)

Below I've drawn the supply and demand curves for the case of a totally flat (perfectly elastic) supply curve. In this case, the credit shifts up the demand curve vertically by the amount of the credit, there is no change in the price of tuition, and enrollment expands. If the supply curve is not quite entirely flat, the subsidy would increase tuition a bit, and enrollment would increase not quite as much. I think it's a good bet, however, that the supply curve is flat enough that the effect of the credit on tuition would be small.



For more details on Obama's higher education proposals, see this document.

Update: See a more recent post on this issue here.

Questions from Krugman on Obama's Tax Policy

A reader wrote in asking me to comment on Krugman's questions regarding Obama's tax policy in today's column. Krugman's main point is that the Bush tax cuts have restricted the options available to the next president. When it comes to Obama, he says the following:

These tax cuts would mainly benefit lower- and-middle-income families, although this can’t be said of Mr. Obama’s plan to eliminate income taxes on seniors with incomes under $50,000: since most seniors already pay no income taxes, this would do nothing for those most in need. And one wonders why we should create the precedent of exempting particular demographic groups from taxes.

But the big question is, are these tax cuts, however appealing, a top priority? The most expensive proposal, under the title Making Work Pay, would give most workers $500 in tax credits, at a 10-year cost of more than $700 billion. Isn’t it more important that workers be assured of health care?
...
One more thing: on Friday Mr. Obama declared that he would “extend the promise” of Social Security by imposing a payroll-tax surcharge on people making more than $250,000 a year. The Tax Policy Center estimates that this would raise an additional $629 billion over the next decade.

But if the revenue from this tax hike really would be reserved for the Social Security trust fund, it wouldn’t be available for current initiatives. Again, one wonders about priorities. Whatever would-be privatizers may say, Social Security isn’t in crisis: the Congressional Budget Office says that the trust fund is good until 2046, and a number of analysts think that even this estimate is overly pessimistic. So is adding to the trust fund the best use a progressive can find for scarce additional revenue?

I've put Krugman's "questions" in bold. I use the scare quotes because these aren't really queries, but rather are rhetorical questions he's using to express his own view. Translating to declarative sentences, Krugman thinks there's no reason to exempt income taxes for seniors making under $50,000, that a health care reform is more important than lowering taxes for most workers, and that while raising taxes on those earning more than $250K is a good idea, the money should go to something other than shoring up the Social Security Trust Fund.

As a whole, Obama's program would dramatically shift the tax burden to the wealthiest, particularly those in the top 1 percent, while reducing taxes. As this graph based on the Tax Policy Center analysis shows (stolen from Kevin Drum), taxpayers in the bottom four quintiles would see their after-tax income rise under Obama.
Krugman's column implies that the tax program he would favor would increase taxes on everyone, except maybe those in the bottom quintile, in order to be sure that there would be plenty of money for the Obama health care plan. Krugman would like Obama's message to be "Yes, taxes will have to go up on most Americans, in order to pay for an expanded health care program." Putting the merits aside (on which I don't have a firm opinion), I think it's clear that Obama's plan is more politically marketable than Krugman's. But this is exactly Krugman's point--the Bush tax cuts (and years of Republican anti-tax rhetoric) have made it fatal to propose tax increases on most people.

On Social Security, my view is that Krugman is right--we have bigger priorities right now than worrying about the possibility of a long-run shortfall in the Social Security Trust Fund. But he and I are in the minority among liberal-minded economic policy watchers. The same Tax Policy Center gurus that Krugman cites fault Obama for not doing enough to address Social Security.

The Other List: McCain's Economic Advisers

McCain himself has said "The issue of economics is not something I've understood as well as I should," and made similar assertions on many occasions. This makes it particularly important who he's listening to for economic policy advice. Here are his economic advisers who have been mentioned in the press:

Phil Gramm source
Gramm is a lobbyist who was vice president of one of the investment houses most heavily implicated in the mortage industry scandal. He has described the United States as a "nation of whiners" and said that we are in a "mental recession." As a senator he pushed for the banking deregulation that led to the current crisis. Here is an excerpt from a very good article describing his role:

Who's to blame for the biggest financial catastrophe of our time? There are plenty of culprits, but one candidate for lead perp is former Sen. Phil Gramm. Eight years ago, as part of a decades-long anti-regulatory crusade, Gramm pulled a sly legislative maneuver that greased the way to the multibillion-dollar subprime meltdown.
....
The [Commodity Futures Modernization Act], he declared, would ensure that neither the sec nor the Commodity Futures Trading Commission got into the business of regulating newfangled financial products called swaps—and would thus "protect financial institutions from overregulation" and "position our financial services industries to be world leaders into the new century."
....
Because of the swap-related provisions of Gramm's bill ... a $62 trillion market (nearly four times the size of the entire US stock market) remained utterly unregulated, meaning no one made sure the banks and hedge funds had the assets to cover the losses they guaranteed.

