Sunday, June 1, 2008

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.

1 comment:

Anonymous said...

read Coase my dear friend!