Friday, August 22, 2008

More on Obamanomics

From the same NYT piece:
So 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.

He 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.”
This, of course, sounds just terrific. So let's think about whether it actually is terrific.

The knock against central planning has always been that market signals convey information and force resource allocation adjustments faster than a central authority could ever gather the data and act correctly on it. Obama isn't arguing for that level of central planning; indeed, he specifically repudiates it. But he is asking for an end to "unresponsive and inefficient government." In other words, he's making a classic argument that government can be smarter than it is. (We will, for the moment, leave aside the companion argument that implies that I can be smarter than you are.)

But that's not the question. The proper question is, "Can government be smart enough to control any but the most trivial aspects of the economy?" There's no question that, in certain circumscribed areas of the economy, government can be smart enough. The Federal Reserve comes to mind. SEC regulations seem to add value and are fairly responsive to changing market conditions.

But Obama is thinking about about something a bit more grandiose: He wants to fool with tax policy to effect a significant redistribution of wealth. He also wants to enact government policies that will, by dint of beefing up infrastructure projects, slow the decline of demand for blue-collar labor.

This is a far cry from a command-and-control economy but it's certainly tinkering with central aspects of the nation's economic system. Is government smart enough to do this without unleashing a cascade of unintended, adverse economic consequences? This is ultimately a question that can only be answered by trying it and seeing what happens. That's a very liberal thing to do and it doesn't have a very good track record.

1 comment:

The Crafty Trilobite said...

You're exaggerating.

Obama's much-vaunted redistribution of wealth amounts with minor tweaks to the tax policy of the 1990s. That was not exactly an era of class warfare and hanging aristocrats from lampposts.

Also, if you think our government doesn't exert a great deal of control over large sectors of the economy, you have paid no attention to, e.g., the SEC, FERC, FTC, NLRB, FCC, and most of the tax code. Republican or Democrat, the government does a lot to manage the economy. We're not choosing between regulation and laissez-faire here, we're choosing between different kinds of management. Reducing the tax rate and borrowing hand-over-fist on the theory that "Reagan proved deficits don't matter" had some unintended consequences too -- tho you can't call them unanticipated since every economist worth his salt expected them.

Which brings me to your main point: of course the government is not smart enough to play with the economy without unleashing many unintended consequences. (Neither is Goldman, Sachs, but it does it anyway.) As big as the federal government is, it can't do much of anything without unintended consequences. But somehow we generally muddle along. There is nothing especially fraught about redistributing to the working class by WPA-type programs, any more than about redistributing to certain classes of investors by changing the interest rate. You can only do your best.

As to whether Obama can be smarter than Bush and McCain (in this particular area, they can be grouped together since McCain wants to continue Bush's tax policies and generally agrees with his spending policies), well, part of doing your best is using the best predictive theories available. We actually have learned something about managing the economy over the last 50 years or so -- our problem lately is not that we don't know what we're doing, but that we are basing our policies on wishful thinking and willful blindness instead of on what we have learned.

In particular, we know pretty well that trickle-down just doesn't work. In fact, it's anti-market. Trickle-down is based on the idea that we can leverage relatively small government expenditures and tax cuts by making it easier to accumulate and use capital, thus multiplying the effect of investment decisions. But the market works by rewarding those investors/entrepreneurs who have a good idea, not by multiplying the effects of all investment decisions (a/k/a, making it easier to invest more in stupid ideas). Therefore, the way to stipmulate growth is by giving more money to the consumers (i.e., middle class tax cut, and in extreme cases WPA-type programs), whose aggregated consumption choices will automatically draw more investment to the most productive (i.e., profitable) zones. Repairing infrastructure and the like helps by using economies of scale to reduce collective transaction costs, which among other things puts more of that investment dollar into actual production and sale and less into, e.g., transportation, insurance, security, etc.
To put it more succinctly, it's easy to be smarter than the current GOP on economics.