Banks and hedge funds, notes Michael Greenberger, who directed the cftc's division of trading and markets in the late 1990s, "were betting the subprimes would pay off and they would not need the capital to support their bets. "These unregulated swaps have been at "the heart of the subprime meltdown," says Greenberger.
....
Gramm's record as a reckless deregulator has not affected his rating as a Republican economic expert. Sen. John McCain has relied on him for policy advice, especially, according to the campaign, on housing matters. Media accounts have identified Gramm as a contender for the top slot at the Treasury Department if McCain reaches the White House. "If McCain gets in," frets Lynn Turner, a former chief SEC accountant, "we'll have more of the same deregulatory mess. I like John McCain, but given what I know about Phil Gramm, I wouldn't vote for McCain."

Kevin Hassett source
Hassett has been widely ridiculed for writing the book Dow 36000: The New Strategy for Profiting from the Coming Rise in the Stock Market in 1999, predicting that the Dow would hit 36,000 within five years, if not sooner.

Carly Fiorina source
Fiorina was spectacularly fired from her previous job as CEO of HP. Regarding Fiorina, Jeffrey Sonnenfeld, the senior associate dean for executive programs at the Yale School of Management, says "What a blind spot this is in the McCain campaign to have elevated her stature and centrality in this way. You couldn’t pick a worse, non-imprisoned C.E.O. to be your standard-bearer.” According to the Times,

... Republicans say Ms. Fiorina is using the McCain campaign to rebuild her image after her explosive tenure at Hewlett-Packard. They also say it is hard to see why a woman widely criticized for mismanaging one of Silicon Valley’s legendary companies is advising and representing a candidate who acknowledged last year that he did not understand the economy as well as he should.

Nancy Pfotenhauer source
Pfotenhauer is a pure distilled product of Koch Industries, an oil company which funds much of the right wing message machine. See here for details.

Donald Luskin source
Luskin has been repeatedly criticized by many observers for his shoddy analysis. He is not an economist and according to his own online bio is a college dropout. He recently wrote in a Washington Post column that "we're on the brink not of recession, but of accelerating prosperity." Here is a discussion of that column with links to some of his previous mispredictions. I can attest based on my own interaction with him a few years back that in addition to being not the sharpest tack in the box, he is also an extremely unpleasant person.

Doug Holtz-Eakin source
Holtz-Eakin is a formerly respected academic and government economist who has been reduced to making distortionary arguments to paper over the massive deficit black hole McCain's tax cuts would create.

Arthur Laffer source
Laffer is the originator of the Laffer curve, the fringe view that claims government revenue increases when tax rates are lowered. There is zero empirical evidence this is true at current tax rates. McCain has repeatedly said that he believes this foolishness, but Holtz-Eakin has said (also repeatedly) that McCain does not.

Compare this list to the list of Obama's economists here.

David Plouffe on which states will be the battlegrounds

I'm on my way home from a fundraiser with Obama campaign manager David
Plouffe at the Capitol City Brewery, site of some of my most memorable
political inebriation. (Among other things, it was there that I
celebrated the 2006 Democratic victory with my old boss Howard Dean.)
Plouffe mostly talked about which states will be decisive for the
November election. He started off by saying that Michigan, New
Hampshire, and Pennsylvania will be the key battlegrounds. Then he
mentioned a long list of others, in no particular order, New Mexico,
Nevada, Colorado, Alaska, Montana, South Dakota, Wisconsin, Iowa,
Virginia, North Carolina, Georgia, Mississippi. Louisiana, and of
course Florida and Ohio. He said he's happy that he can look at the
map and see 12 ways Obama can win, even without considering Ohio and
Florida. He confirmed what I'd heard informally from the campaign:
Obama will use his money, his broad appeal, and his superior ground
organization to force McCain to spread himself thin and campaign in
states that the Republican nominee would usually take for granted.

What Does McCain Think About the Big Questions of Economic Policy?

The astounding truth appears to be that he doesn't know. He really wasn't kidding when he said,"The issue of economics is not something I've understood as well as I should."

Consider these three questions:
1) Do tax cuts increase government revenue and thus pay for themselves?
2) Should Social Security be privatized?
3) Should the Alternative Minimum Tax be repealed?

On all three questions, McCain (or his website or his advisors on his behalf) have said both yes and no. These are perhaps the most fundamental questions of economic policy. Why doesn't a reporter just ask him what he thinks about each of these questions and then, regardless of the answer, point out to him that he has said just the opposite?

I have documented the contradictory answers to question 1 here.
Via Mark Thoma, here's Cliff Schecter's documentation of McCain saying both yes and no to question 2. Also via Mark, here's hilzoy on question 3.

(Note that in the case of question 3, the contradiction is between what the Tax Policy Center (TPC) analysis implies that his campaign told them and what's on his website. It is possible that TPC misunderstood what the campaign said.)

I keep waiting for some reporter or town hall questioner to point out that McCain's health care plan would amount to a massive tax increase if it works out the way his advisor says it would, as I explain here. Given his evident confusion on the more straightforward questions listed above, I wonder if he even understands what his health care plan would do.

Jason Furman, Social Security, and Walmart

Seeing that he's made the cover of the NY Times this morning, I was going to write up a summary of the controversy over Jason, but Mark Thoma beat me to it, with a very good post here.

It's a bit disingenuous to suggest that the views of the economic policy director don't matter, in part because campaign jobs lead to administration jobs. Given his position, it's a good bet that if Obama wins, Jason will be director of the National Economic Council, making him the President's main interface for economic policy. During the campaign, Jason will be working on drafts of economic policy speeches, sending Obama daily memos on economic issues, and screening the huge mass of external economic policy advisers trying to get their word in with Obama, so his own views have to come into play somewhat. At the same time, Jason is a skilled campaign staffer and technocrat--not an ideologue--and he's not going to be trying to sell Obama on a particular economic vision. Plus, given that, by all accounts, Obama likes to seek out a variety of viewpoints and then make the call himself, Jason's views are not going to be a huge factor.

Jason Furman and Social Security

As Brad Delong points out, this article in the LA Times completely misrepresents Obama Economic Policy Director Jason Furman's position on Social Security privatization. In fact, Jason is the economist who did the most to supply the intellectual ammunition to gun down Bush's proposal during the great Social Security battle of 2005. Jason, with help from Dean Baker and Brad Delong, was key to victory in that struggle. It's not hyperbole to say that without their efforts (especially Jason's), Bush might have succeeded in his efforts to gut the most important social safety net we have. See this paper for one of Jason's contributions in that battle.

Regarding the broader concerns raised in the article, I think Jared Bernstein has it right:

One economist from the left-leaning Economic Policy Institute, Jared Bernstein, offered praise for Furman, saying he understood why some critics were unhappy, though he thought their fears were misplaced.

"I understand the concerns, given positions he has taken" on some issues, Bernstein said. "But I am 110% certain that it will be Barack Obama -- not Jason Furman or Robert Rubin -- who will be setting the policies for the Obama administration."

Although Furman has directed think-tank work on some controversial topics, Bernstein said he would be an effective campaign staff member. "If you look at his body of work, it's quite clear that the ultimate goal is very much the same as Obama's," he said.

New Obama Economic Policy Director and Advisers

Obama has named Jason Furman as his economic policy director.

Jason is a natural pick for the job: an excellent economist and dedicated wonk with lots of campaign and policy experience.

What's interesting in the announcement is that on the list of advisers the campaign will draw on, Jason mentions not only Larry Summers and Alan Blinder but also two who are on the more progressive end of the liberal econosphere: Jared Bernstein and James Galbraith. Jared and Jamie are two of my favorite economic policy thinkers, and it's great to see that they may have some role in the Obama administration.

I've updated and spruced up our list of Economists for Obama to include these new recruits.

Update: courtesy of Talking Points Memo, here's the audio from today's media conference call with Jason Furman and Austan Goolsbee.

Question for McCain: Effect of Taxes on Revenue

In what I imagine reflects an ongoing power battle among McCain's staff, one of his economic advisers--Doug Holz-Eakin--is now speaking for McCain on issues outside of the economic realm, namely illegal warrantless wiretapping. He says that McCain embraces the unconstitutional Bush-Nixon claim that "It's not a crime if the president does it." The problem for Doug is that McCain previously said just the opposite.

He's flatly contradicted his boss on perhaps the most basic question of public finance as well. At a forum I attended, he was asked ""Does Senator McCain believe that tax cuts pay for themselves?" and he said "No."

But McCain has said on multiple occasions that they do. Here's a snippet from an interview with the National Review where he couldn't have been clearer in claiming (wrongly) that tax cuts raise revenue.

Ponnuru: If you could get the Democrats to agree, or at least to come to the table on entitlements or on tax simplification, are those circumstances under which you’d be willing to accept a tax increase?

Sen. McCain: No; no.

Ponnuru: No circumstances?

Sen. McCain: No. None. None. Tax cuts, starting with Kennedy, as we all know, increase revenues. So what’s the argument for increasing taxes? If you get the opposite effect out of tax cuts?

Question for McCain: "You have said multiple times that you share the belief of Arthur Laffer, one of your advisers, that tax cuts increase government revenue. Another one of your advisers says that you don't hold that view. So which is it? Do tax cuts increase revenue or not?"

Follow-up: [If he does believe tax cuts increase revenue] "As CBO Director, your adviser Doug Holtz-Eakin published a study that said that you're wrong. Only a miniscule number of economists agree with you. On what basis do you hold your view?"

Follow-up: [If he doesn't believe tax cuts increase revenue] "The Tax Policy Center calculates that your tax plan will lead to a shortfall and increase the national debt by %5.7 trillion, about $50,000 per household. Who will pay off that debt?"

Jim Webb for Vice President

Just after I ordered Jim Webb's new book A Time to Fight, I looked at the copy of the NY Review of Books that came in the mail today and found that the cover story is The Rise of Jim Webb. I've read a great deal about him the last few days, and this is the best short bio of Webb I've seen.

The end of the article talks about the speculation that he might be Obama's VP pick:

... to a number of people the idea of an Obama-Webb ticket makes a lot of sense: an African-American (actually of mixed race) and a man of Scots-Irish working-class descent; a war hero who can stand up to anyone on military expertise and patriotism. In fact, in his writings, as well as in his new book, Webb has argued that a combination of blacks and the Scots-Irish working class could form an electoral majority. He argues that they have similar grievances: lack of adequate education and health care, job training and job opportunities; and that both have been put upon or neglected by the elites. To him, the basic issue is more one of class than of race.

Webb's roots lie in exactly the area in which Obama has shown his greatest weakness so far—in the Appalachian region. Though both are freshman senators, Webb combines substantial government service with close knowledge of the military and the world....

Like Obama, Webb offers a fresh approach to politics and stirs an excitement that would provide the ticket with more pizzazz than would some of the more conventional figures whose names are in play.

We'll write more later about why Webb would be a great VP pick (I say "we" because I know Jonah is a Webb fan, too). But briefly, an overlooked plus is that he would be a very valuable public face for the administration when President Obama tries to extricate the United States from Iraq. It's going to be extremely difficult for Obama to follow through on his promise to get out of Iraq: the Republicans are going to be screaming bloody murder and calling him a traitor, and in the short-term things may well get worse for Iraqis. I think it would be a big help to have at his side Vice President Webb, who like Obama was a fierce critic of the war and occupation before in started.

He's also a great speaker. Here's his superb response to Bush's State of the Union address last year:

Foreign Languages and the Candidates

Obama says that he speaks "Indonesian and a little Spanish." The strength of his Indonesian is attested to in an article in Time:

When prominent Indonesians visit the U.S., the first person they want to meet is Obama, says Parnohadiningrat Sudjadnan, the Indonesian ambassador to the U.S. "Back home people think of him as one of us, or at least one who understands us," he says, adding that they are delighted to find that Obama speaks passable Bahasa, the language spoken in Indonesia and Malaysia.

Based on the video below, I think he's overly modest in his evaluation of his Spanish. His accent, while clearly not native, is better than that of many non-native speakers I know who consider themselves fluent. He sounds considerably better than, say, Bush when he gave his 2001 Cinco de Mayo radio address in Spanish. (Bush sounds like a kid in a 7th grade Spanish class struggling to read the textbook.)

People who've travelled abroad substantially know that speaking the local language makes a big difference. In most places, you get a lot of credit even just for trying. Obama will wow people when he goes to Mexico or to Indonesia--the most populous Muslim country in the world--and speaks for just a few minutes on television in the local language. This steels my conviction that Obama will be the world's most popular U.S. president ever.

McCain, by the way, doesn't speak any foreign language. Jim Webb, my pick for Obama's running mate, speaks Vietnamese.

The Madman Strategy

Hillary's plan at this point appears to be to threaten to fight a fruitless and destructive battle until the convention and to use that threat as leverage to get something from Obama. In this context, her non-concession speech tonight was disheartening but not surprising.

On the other hand, Terry McAuliffe's behavior in his Daily Show appearance tonight--recorded earlier in the day--was completely baffling. In what at first appeared to be a bizarre self-parody, he insisted that Hillary will be the nominee. Then, in an impromptu role play where Jon Stewart was Obama, McAuliffe actually said, "Kiss my ass, Barack."

Upon reflection, I see two possible explanations here. One is that McAullife has lost his marbles and isn't considering the consequences of his actions. The other is a variation on Nixon's "Madman Strategy." Just as Nixon wanted the North Vietnamese to think he might be nuts enough to nuke them, McAullife wants Obama to think he will become a raving lunatic opponent to the Obama candidacy if Hillary doesn't get what she wants, whatever that is.

Update: Stewart put it more simply during the interview "Your strategy appears to be, 'If we act deranged enough maybe they'll just give us the country.'"

Update 2: A third possibility is that McAullife (and Clinton) really do intend to sabotage Obama's candidacy so that Clinton can run as the "I Told You So" candidate in 2012. See some discussion on this possibility from Brendan Nyhan here.

The List: Obama's Economists

We've mentioned these before in individual posts. Here's a unified list:

Economic policy advisors:

• Jason Furman (director of economic policy) source bio
• Austan Goolsbee (senior economic policy advisor), University of Chicago tax policy expert source Wikipedia website
• Karen Kornbluh (policy director) source bio Wikipedia
• David Cutler, Harvard health policy expert source Wikipedia website
• Jeff Liebman, Harvard welfare expert source Wikipedia website
• Michael Froman, Citigroup executive source bio
• Daniel Tarullo, Georgetown law professor source bio
• David Romer, Berkeley macroeconomist source website
• Christina Romer, Berkeley economic historian source website
• Richard Thaler, University of Chicago behavioral finance expert source Wikipedia
• Robert Rubin, former Treasury Secretary source Wikipedia bio
• Larry Summers, former Treasury Secretary source Wikipedia bio
• Alan Blinder, former Vice-chairman of the Federal Reserve source Wikipedia bio website
• Jared Bernstein, Economic Policy Institute labor economist source bio
• James Galbraith, University of Texas macroeconomist source Wikipedia website
• Paul Volcker, Chairman of the Federal Reserve 1979-1987 source Wikipedia
• Laura Tyson, Berkeley international economist, Bill Clinton economic adviser source Wikipedia
• Robert Reich, Berkeley public policy professor, former Secretary of Labor source Wikipedia weblog
• Peter Henry, Stanford international economist source website
• Gene Sperling, former White House economic adviser source Wikipedia
• Heidi Hartmann, President, Institute for Women's Policy Research website
  

Other prominent economists who support Obama:

• Brad Delong, Berkeley macroeconomist source Wikipedia website weblog
• Joseph Stiglitz, 2001 Nobel laureate source Wikipedia
• Edmund Phelps, 2006 Nobel laureate source Wikipedia
• Ray Fair, Yale macroeconomist source Wikipedia
• Dan McFadden, 2000 Nobel laureate source website
• Robert Solow, 1987 Nobel laureate source Wikipedia

Prominent finance people who support Obama:
(not actually economists)

• William Donaldson, Securities and Exchange Commission (SEC) Chair 2003-05 source Wikipedia
• Arthur Levitt, SEC chair 1993-2001 source Wikipedia
• David Ruder, SEC chair 1987-1989 source Wikipedia
• Warren Buffet, investor, richest person in world source Wikipedia

Updated and revamped 6/9/08 to reflect new announcements and again on 6/28/08, 8/21/08, 8/22/08, and 9/7/08.

Obama is the Pro-Growth Candidate

There is much that is wrong with this column by Sebastian Mallaby, but the overall message is right on: Obama's proposals for investments in the future and smart reforms are pro-growth. Key excerpts:

The real pro-growth candidate in this campaign looks to be Barack Obama.

... [T]he real litmus tests on growth lie ... in policies toward education, basic science, skilled immigration, infrastructure and the grotesque tort system. Tax reform, not cuts, would help: The complexity of the tax code wastes millions of hours, and the crazy deductibility of mortgage interest encourages real estate bubbles. Regulatory reform, not deregulation, could help, too. ... But the old Republican playbook of tax cuts, deregulation and lower barriers to trade misses the real challenges....

Obama wants to double federal spending on basic scientific research. He wants to make broadband access universal. He has proposed an infrastructure bank to pump $60 billion into broken-down highways, ports and so on. If (and it's a big if) Congress could be prevented from turning this last proposal into a pork-fest, the growth payof could be substantial....

The one certainty about education is that holding schools accountable is only part of the solution. This is where Obama has the lead. He wants a big push on early-childhood education, which researchers believe can have an excellent payoff in terms of later achievement; he wants to address key gaps in teacher quality with higher pay; he wants a new tax credit to make college more affordable. A hundred years ago, the United States set the stage for the American century by investing more public money in education than other advanced economies. It needs to up its game again if it wants to retain its preeminence.

Question for McCain: Food Prices

While waiting for the South Dakota polls to close and Obama to be declared the nominee, I'm watching McCain's speech. I don't think I realized before just how awful a speaker he is. It's hard to listen to what he's saying because his style of reading the teleprompter is so distracting. If I was a McCain advisor, I would tell him to never give a formal speech. Even Alex Castellanos, the Republican talking head on CNN, is having to acknowledge that the speech was horrendous.

At one point in the speech McCain said, "Sen. Obama supports the tariffs that have led to rising grocery bills for American families." This is wrong on two points. First, Obama doesn't support any such tariffs that I know of, although I imagine someone in the McCain campaign would try to argue (falsely) that Obama's criticism of particular aspects of trade agreements means that he supports food tariffs.

More importantly, no one thinks tariffs are behind the increase in food prices. As Obama noted in an interview a few weeks ago, there are many factors behind the rise in food prices. These include rising oil prices (which affect fertilizer and tranports costs), poor harvests this year in a few countries, rising demand in Asia, and the rising demand for biofuels, which has been driven by subsidies in the U.S. and elsewhere. I've read many studies on this topic in recent months, and no one has suggested that food prices in the U.S. have increased because of U.S. tariffs.

Back when Lerxst was guiding the Economists for Dean and their weblog, I recall on at least one occasion, a journalist asked a White House spokesperson a question that clearly came out of a post on his blog. I'm sure we have some journalists among our readers, and I'm hoping that we manage to inspire them (or anyone else who gets a chance) to ask McCain some pointed questions related to economic policy.

So, here's one: "Experts attribute the rise in food prices to a number of factors, but U.S. tariffs is not among them. You've said [see quote above] that the recent increase we've seen in food prices is due to tariffs. But U.S. tariffs on food and haven't changed. How can unchanged tariffs have caused prices to rise? And which one of your economic advisors told you they have?"

Economists for McCain

Update: Also see our list of McCain's economic advisers.

A couple weeks ago I wrote to the economists who signed the letter in support of McCain's economic policies. Drawing upon Jonah's discussion of the biggest problems with the letter, I wrote a straight-forward message which I hoped would provoke some interesting back-and-forth. Alas, the Economists for McCain have ignored me, bursting my bubble of self-importance.

I console myself with the thought that this non-response partially reflects a generation gap. McCain's economists are mostly pretty old--one guy was on Eisenhower's Council of Economic Advisors--and less likely to have embraced the democratic salon of the Internet age. I know the intellectual style of this earlier generation: when they descend from the ivory tower, it's to make wise pronouncements, not to chit-chat with the masses.

(In fairness I should note that Gary Becker, who's older than his endorsee McCain by half a decade, has a blog, with comments!)

Anyway, here's the message I sent to each of the letter's signatories:

Dear Professor X,

I am writing regarding your letter in support of John McCain that was posted on Tyler Cowen's website. I am part of a group of economists who favor Barack Obama for the presidency and who have a weblog with discussion of economic issues in the campaign.

In the interest of promoting a serious dialogue on the differences in the economic approaches of the two candidates, I am hoping you will take the time to answer a few questions related to the letter.

Here are the questions:

1) Do you take seriously the $5.7 trillion in additional deficits over 10 years projected by the Tax Policy Center analysis of McCain's program? If not, why not?

2) Are you concerned about the long-term cost of a continued American military presence in Iraq?

3) Given the Supreme Court's previous rejection of the line-item veto, do you think a "constitutionally-valid line item veto" is possible, and if so, how?

4) What makes you say that there has been "explosive growth" of non-military discretionary government spending programs? This think tank analysis shows that the real growth rate of domestic discretionary spending 2001-2008 was 1.3%. By comparison, defense/security increased 9.1%, while SS/Medicare/Medicaid increased 3.8% As a share of GDP, domestic discretionary spending actually fell, from 3.1% to 2.8%.

I would also appreciate any other comments you have beyond the material in the letter regarding what motivates your support for Senator McCain. Please note that we may post your response on our weblog.

Warm regards,

Don Pedro

(Apologies for the pseudonym: unfortunately, I am subject to restrictions on political activity in my current position, and consequently for purposes associated with the weblog, I can't use my real name.)

Obama and Keynesianism, Part II

John Cassidy, the New Yorker's economics writer, has a new article titled "Economics: Which Way for Obama?" in the latest NY Review of Books. Unfortunately, the article doesn't live up to it's billing. Via a review of Thaler and Sunstein's new book "Nudge," it does provide a decent overview of behavioral economics. When it comes to describing Obama's views on economic policy, however, I found the article confusing.

A couple weeks ago I explained how some right-winger writing about Obama's "menacing Keynesianism" didn't have any idea what Keynesianism is. Cassidy--although usually a good journalist--also seems fuzzy-headed about the definition of Keynesianism. He writes

With respect to the national economy, Keynesians worry that unfettered capitalism is subject to ruinous boom-bust cycles, so they advocate management of demand through interest rates or government programs that create jobs. On the micro-level, they believe that some economic activities have harmful effects that the price mechanism fails to capture, so they support taxation and regulation.

The first part is roughly correct (but substitute "spending and tax policy" for "programs that create jobs.") The second part is just a description of how to deal with externalities, which isn't Keynesian but rather straight-up neoclassical thinking that goes back to Pigou.

Cassidy also writes,

When I spoke to [Obama economic advisor] Goolsbee earlier this year, he said that one of the things that distinguished Obama from Clinton was his skepticism about standard Keynesian prescriptions, such as relying on tax policy to stimulate investment and saving.

There are two problems with this statement. First, what he's talking about here is not really "Keynesian" in any proper sense (and I'd be surprised if Goolsbee used the term this way). Second, when you look at their proposals on these fronts, there is little difference between Obama and Clinton. For example, as I discussed in an extended post here, the Clinton and Obama proposals on retirement savings are very similar.

So what's going on here? When Cassidy uses this term Keynesian, I think he's talking about a relatively heavy-handed approach to economic policy intervention, using measures like command-and-control regulations. (Cassidy would probably respond that some people like John Kenneth Galbraith who tended towards such views also called themselves Keynesians. Still, I'd argue against taking a term which has a very clear meaning in macroeconomics and redefining it to mean something else.)

Anyway, as Goolsbee explained in an interview with Megan McArdle, when given the choice, Obama tends to give more emphasis to elegant and effective measures, like those described in "Nudge." But we're talking shades of difference, here; for retirement savings, he highlights his Nudge-ish proposal to enact automatic IRA enrollment, but he wants to expand savings incentives as well (a more heavy-handed approach.)

My general sense is that when it comes to economic policy, Obama and Goolsbee are pragmatists. They will do what works, drawing on empirical evidence and insights like those of Thaler and Sunstein. I think this reflects the fact that Goolsbee is a relatively recent vintage economist (Ph.D from MIT in 1995), so his thinking is well-informed by the current economics zeitgeist, where is readier to recognize that the simplistic Econ 1 models can sometimes lead you astray. Behavioral economics, the intense empirical focus of modern labor economics, and the current enthusiasm for impact evaluation studies are all part of the direction that the discipline has taken in recent years. I'm hopeful that with Goolsbee at his side, Obama will be able to make good use of the rich fruits of modern economics.